CHERYL ROBERTS HAS HAD HER FAIR SHARE of financial hardship. After graduating from Illinois State University in 1986, she spent five years in sales with consumer-brand giants Johnson & Johnson, Scott Paper Co., and Kimberly-Clark. Then she was laid off from work. Up until then, she didn't have any debts; her parents had paid for her college education and she had always driven a company car. But after losing her job, the Chicago native lived off of personal savings for nearly a year before landing employment as a secretary at a local radio station earning less than $21,000.
A year later, she was working as a sales rep for another radio station. "That's when I started making money again, first it was around the $40s. When I left, I was earning around $70,000," says Roberts. During this time, her first goal was to be debt-free. "I had about $6,000 in credit card debt plus a car loan. My second goal was to start contributing to my 401(k) at work," she explains. Third, she wanted to save money--about $13,000, which added up to a
year's worth of monthly living expenses.
She experienced another dramatic change six years ago when she learned she had a medical condition that affected the lining of her uterus. Her doctor suggested that childbirth could prove helpful. But it wasn't until recently, that Roberts, now 37, was ready for motherhood. Last fall she gave birth to Christian; just two weeks after purchasing her first home, a three-bedroom townhouse in Chicago.
Roberts knows just how important it is to manage the financial challenges of being a single parent. On the one hand, it is important to meet your parental obligations and save money for your children's future. On the other, you must save to support yourself.
"There has to be a balance," says Jonathan Sard, a certified financial planner with Financial Alternatives Inc. in Atlanta. "Single parents must develop the discipline of setting aside discretionary money in an education fund and retirement account as well as a cash reserve [for emergencies]."
EARMARK MONEY FOR YOUR CHILD'S EDUCATION
Tuition bills are just around the corner for Rebecca Wills, a 55-year-old physician with the health services department at California State University in Long Beach. Wills has about $10,000 saved in a gift trust for her 14-year-old son's college education. "I need to be prepared to have about $15,000 a year," she says, anticipating that Justin will attend a four-year college out of state to pursue his dream of becoming an architect.
Wills was age 43 when she decided to adopt her son, who was 3 1/2 years old at the time. While she has about $250,000 saved in a 403(b) at work and $10,000 set aside in an IRA, she doesn't want to have to tap into her retirement account when the time comes to send Justin to school. Wills also has outside investments, mostly stock mutual funds and time-share properties. But more than likely, she will have to make up the shortfall from her income, which is about $9,000 gross a month.
This may not necessarily be a bad thing. "At $10,000 a year, which is about $800 a month, a single parent might be able to pay for a child's education out of earned income," says Mark A. Mitchell, registered advisor with AXA Financial Advisors in San Juan Capistrano, California. The typical African American student is not paying an Ivy League price tag for a college education, he adds.
According to the New York-based College Board, 41% of all students attend four-year state universities where annual tuition averages $8,470 including room and board. There are several ways for students to finance their college education, including scholarships, grants, loans, work-study programs, summer jobs, and part-time jobs.
Although you want to save as much as you can for your child, you don't necessarily want the money tied up in an irrevocable account in your child's name. "If you started saving when your child was a year-old and you set aside $166 a month or $2,000 a year until age 18, that principal amount of $34,000 would turn out to be worth a little more than $60,000 (at an average rate of return of 6%)," explains Mitchell. "But say your kid ends up needing $40,000 for college. You can't ask for the other $20,000 back."
A benefit of investing funds in a child's name is the money is taxed at the child's lower rate. But Mitchell says this could count against your child when applying for financial aid. Students can be required to contribute as much as 35% of their total assets toward college costs each year compared to 5%-6% of parents' total assets.
A better alternative: Section 529 college savings plans. You can put up to $50,000 in one year and $247,000 over the course of the plan. The money grows tax-free (as of 2001). You can name your child as the plan's beneficiary, and if he or she doesn't go to college or you change your mind, you can alter the plan's beneficiary.
Education IRAs are still viable options. The maximum contributions allowed will increase from $500 to $2,000 effective next year. Also, these plans will allow for tax-free withdrawals for educational costs from kindergarten to grade 12. Moreover, tax deductions for college tuition and related expenses increases to $3,000 for the 2002-2003 school years and $4,000 for 2004-2005. To qualify, single parents must have an adjusted gross income below $65,000.
SAVING FOR RAINY DAYS AND GOLDEN YEARS
Today, Roberts earns six figures in salary including commission as a sales manager for RCN Telecommunications. She has amassed more than $50,000 in investments, including employer-sponsored retirement accounts, mutual funds, and individual stocks. Her goals are to set aside money in another tax-efficient retirement plan (she currently contributes the maximum allowed to her 401(k) at $10,500 a year) and to get an early start earmarking money for her son.
According to the 2000 investors survey conducted by Charles Schwab & Co. Inc. and the Ariel Mutual Funds, African Americans are saving as much as or more than whites--roughly $12,200--for their children's education. But they are forsaking their retirement savings, with the average savings of $44,000 compared to $69,000 for whites.
"No one knows what the future holds. More and more we are seeing children coming back home to live with their parents," says Jonathan Sard, a certified financial planner with Financial Alternatives in Atlanta. "You think that your kids will be gone by the age of 22, but your son or daughter might get laid off from his or her job," he says. "You never know when the support of your child is going to end."
