7 Considerations for Managing Wealth as a Single Parent
Guest Post: By Faisal Karmali
Raising children in a single parent household comes with its own unique challenges–both financial and emotional.
As a portfolio manager, I have worked with many clients as they learn to manage their wealth post-divorce, and I have found that their financial goals for their children largely do not change. However, now they must try to achieve those goals on a single income.
Here are 7 things you should consider when managing your wealth as a single parent:
1. Start With a Clear Financial Picture
It is difficult to plan for the future without knowing exactly where you stand. However, you can begin to clarify your post-divorce financial situation by:
- Evaluating your current assets and liabilities: What assets do you now own independently? What, if anything, do you still own jointly with your former spouse? What debts are you carrying?
- Reviewing your cash flow: It is likely you have most of the same expenses you had when you were married, but now you are paying for them with one income rather than two. As a single parent, you may be facing some new expenses, such as before or after school care. Having a clear picture of your cash flow will help you create a realistic budget, which can then lead to an increased sense of control and financial stability.
- Updating legal agreements: Ensure that property settlements, child support, and spousal support agreements are documented and incorporate them into your financial plan.
Updating your financial plan to account for this new information will help you set realistic goals for your family’s future and increase the likelihood of achieving them.
2. Set Your Portfolio Up to Meet Your Goals
If you try to achieve all of your goals with the same assets, it is going to get messy. This is where asset dedication comes in, which essentially means putting specific assets to work to meet certain goals.
If you are recently divorced, your primary investment goal may be generating enough income to cover your day-to-day expenses while you regain your financial footing. However, if your portfolio stops growing and you keep making withdrawals, you risk running out of money in the long-term. So, how do you balance these two competing goals?
When working with clients, I create groups of assets–or what I call buckets–dedicated to each goal. For example, the income bucket contains assets that are not invested in the stock market and thus are protected from volatility so that they will be there when you need them. On the other hand, the assets in the growth bucket take advantage of the market in strategic ways and, as they grow, they replenish the income bucket.
3. Plan for Education Costs
This is a big one for most parents; however, it is especially important for single parents who are trying to navigate their unique financial challenges while also saving for their kids’ post-secondary education. Fortunately, Canada offers some excellent opportunities, including:
- Registered Education Savings Plans (RESPs): For single parents, a RESP is more than just a savings plan. It is a financial strategy that leverages government grants and tax advantages to fund your child’s education without derailing your other financial goals.
- Family trusts: A family trust offers flexible contributions, tax efficiency, and control over how and when the funds can be used, making it a great option to save for your children’s education. Further, if something were to happen to you, the trust’s terms would ensure the funds are used as you intended.
4. Protect Yourself, Your Children, and Your Wealth
Your ability to earn income is one of your family’s most valuable assets and should be protected. Insurance can provide a financial cushion should an injury or an illness prevent you from working and, if you pass away, it can ensure your children are provided for.
But beyond protecting against the ‘just in case’, insurance can also be used as an alternative investment to help diversify your portfolio. Some of the benefits can include:
- Growing your wealth: Similar to when you buy shares in a company, investing in insurance allows you to participate in the success of that insurance company. This means you can earn income–including dividends–from that investment, which can help support your family.
- Reducing your taxes: The cash within your insurance policy can grow tax-exempt and be invested in a variety of investment funds.
- Protecting your legacy: When you pass away, the death benefit from your life insurance policy is typically tax-free for beneficiaries. This means your kids will receive the full amount of the policy to help replace your income, pay for your funeral expenses, and provide for their future.
5. Prioritize Estate Planning
Estate planning is particularly important for single parents as it helps ensure your children are cared for and your assets are distributed according to your wishes. Key steps can include:
- Updating your will: After a divorce, you should draft a new will to reflect your current situation. If you fail to update your will and control of your estate is left to your former spouse, it may not align with your intentions for your children. This is particularly problematic if your children are minors and you want someone else to manage their inheritance.
- Revisiting your beneficiaries: You should also update your beneficiaries on your life insurance policies, registered accounts, and other investment accounts to ensure your assets go to your intended recipients.
- Setting up trusts: While minors in Canada can inherit assets, they cannot manage significant property or funds until they reach the age of majority. A trust is a great option to safeguard your children’s inheritance until they are able to take control of it. If you are considering setting up a trust, it is a good idea to consult a lawyer for advice specific to your situation.
6. Do Not Shortchange Your Own Financial Stability
Like all families, single parents strive to balance their own financial needs and goals with those of their children.
A 2022 Retirement Confidence Survey conducted by the Employee Benefit Research Institute found that 40% of working parents are cutting back on the amount of money they are saving for retirement to allow them to save more for their child’s education.
If your kids cannot afford post-secondary education, they can get a job, a loan, or a scholarship. Your options for funding your retirement are much more limited.
7. Get the Support You Need
Solo parenting can be isolating, but you do not have to do it alone. Get the support you need to raise your children from friends, family, and teachers. Also, remember the importance of building a professional support system, which can include:
- A wealth advisor to help you identify your goals and create a plan to reach them.
- A tax specialist to guide you through the complex tax situations that divorce and single parenting can create.
- Legal professionals to provide advice on everything from protecting your interests after a divorce to estate planning.
Prioritizing your own financial well-being, cultivating good financial habits, and getting the advice that you need can lead to long-term financial security for you and your family.
ABOUT THE AUTHOR:
Faisal Karmali is a senior wealth advisor with the Popowich Karmali Advisory Group, media personality, and business and market expert for QR Calgary and CTV. He has dedicated his career to helping people improve their financial security as they prepare for and live in retirement.
Managing wealth as a single parent comes with unique challenges, but you don’t have to navigate them alone. At Crossroads Law, we understand the importance of protecting your financial future while ensuring your children’s needs are met. Whether you need assistance with estate planning, drafting or updating your separation agreement, or guidance from a legal professional to protect your interests during and after a divorce, our team is here to help. Take the first step toward securing your family’s future—schedule your free consultation today.
