As women, we are naturally caretakers. From caring for our children and our spouses, to caring for our parents and grandparents, we often put our own needs aside in order to support our family.
The current pandemic created even more challenges for working women. From school closures to daycare closures, many women were forced to leave their jobs to care for their family creating financial challenges for many.
As some women head back to work, it is important to reposition ourselves to take advantage of any benefits available through our employers or take the time to create financial strategies that can help us manage our finances. Here are a few tips to help regain control of your finances to create a better financial foundation.
Take Advantage of Dependent Care FSA
The tax advantages of a dependent care FSA are a way to keep some of your hard-earned money. This type of account is offered by an employer and is a way for participants to make pre-tax contributions to an account to pay eligible dependent care expenses.
The cost of childcare is arguably one of the largest expenses for parents with young children. If you’re eligible and can take advantage of this benefit, on average you could be saving $220 on every $1000 in expenses, assuming a 22% effective tax rate.
You only have one year to spend your DCFSA and unused funds are forfeited, though some organizations have a grace period. Talk with your employer to find out their specific eligibility requirements and when they hold open enrollments.
Life and Disability insurance are critical in ensuring that the people you care for will be protected should the unexpected happen.
Life Insurance can help protect your loved ones by replacing the financial support you provide them if you pass away. It can help replace your income, cover your funeral expenses, your liabilities and pay for your child’s education. Death is not something we want to think about but it is one of the few things in life that is certain. Life Insurance not only gives you peace of mind that your family will be taken care of but it can also help you create wealth while you’re living.
Disability insurance protects you by allowing you to continue your lifestyle and to care for your family should you ever become unable to work. Disability insurance replaces 60% of your working income if you become disabled and most employers offer this benefit. If you’re employer does not offer disability insurance, you can acquire it privately.
Start An Emergency Fund
Unfortunately, many parents turn to short-term loans for money to meet some unexpected need. Many of these loans can be very expensive and if someone cannot repay them, they may find themselves getting deeper into debt and creating more financial hardship for themselves. Payday loans are often advertised as a support to fill temporary financial shortfalls but these loans often charge over 300% interest causing many people to extend their payments and sometimes accumulate overdraft fees from their banking institutions. This can create a domino effect leading to more financial hardships.
Building an emergency fund gives you access to money for unexpected expenses. Funds to cover emergencies such as medical bills, car repairs or having to pay extra out of pocket for a sitter if your daycare center closes for any reason. One strategy to build an emergency fund is to pay yourself first each time you receive your paycheck. Try to set aside an amount, no matter how small each pay check and have it directly deposited into a separate account from your everyday spending account. A great goal is to eventually have at least six months of income saved.
Make your W4 Work For you
Your W4 can be a very powerful tool in helping you keep more of your hard-earned money each pay period. Most people fill them out when they start a new job and never think about them again but you should probably adjust them when your circumstances change, and they’re never set in stone. You’ll want to talk to a tax professional to get advice and you might also find the IRS Tax Withholding Estimator helpful.
Your W4 filing can mean the difference between receiving an unexpected tax bill at the end of the year, breaking even or receiving a large refund at the end of the year. If you’re receiving a large refund at year end, you’re missing out on money that can be put to use now. Keeping more of your money each pay period allows you to take control by deciding to save, invest or pay down debt.
Create a Budget
You won’t know how much to comfortably set aside for rainy days if you don’t understand where all of your money goes. A budget is a critical activity for everyone, especially single parents because of the financial pressures of raising a child. As a parent, you have the additional unique financial obligations from paying year-round school fees to include back to school spending and extracurricular activities for the kids.
You need to budget to understand what amount you have coming in and how much goes out. If you know what you bring in each month and what you spend on your needs and wants, you will have a clear path to planning ahead for the months when you spend more. When creating a budget, a good starting point could be to use the 50/30/20 method. This is where you set aside 50% of your take home pay towards your necessary expenses, 30% towards your discretionary expenses and 20% goes towards your savings and debt. If you’re struggling with your debt, it might make sense to set more money aside toward savings than toward your discretionary spending.
Manage your debt
Getting a handle on your debt can help alleviate some financial stress. The number of women attaining their post-secondary education continues to increase meaning more student loan debt. According to The American Association of University Women – women hold two-thirds of US student loan debt. Taking into account student loan payments in addition to childcare payments and other financial obligation can make it difficult to cover everyday expenses. If you’re currently having trouble managing debt, it would make sense to create an accelerated strategy to pay down debt.
There are two popular debt payment methods each of which have their own pros and cons. You can use the avalanche method which tackles high interest debt first or the debt snowball method which tackles the smallest amount of debt. With the debt avalanche method, you save money in the long run while the debt snowball method might motivate you as you see progress right away.
Most people start investing towards their future through an employer sponsored plan. Many employers offer a match up to a certain percentage when you contribute to your 401k. This is free money and you should definitely be taking advantage of it. You can start with as low as the minimum match and increase your contributions as you receive any annual raises or bonuses.
If you’ve created your budget and have found a cash surplus, you can begin investing outside of your employer sponsored retirement plan and add money into that investment whenever possible.
Utilizing your current situation to plan and prepare for the future can help empower you to make the most of your time and help you focus on what’s important. Taking advantage of the benefits from your employer as well as creating a strategy to take charge of your finances is essential in managing your money as a single mom.