5 key financial planning tips for single-parent families
Having one source of income puts additional pressure on the need to save
By Jon Hembrey, CBC News
Posted: Jan 24, 2012 12:53 PM ET
Last Updated: Feb 2, 2012 7:55 AM ET
The financial planning goals for a single-parent family are not much different from those of a two-parent unit, but meeting them can be a challenge because of the obvious fact that there's only one breadwinner.
For single-parent families, financial strategy is really about stretching scarce resources and prioritizing to meet both family and retirement goals, financial planners say.
According to data from Statistics Canada, lone-parent families had an average after-tax income of $45,400 in 2009 compared to $84,800 for a two-family unit.
A female single-parent, moreover, earned $43,400 during that same year compared to $55,300 for a male single-parent.
Although resources may be exceptionally tight, the solitary parent still needs to plan for post-secondary education for their child, or children, while making housing payments and planning for a retirement.
It's a tall order, but not an impossible one, according to financial experts.
After speaking to several of those experts, CBC News compiled five key investment and financial planning tips for single-parent families.
RESP is key
Once basic bills are covered, saving for a child’s post-secondary education rather than for the parent's retirement should be the top priority for a young family, says John De Goey, vice-president and associate portfolio manager at Burgeonvest Bick Securities Ltd. in Toronto.
The primary means of doing that is through the registered education savings plan. The government will provide a top-up grant of 20 per cent to a maximum of $500, so an RESP provides an instant return on the investment as well as the potential for growth over time through interest or increases in market value.
Parents can contribute more than the $2,500 necessary to receive that top-up from the government, but will receive no extra funds if they put more than $2,500 into an RESP.
A total of $50,000 in principal per child can be squirreled away in RESPs over time. Children will have to pay tax when they withdraw the money, but they'll end up paying little or nothing if they are students without a regular income.
As income is particularly tight for single parents, it's very important to let time go to work for you. Invest early to give the money in an RESP, which accumulates tax-free until the child draws on it for school, time to grow.
Starting an RESP when a child is first born allows a parent to invest in higher-risk equities to maximize their returns because over the long term markets usually go up, says De Goey.
If a parent chooses to be more conservative, saving the money in things like guaranteed investment certificates (GICs) that have a low return at the moment but one that's guaranteed, starting early also gives the interest on the investment more time to compound.
Insurance is a must
Although it is important for all mothers and fathers to keep their estate planning in order and to maintain life and disability insurance, this is absolutely crucial when a person is a single-parent, since they are the only provider.
Parents should have a will, a power-of-attorney, and insurance that covers them in the event that they get sick or injured and cannot work.
They should also have life insurance, and a policy that covers their outstanding mortgage balance.
Single parents also need to plan for their own retirement, drawing on whatever money remains after RESP contributions and mortgage or insurance payments.
Some advisers recommend they utilize a tax-free savings account, which does not offer upfront tax benefits like an RRSP but allows the savings to be accessed immediately for emergencies. Money can be placed in a number of investment vehicles, including stocks and bonds, and accumulates tax free.
A good way to build an RRSP or TFSA is to set things up so that a small but manageable amount is contributed to a plan automatically. It can be hard to save up a lump sum for a big contribution, but many people can easily adapt their lifestyles to accommodate a small, regular contribution that can add up to a substantial amount over the course of a year. Most financial institutions allow you to designate a portion of your paycheque to be automatically put into a plan, or you can have an amount taken out of your account and put into a plan at specified intervals – such as once a week, or once a month.
If you get a raise, this is also the ideal time to set up an automatic contribution. Before you get used to the extra money coming in each month, channel it straight towards your longer-term plans.
Budgeting is important for people of all ages, but is absolutely critical for single-parent families because there is less money to go around.
With little financial wiggle room, figuring out a workable budget and then sticking to it will help keep a family's financial plan from going off the rails. It's amazing how much money trickles away into impulse purchases and things like coffee and meals out, according to budgeting gurus. This is the money that you can afford to use towards your long-term goals instead of quick gratification.
“You have to be in tune with how much saving capacity you have, where you put it, how much investing you do [and] what your total priorities are,” says Adrian Mastracci from KCM Wealth Management Inc.
Top News Headlines
- NDP wants RCMP inquiry into $90K payment to Duffy
- The NDP has asked the RCMP to launch an investigation into the $90,000 payment from the prime minister's former top aide, Nigel Wright, to Senator Mike Duffy in relation to the Senate expense scandal. more »
- Will alleged Rob Ford video overshadow Toronto casino debate?
- A debate about a proposed downtown casino is supposed to take centre stage at Toronto City Hall on Tuesday, but it seems a safe bet that a still-unseen video of Mayor Rob Ford will continue to be a topic of conversation. more »
- Canadian on EI shut out amid foreign worker influx
- A jobless Canadian IT professional who is collecting employment insurance is upset because he now suspects several recent jobs he applied for went to temporary foreign workers. more »
- Baseball fuels dreams, desperation in Dominican Republic
- The Toronto Blue Jays have a number of stars from the Dominican Republic, but in the shadow of these successful players is an equally important story about hope and poverty, and a country desperately struggling to balance the two. more »
Latest Business Headlines
- Russell 2000 small-company index surpasses 1,000
- The Russell 2000, an index of small-company stocks, rose above 1,000 for the first time. The index is outpacing the Dow Jones industrial average and the Standard & Poor's 500 index this year. more »
- Yahoo buys Tumblr blogging site for $1.1B
- Yahoo is buying online blogging forum Tumblr for $1.1 billion as CEO Marissa Mayer tries to rejuvenate an internet icon that had fallen behind the times. more »
- Xbox launch Tuesday highly anticipated
- Microsoft's next-generation Xbox expected to be revealed Tuesday, and anticipation for the entertainment console's latest evolution is running high. more »
- Wealth management key for banks amid slow growth in retail
- As Canada's biggest banks prepare to report their second-quarter results, analysts say those that rely more heavily on wealth management and global markets will fare better amid slowing growth in Canadian retail banking. more »
The data on this site is informational only and may be delayed; it is not intended as trading or investment advice and you should not rely on it as such.