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The single mother’s guide to financial planning

Concrete steps that single mothers can take to fortify their financial positions.

As sole breadwinners responsible for the welfare of minor children, single mothers face a particularly daunting set of challenges when it comes to financial planning. Besides not having a partner’s income as a safety net, the emotional strain of shouldering the family’s finances alone can leave many single mothers feeling overburdened and financially strained.

From our experience, however, single mothers have a special type of resilience and resourcefulness when it comes to managing their finances. Research shows that women make better investors because they are more likely to seek advice, stick to their financial plans, and remain composed in times of market volatility. With these inherent advantages in mind, there are some concrete steps that single mothers can take to fortify their financial positions.

Budgeting and money management

Running a single income household, single mothers know and understand the importance of careful budgeting. With only one person generating an income and managing outflows, budgeting for a single mother is easier to centralise and manage. Many single parents find it easier to manage their finances through a single financial institution using a range of account types to meet their objectives, such as a transactional account, credit card, and savings account earmarked for emergency funds.

Having multiple bank accounts across a number of financial institutions can be difficult to manage, especially when it comes to the timing of debit orders, making credit card payments, and managing the interest-free periods of credit facilities – keeping in mind that retaining a good credit record is absolutely critical for a single parent.

Whereas a dual-income family will have the other partner’s credit record to fall back on if financing is required, a single parent’s ability to secure finance is wholly dependent on her good credit standing. Careful and responsible management of one’s credit card is key to keeping your credit rating in a healthy position, keeping in mind that payment history accounts for 35% of one’s overall rating.

Insurance protection

As a single mother, there are two main types of long-term insurance cover to consider when it comes to protecting your livelihood and your child’s future. Income protection cover is specifically designed to replace your income – either wholly or in part – should you become unable to work as a result of either illness or disability, either on a temporary or permanent basis. For a sole breadwinner with minor children, this type of cover is critical although it is important to get expert advice in this regard. Disability insurance is a highly technical area of risk cover, and it is best to get advice from an independent financial advisor with expertise in this field.

Secondly, life cover can play an important role in protecting your child’s financial future in the event of your untimely death, particularly where you do not yet have sufficient invested capital to make provision for your child’s future living and education expenses. However, quantifying the correct level of cover and structuring the beneficiary nomination on such a policy is critical and should ideally be done with the guidance of an expert.

Estate planning

Regardless of your net worth, having a valid will and an appropriate structured estate plan is essential. If your child’s other parent is still alive at the time of your death, that parent will be your child’s guardian. However, if you are the child’s only surviving parent, it is imperative that you nominate a legal guardian for your minor child in terms of your will. Your child’s nominated guardian will be responsible for the day-to-day care and decision-making with regard to your child if you are no longer around, so it is important to give careful consideration to this appointment.

Be careful of appointing your child’s grandparents as guardians, especially if they are elderly and/or in poor health. Also, give consideration as to where your nominated guardian lives as, in the event of your death, your child will need to go and live with that person. If the guardian lives in another city or even country, it may mean that your child will need to be uprooted and relocated at an already traumatic time of their life.

When it comes to structuring your estate for the benefit of your minor child, remember that any child under the age of 18 is incapable of inheriting. This means that any assets bequeathed to your minor child will either be administered by your child’s other guardian (which could be an ex-spouse or boyfriend) or by the state-run Guardian’s Fund. To circumvent this, it is advisable to set up a testamentary trust in terms of your will and to bequeath any assets intended for your minor child to the trust. In the event of your passing, the trust will automatically be formed, and the assets transferred into the name of the trust where they will be managed by your appointed trustees in the best interests of your child. It is, however, important to choose your trustees wisely and to be absolutely confident that they will manage the trust assets properly.

If your intention is to leave the proceeds of your life policy to your minor child, you may nominate the testamentary trust as the beneficiary on the life policy so that, in the event of your death, the proceeds will be paid directly into the trust and will not attract estate duty. While you may be tempted to put a DIY will in place, we strongly advise against doing so, bearing in mind that if your will is found to be invalid, no testamentary trust will be formed, and your estate planning goals will be inadvertently thwarted.

Saving and investing

Having an easily accessible and appropriately sized emergency fund is a financial planning necessity for any single mom, although setting one up can be challenging when faced with the costs of raising children. If you’re dependent on maintenance income from your child’s other parent in order to meet your monthly living costs, be sure to build a buffer into your emergency fund in case of late payment or defaulted maintenance payment. Approaching the maintenance courts for relief is time-consuming and subject to frustrating delays and postponements, so budget for a worst-case scenario when putting your emergency fund in place.

Another factor to consider is whether your child’s maintenance payer has sufficient life insurance in place to honour his maintenance obligations in the event of his death. In many instances, cover on the life of the maintenance payer is made an order of the court in terms of a divorce, but in the absence of such an order, you may need to take steps to ensure that the payer’s future obligations are insured.

While your natural instinct may be to put your own retirement funding on hold so as to prioritise your child’s education funding, be careful of taking this approach. Remember, while it may be possible to borrow for your child’s tertiary education, it’s not possible to borrow for your retirement. While you are raising minor children, you may be somewhat limited in what you can set aside for retirement, but it’s important to at least start the process – keeping in mind that as your children grow older and become financially independent, you can start ramping up your retirement savings. In the interim, however, finding a balance between funding for your retirement and putting some money aside for your child’s education is key.

Be careful of taking out insurance-based education policies as these are generally commission-based products with little transparency and flexibility. Ideally, seek to invest through a reputable unit trust platform that will allow you to tailor-make an investment portfolio that is fully aligned with your investment goals, propensity for risk and timeline. Tax-free savings accounts are also excellent, tax-efficient vehicles for longer-term investment goals such as tertiary education and retirement, although they are generally most appropriate once you have already maximised your tax-deductible premiums towards a retirement fund.

Medical aid cover

Medical aid is an expensive line item in any budget and, because medical inflation continually outstrips consumer inflation, medical aid premiums can become a proportionately bigger monthly expense, especially if your salary is not keeping pace with inflation. With 18 open medical schemes to choose from, navigating the complexities of medical aid benefits, premiums, thresholds, co-payments, waiting periods, and Prescribed Minimum Benefits can be frustrating. At the very minimum, ensure that you and your child remain registered on a basic hospital plan, bearing in mind that the network options are generally more affordable, and ensure that you do not have any break in your membership.

Ideally, spend time consulting with an independent healthcare advisor who can source a medical aid and plan option that is most appropriate for your family’s needs, taking into account any pre-existing conditions or ailments that you or your child suffer from. Some medical aids offer excellent condition-specific treatment programmes for illnesses such as diabetes and asthma, and it sometimes makes more financial sense to move onto a more comprehensive option to take advantage of these benefits.

While rewards programmes are seemingly attractive and can offer some significant benefits, unless you intend to fully engage with such programmes, it is unlikely that you will receive full value for the additional premiums you are paying. If you do opt for a hospital plan, it is advisable to build additional reserves for out-of-hospital expenses either in your emergency fund or in a specially designated medical expense fund.

ADVISOR PROFILE

Craig Torr

Crue Invest (Pty) Ltd

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