- March 29, 2016
- Category: Financial Planning
Being a single parent is not easy. Coping through widowhood or divorce along with children is painful. Besides the emotional grief to deal with, a challenging financial journey lays ahead. As household responsibilities are divided between spouses, financial matters are handled and executed by one partner in the family while the other is passive. When the decision making partner is no more, it is a huge task for the other partner to get familiar with money matters. Securing the financial future of the child and getting an immediate grip on existing finances become a priority. Here is a checklist on how you can streamline financial issues after the spouse is gone or separated.
- Review Budget: Total income usually takes a hit when the spouse is no more or in case of divorce. Savings are affected as household expenses which were shared earlier will now have to be paid singly. More funds need to be provided for contingencies. Certain critical questions need to be addressed to get an understanding of where you stand financially:
- Would you be able to take up a job if not working earlier?
- Would you be able to sustain at least your household expenses with your potential income?
- Do you have a strong support system to take care of your kids? Can you afford day care?
- Do you have an alternate income stream to support expenses?
- Can you afford to meet your child’s lifestyle expenses or compromise on them?
These questions will help you to assess your cash flow and revise your budget to reflect the changed situation.
- Settle Liabilities: Outstanding liabilities after the death of spouse can be a big drain on cash flows. It is thus imperative to repay debt first. Proceeds from life insurance cover of the deceased spouse can be used to repay debt.
In the case of divorce, it is prudent to mutually decide in advance about sharing debts with least possible conflict. You and your spouse can both decide to continue sharing the loan burden or sell off the property to close it.
- Have adequate insurance: You need to ascertain whether your existing income and the proceeds from your spouse’s life insurance policy are adequate to cover household expenses, outstanding debts and future goals like child education. If not, then buying additional life cover should be a top priority as you would be the sole breadwinner now. You also need to have adequate health cover to take care of huge medical expenses.
In the case of separation, nominations in life insurance policies in favor of the spouse need to be changed quickly. If you are the sole custodian of the child, then you need to reassess your life insurance requirement to secure your child’s financial future. While re-computing cover, it is prudent to make a conservative assumption about not receiving any money from your spouse for the maintenance of child. Employer health policies and independent family policies having spouse’s name need to be removed to reflect the new circumstances.
- Complete banking & other formalities: After spouse’s death, the priority should be closing all bank accounts, making insurance claims, application to the employer to get provident fund and other benefits.
In divorce, it is not just joint liabilities and assets that need to be settled. Bank account, demat account, bank locker, etc., everything that is joint needs to be closed. With the consent of both parties, the joint bank account can be converted into a single account of the spouse who is operating it as the primary account. Any holdings in the joint demat account can either be liquidated or transferred to respective new individual accounts of both parties with mutual consent. In the case of joint bank lockers, both parties need to be present at the branch to complete the closure formalities and divide the belongings by mutual decision.
- Estate Planning: As a single parent, it is imperative to create a Will for the financial security of your child. You can also create a trust for your minor kids and appoint a trusted individual as their guardian.
If your Will already exists at the time of separation, it needs to be amended quickly to change the beneficiaries. Further, nominations across life insurance policies, investments, bank accounts, etc., in favor of the spouse need to be changed.
- Re-plan investments: With a sudden shift from double income to single salary, you will have to review your financial goals. Essential goals like children’s education will have to be given priority. But do not compromise on your retirement goal. While the financial security of your children would take precedence over everything else, you need to think of your finances too in twilight years.
You also need to review your asset allocation. Locking up money in safe debt products will not help to meet your financial goals. To build wealth over time, you need to invest smartly in equities. While your risk taking ability will be low, you can invest in equity mutual funds instead of directly investing in shares. You can also invest in hybrid fund for starters which invest in a mix of both stocks and debt instruments.
Any lump sum received after spouse’s death or through alimony need to be invested with a lot of thought. Avoid hasty decisions and put the the money received in fixed deposit till you come up with a concrete investment plan.
Conclusion: A single parent can appear vulnerable to many. There will be relatives who will dispense advice as per their whims & wishes but not understand your financial situation completely. You will have constant fears and doubts about taking financial decisions. It would be better to put off decision making till the time you think rationally about money and your financial goals. You can seek help of a competent financial advisor who would give you unbiased advice bearing your complete benefit in mind.