BackSingle parents have twice the responsibility
When you have only yourself to depend on, it's even more critical to have an airtight money plan
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Life doesn’t come with a guarantee, and there are always exceptions to the rule. It’s difficult enough for a couple to take care of their child; for a single parent, the responsibilities and the anxiety only doubles. Being financially secure, or at least having a plan B in place, provides a kind of a trustworthy safety net.
As a single parent, you are also most likely to be the sole source of income. Therefore, it is doubly important that the money is judiciously saved, invested and spent—you don’t want your finances to take a toll on you. Creating an emergency fund, taking care of loan repayments, healthcare support, education, and, yes, retirement, are just some of the points in the to-do list.
Here is a basic roadmap on the goals that a single parent especially needs to aim for, and the possible routes to get there.
Get insured
Insurance has to be at the top of the to-do list of creating a safety net. “Insurance is very critical for a single parent considering that there is only one earning member in case of any unforeseen circumstances," said Kapil Mehta, managing director, SecureNow Insurance Broker Pvt. Ltd.
In terms of life insurance, the best option is to choose a term plan as it gives more cover at a lesser cost. Moreover, various versions of term plans are now available that give the policyholder flexible options such as buying the policy online and a staggered or lump sum payment to the beneficiary.
The general rule is to have a sum assured that is 10 times your annual income—this applies to single parents as well. If you have liabilities such as a home loan, include the loan amount in the term plan. Doing this has distinct benefits—if you die, the insurer pays the remaining loan amount; your dependants are spared the burden; and they get to retain the house.
The next item on the list is health insurance—again a must-have. “If you are living in a metro like Mumbai, you should have at least 10 lakh health insurance cover considering that the medical expenses are higher at such locations. If you live in a non-metro city, 5 lakh cover will work," said Mehta.
Medical costs are only climbing, so it makes sense to take a health cover for your child too. “Most insurers offer cover for a child till she turns 25 or starts earning, whichever is earlier. Go for a floater plan, as it will cover both you and your child," said Rahul Aggarwal, chief executive officer, Optima Insurance Brokers Pvt. Ltd.
Along with a health insurance policy, one must also take a critical illness cover of the same amount because as a single parent you don’t have any back up to rely on.
The other layer of insurance that you need is that of a disability cover. “You can take an accident disability rider. This generally costs 10% of the term plan," said Mehta.
Have a contingency fund
Consider these situations: you are in between jobs and it will be at least a month before you start the next assignment; you want to take a sabbatical to finish your MBA; or, a family member is ill and needs your attention. Such situations mean that you need an emergency fund in place so that even if you are not earning, regular expenses are taken care of. The general rule is to keep aside three months’ expenses. So figure out what your average monthly expense is. This should include not only your household expenses but also equated monthly instalments, a child’s education fees, among other things. “The thumb rule of keeping aside three to four months’ expense as reserve applies to single parents as well to address unforeseen circumstances such as a loss of job or leave without pay. Consider liquid mutual funds to build the contingency fund," said Deepali Sen, a certified financial planner, and founder and partner, Srujan Financial Advisers LLP.
Save for retirement
This may seem like a goal that’s too far in the future, or not important in the current scheme of things. But that’s really not true.
“We have seen that parents tend to depend on their children after retirement, especially single parents. But the reality is that everyone wants space and financial independence," said Sen.
The first step towards retirement planning is to know your risk appetite and to find out how much you need post-retirement; else, it is difficult to stay on track. You can seek advice from an adviser to know the exact expense requirement after factoring in inflation. “If you are in the accumulation phase (age 30-35 years), it makes sense to go ahead with a good amount of exposure in equity. For retirement planning, you need to have the right asset allocation, to keep track of performance, and to rebalance the portfolio whenever required," said Sudipto Roy, business head, Principal Retirement Advisors.
What are the products that one should look at? “You can look at investing in mutual funds such as income funds and exchange-traded funds. Mandatory investments such as provident fund or Public Provident Fund are also a good way to build a retirement corpus considering you get a tax benefit too. But most of these are debt-focused, so it is important to ensure the right equity exposure," said Roy.
As you get closer to your retirement age, reduce your exposure to equity and gradually increase the exposure to debt.
The earlier you start investing, the lesser you would have to save to provide for your retirement.
Provide for education
A child’s eduction can be a major expense in the long run. Consider long-term investment products when building a corpus for this. Before you start, get to know the current cost of your child’s education. If you think your child will go abroad, it’s better to factor in other costs such as lodging and boarding; these can bite a big chunk out of your corpus. “If your child is very young and is 16-18 years away from college, you should have a higher exposure in equity. As you approach closer to the period of education, move your corpus to debt," said Sen.
Make a succession plan
One of the biggest worries of a single parent is: what will happen to my child if I die?
Writing a will is an important part of that plan B. “A will is more authentic if it is registered. Make sure that you name someone—a relative or a trusted friend—as a guardian to execute the will if the child is a minor," said Tanwir Alam, founder and chief executive officer, Fincart, a financial planning firm. Have two people whom you trust, witness the writing of the will so that they can confirm its authenticity.
“A legal expert helps you customize a will, and avoid anticipated problems and ambiguous mis-drafting," said Alam.
What’s more, making a will is not expensive. “If you approach a lawyer to write a will, it will cost you 5,000-10,000 (or more depending on the complexity of assets and other details). Will registration can be done at a nominal cost," said Alam.
A single parent doubles as the provider, the nurturer and the protector. A strong financial plan could well be your strongest ally and your best friend as you take on life single-handedly.
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