Single? Even more reason to focus on financial planning.
Being single has its pros. One of them is that you have complete freedom to decide how to spend and save your money through a budget that’s uniquely your own. But along with that benefit, comes the hard truth that you, as a single person, don’t have a safety net of a second income in case of a financial emergency. But according to John Ludlow, senior financial planner, Commerce Trust, with the right personal financial plan, you can prepare yourself to live your best financial life now, and well into retirement. “There’s never a bad time to start financial planning, but I would tell single people to start as soon as possible,” Ludlow said.
Budget as a first step.
As a single person, a great place to start with a personal financial plan is a budget. Several tools and apps, including Mint and Excel, can help with getting a handle on your cash flow, spending and debt situation. “When it comes to an actual method, a pretty simple one that I use when I start with a client is called the 50/20/30 method,” Ludlow said. That method states that you should spend up to 50 percent of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split up, with 20% going into savings and debt repayment and 30% going toward anything else you might want. This can be difficult to stick to at first, so it may help to find an accountability partner who will agree to follow this budget, too. Schedule quarterly check-ins with them to review how each of you is doing with sticking to the budget and to share tips, tricks and encouragement.
In debt? Get out of debt first, then begin to build an emergency fund as something to fall back on in a single-income household.
Emergency funds are important for everyone to have, but are easier to build for people with a consistent income. The first thing to do when trying to establish an emergency fund is to create a habit of saving. Setting a goal for the amount you’d like to see in your emergency fund can help you stay motivated. Ludlow said that, ideally, having enough cash to cover six months’ worth of expenses in an emergency fund is a great goal. But understanding how daunting that can seem for some, he recommends that if you’re just starting to build this fund, aim to save at least three months of expenses. It’s also important to regularly monitor your progress. If you’re struggling to keep the habit of putting money away into this fund, consider creating automatic transfers. And of course, as you create significant savings, celebrate your success by making small purchases you’ve been saving for, planning a vacation you’ve been wanting to go on and can now afford, or if you own a home, making small investments that will add value over time.
If you’re not a homeowner, consider it as a long-term investment.
Ludlow agrees that owning a home can be a good long-term investment. But he encourages single people to consider their budget, their wants and needs and debt before making the leap to own. “If you’re someone who wants to spend a certain amount of money each year traveling, then maybe a mortgage isn’t in your budget. But if you need the space and can afford it, it can be a good thing.” Ludlow advises. He adds that if a single person already owns a home, from a cash-flow perspective, a mortgage that was previously in place could be significantly lower than the price of rent. “I wouldn’t move if that were the case unless I ultimately had to,” he says.
One of the biggest advantages of owning a home is that you’re no longer paying rent toward a property owned by someone else. Putting money toward rent is an unrecoverable cost, but money spent on a mortgage is going into something that will likely increase in value over time. It’s a long-term investment. Learn more about mortgage basics here. Ready to take the leap? First, start saving for a down payment, which can be part of the above-mentioned 50/20/30 method. Also, make sure you’ve saved enough for anticipated closing costs if they are part of the terms of your purchase. They can range between 2% and 6% of the total mortgage loan. Before you start shopping for a home, determine how much you can actually afford, check your credit score and start to explore mortgage options. Lastly, before you start looking at houses, get a pre-approval letter from your lender so that when you do find the right home, you’re ready to make an offer.
What is the “singles tax” and why you should care.
Being single in the United States does not have the tax advantages that being married has. Single people tend to have fewer tax breaks, larger rent payments, and higher household expenses, due to not having someone to split the expenses with. Singles also pay higher bills for things like cell phone payments because discounts are often only offered in multiples. To add to that, if a single person travels alone on a cruise, for example, they are often charged a “single supplementation” for the use of a double room. All of these factors add up to what is known as the “singles tax.” Or as you may already see it, a financial burden that’s annoying at its best and at its worst, financially crippling. “I think if the idea of the singles tax was brought more to the forefront of people’s thinking, they would be more diligent with their spending or paying attention to inflation, for example,” Ludlow said. Knowledge is power, though. So now that you’re aware of the singles tax, you can plan your budget accordingly to keep yourself in a good financial position.
It’s never too early to begin to build a retirement fund.
If you’re self-employed, you have options for building a retirement fund. If you aren’t self-employed, look into the retirement options provided by your employer. Take advantage of any 401(k) match they offer and then consider talking to a wealth planner or financial planner to find other avenues in which to invest. They can also look at inflation and determine how much you will need per month at the time you retire through the rest of your life. Once you’ve got a plan, check in on it once a year to see where you may need to adjust. Sometimes, it’s necessary to be flexible with the date you wish to retire based on the economy and market ebbs and flows. Consider turning a passion into a side gig for extra income that you can use as general cash flow if you’re concerned that you’re putting away more than you’re comfortable with for retirement.
Estate planning, while not a fun topic, is necessary to complete your personal financial plan.
Estate planning is not just for married couples. In fact, Ludlow says that single people need to focus on laying the groundwork for allowing someone else to make financial and medical decisions on their behalf if they aren’t able to do so. This can happen at unexpected times. For example, a car accident that leaves you in the hospital for a few months. And while estate planning is not just for death, a piece of this puzzle is considering where assets will go when you do pass away, because it may not be as clear as going to a spouse or a child. First, put a power of attorney in place for financial affairs and for health care decisions (a medical power of attorney). Next, work with someone to create a will or a trust if you have significant assets. A probate court will rely on state law to determine the order of inheritance of your estate in the absence of a will or trust.
Sit back, take a deep breath and enjoy your life, knowing you are financially prepared (or preparing) for what’s to come.
In conclusion, financial planning for single people requires discipline, foresight and a proactive mindset. By setting clear goals, building a budget, investing in yourself, building an emergency fund, planning for retirement, and protecting yourself and your assets, you can build a strong financial foundation that can support you – and your dreams.
The opinions and other information in the commentary are provided as of 09/21/23. This summary is intended to provide general information only and may be of value to the reader and audience.
This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such.
Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Commerce Trust is a division of Commerce Bank.
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