Q: I am a single mom with $25,000 to invest. Any ideas?
A: First of all, kudos on looking past immediate needs and temptations and thinking long-term by investing. Too many people in tight financial circumstances look at any lump sum as a windfall to be spent right away. But when this happens, it usually is not long before they find their finances tightening up again. The way to work towards a better future is through financial discipline and targeted investing.
So, what kind of investments should you be making? A good way to answer that question is to think of your future needs and work backwards from there.
Financial priorities for a single parent
As a single parent, you probably have a number of different needs to be met for you and your children. However, they probably fall into three major categories: short-term emergencies, future education needs and funding your retirement. Here's how you can put some of that $25,000 towards each of these types of needs:
1. Build an emergency savings fund
A basic building block of saving money is an emergency fund, a reserve of money you can access easily to meet unexpected expenses. Besides the usual expenses that can pop up - car repairs, medical bills, etc. - a single parent who is the only breadwinner for her family needs to be prepared in case she loses her job. Having an emergency fund of three to six months worth of essential expenses would help you cover the bare necessities while you look for a new job.
While people tend to think of savings accounts and money market accounts as the natural places to put an emergency fund, given today's low interest rate environment it may be worth looking for a long term CD with a relatively low early-withdrawal penalty. Unless a need arises in the first few months, chances are good that a higher-yielding CD would more than make up for the penalty if you have to break into your emergency fund a further down the road.
2. Look into a 529 education savings plan
These are funds that allow money invested in them to grow tax-free as long as they are eventually used for educational purposes. Long-term stock investments within a 529 fund may be appropriate if your kids are very young, but you should downshift to more conservative investments as their college years approach. Also, since you cannot access this money for non-educational uses once it is in the 529 plan, don't commit more than your kids are likely to need for school.
3. Continue to save for retirement
Between running a household on a single income and providing for your kids' education, there will always be plenty of demands on your money. Still, don't forget to also provide for your own future by using some of the money you have at hand to boost your long term retirement investments. And no, this isn't being selfish - if you don't provide for yourself, your kids may be called upon to do it when you are older.
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