The Ariel/Schwab survey revealed that 32% of Black parents expected to support adult children compared to 20% for whites. Asks Sard: "If you have saved all this money all a long for your kids' education and nothing for your own retirement, what happens to you when you're ready to stop working?" Figure out how much you need annually to live in retirement--projected living expenses and income (Social Security, pension, and value of savings). How much do you need to save annually to reach that retirement goal?
As a single parent, how you allocate assets for retirement and your kid's education may differ, says Pierre Dunagan, president of the Dunagan Group, a Chicago financial services firm. "If you are age 40, your mix may be 60%-80% in stocks mutual funds and 20%-40% in fixed-income funds," he says. "For your kids, the younger they are, the more aggressive you can be--80%-90% in stock mutual funds and 10%-20% in fixed-income securities.
Moreover, you need to stash some cash in a contingency account (three to six months' living expenses). Both Wills and Roberts understand how crucial it is to faithfully deposit money into an emergency till. Wills unfortunately has depleted her funds, mainly owing to about $25,000 in debts from a dissolved medical partnership and $10,000 in home repairs after an earthquake.
SHARING IN PARENTAL AND FINANCIAL OBLIGATIONS
Bilal Hailstock debunks the stereotype that single Brothers shrug their responsibility of fatherhood. For 11 years, he and his ex-girlfriend have had joint custody of their daughter, Atiya. "We never had to go through the system; it was always understood. Her mother sends money when [Atiya is] with me and when she's with her mother, I send money there," explains Hailstock.
Hailstock, 36, is pleased with his company's compensation package: He has disability and life insurance policies--which each pay three times his salary; a 401(k) plan in which his employer matches dollar-for-dollar; and, a pension. For the past 10 years, the senior claims adjuster for New Jersey Manufacturers Insurance Group has contributed 10% of his salary to his 401(k), valued at more than $100,000, and mostly invested in the Vanguard S&P 500 Stock Index Fund. Hailstock also has about $7,000 invested in three emerging-growth tech companies.
His biggest concern is identifying the best way to fired a college education for Atiya--who plans to attend her parents' alma mater, Hampton University in Virginia. Until two years ago, Hailstock's daughter lived with him; now he gets her during the holidays and summer months. Atiya moved in with her mother, who recently nailed down a position at a radio station in her hometown of Baltimore.
Regardless, if you are a single parent with shared custody or sole custody, "it is important that the right documents are drawn up," says Mitchell. "You want to make sure that money earmarked for your child goes directly to him or her, especially in situations where there are multiple children from other relationships living in the same household." It might be better to set up a custodial account under the Uniform Gift to Minors and Uniform Transfer to Minors acts, where the ,money is held in trust until your child comes of age (18 or 21).
Mitchell adds that you should hold life insurance in a living trust to ensure your child receives death-benefit payments. In general, a trust holds cash, securities, real estate, and other assets that are transferred to a trustee (a person or corporation) on behalf of its beneficiaries. You can change a revocable living trust; you can't touch an irrevocable one. You can use testamentary trusts to isolate funds for your children from a first marriage. If you are the sole parent raising the child, you need a will that appoints an executor as well as a guardian for young children, otherwise the court will make that decision for you.
There are a lot of different dynamics that come into play when you have children from a divorce. Whoever is the prevailing spouse may get alimony for the health, welfare and maintenance of herself (or himself) and the children. However, child support is earmarked for the children only. Moreover, alimony is tax deductible, child support isn't.
Recent changes in child-support laws are helping single parents track down elusive spouses who owe thousands in unpaid, but court-ordered, child support. The Office of Child Support Enforcement (OCSE) estimates that 4.4 million parents have skipped out on paying child support. To change that statistic, OCSE has culled two major allies.
Now after a person gets a new job his or her name is automatically input into the National Directory of New Hires, a federal database that enables child-support recovery agencies to locate hiding parents and collect overdue funds. Or depending on your state, the License Revocation Program takes away your ex's commercial, professional, or driver's licenses. Your ex will have to arrange to make amends before getting his or her license back.
Reducing taxable income is a key part of estate planning. Owning a home offers significant tax benefits. The federal government provides tax deductions for property taxes and mortgage interest. Roberts refinanced her mortgage to take advantage of lower market rates, 6.2%; she also pays extra on her monthly mortgage payments to build up equity in her home even quicker.
"I really want to get my hands on my first piece of property (a two- or three-family home) this year," says Hailstock, who is virtually debt-free with about two years left to pay on a car note. A savvy entrepreneur, he currently uses money earned from sideline businesses--selling fashion accessories--to fund a personal savings account. Atiya helps with sales and Hailstock is teaching her to invest part of her earnings. He currently plans to open up a Roth IRA in anticipation of receiving additional monies from work. "The insurance industry is sound," he explains. "During times when the economy is rough, that is when we tend to flourish." And that translates into a stable income that he can rely on to fund his daughter's education.
To Do List
earmark money for education so you won't have to tap into your retirement fund.
* Stash cash for an emergency fund, covering at least six months of living expenses.
* Consider an Education IRA.
* Hold life insurance policy in a living trust to ensure your child receives death benefits.
* Enlist the help of a state agency such as the Office of Child Support Enforcement (New York residents) to track a deadbeat parent.
* Talk to a tax consultant to ensure you receive maximum write offs.
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|Title Annotation:||managing your money and kids on your own|
|Author:||BROWN, CAROLYN M.|
|Date:||Oct 1, 2001|
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