Being a single parent demands so much of a person’s time and energy that taking care of longer-term financial concerns often take a back seat. So many single parents face financial restrictions that make it seem they are constantly on a financial tightrope. Getting off that tightrope and onto solid financial ground should be a priority for every single parent. Finding solid financial ground starts with determining your financial goals and monthly cash flow.
Determine your financial goals
The first step on the path to a more secure financial future is to determine your financial goals. Your financial goals should include short-term, medium-term and long-term goals. Short-term goals may be to reduce spending and not rely on credit cards to make it to the next paycheck. Medium-term goals could be paying off your credit card(s) and creating an emergency fund. Long-term goals may be saving for your children’s college expenses and retirement.
Figure out your cash flow
All of your financial goals require one thing – saving money. To do so, you need to figure out how much you spend and then create a budget that incorporates saving. Tracking your spending can be pretty easy these days with online account aggregators like Mint.com. To better understand your spending habits when using credit cards, you may need to go old school and save the receipts to review your purchases. This is particularly helpful if much of your shopping happens at Walmart, Target or Costco, where your shopping cart could include groceries, video games and clothes. One way or another, figure out how much of your spending is essential and how much is unnecessary spur of the moment buys. Create a budget that accurately matches your essential spending and replaces most of your unnecessary spending with savings.
Be mindful of not only what you buy, but also how you buy it. Using high interest credit cards are an impediment to meeting your financial goals. Paying off high interest credit cards is a financial goal that improves the odds of meeting your other financial goals.
Save the tax-free way
Tax-deferred investment accounts such as Investment Retirement Accounts (IRAs) for retirement and college-funding accounts, such as 529 accounts, are a good way to meet those long-term goals. These accounts often can be opened with a couple hundred dollars. Setting up automatic monthly contributions from your bank account to these accounts can be done for amounts as low as $25. Both types of accounts grow without being taxed until the money is withdrawn. For 529 accounts, there will be no taxes if the withdrawals are spent on qualifying college expenses.
Figuring out your budget shouldn’t be a chore done after the kids are in bed. It should be a family project. Developing good financial habits that lead to meeting financial goals is an essential skill that all parents should share with their children.
When you first consider divorce, there are often many financial questions and concerns. A complete resolution will answer many of these questions, but it is important to have a complete understanding of the financial situation before coming up with resolutions. These questions are designed to help you think through the financial issues and build that foundation from which to negotiate.
While we financial advisors need to know a lot about numbers, we often use some shortcut “rules-of-thumb” to make quick estimates. Two of those rules-of-thumb are the Rule of 72 and the Rule of 115.
The rule of 72 is a shorthand way to figure out how long it will take an investment to double in value, if one knows the annual rate of return or interest rate. The equation can also be switched around to figure out the annual rate of return if one knows how long it took for the investment to double.
It is called the rule of 72 because the doubling time is figured out by dividing the rate of return by 72. For example, an investment earning 6% per year will double in 72/6 = 12 years. An investment earning 8% will double in 72/8 = 9 years.
Flipping the equation around to determine the rate of return is done as follows. If an investment doubles in value in 10 years, the annual rate of return is 10/72 = 7.2%.
The rule of 72 is an approximation that is based on annual compounding. The true results will differ slightly. Many investment returns are based on continuous compounding which grows a bit faster than annual compounding. For situations involving continuous compounding, use 69.3 instead of 72.
The Rule of 115 is used to figure out how long it will take for an investment to triple in value. It follows the same process as the Rule of 72. If an investment earns 7% per year, it will take 115/7 = 16.4 years for the investment to triple in value. As with the Rule of 72, the Rule of 115 is an approximation. There are some practitioners that learned this as the Rule of 114. 115 slightly overestimates the time it takes for an investment to triple and 114 slightly underestimates it.
If you have REALY big aspirations… use the Rule of 144 to calculate, your investment will quadruple!