How to become Financially Independent as a Single Mom

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“Becoming a single mother means your life is over,” so the narrative goes. “You’re stuck alone and miserable, forced to shoulder the burden of making money and raising your child all alone.“

Here at WeFIRE, we strongly disagree with this narrative.

Yes, supporting your child on a single income is difficult. And yes, being a single mother (or single father) requires hard work and sacrifice, but with careful planning it can also be full of joy and opportunity. Single motherhood does not mean you need to surrender your dreams.

In this article, we will discuss the ins and outs of financial independence for single mothers. The core path to financial independence is the same for single mothers as it is for anyone else – spend less than you earn and invest the difference. Achieving this may seem daunting when you’re responsible for children but with sufficient determination and planning, you’ll find that financial independence is in fact very possible!

Adopting a New Mindset

The stigma of single motherhood holds countless single parents back from going after their dreams. The reality is, financial independence can still be achieved by single parents if they…

• Seek help – As the saying goes, it takes a village to raise a child. You don’t need to spend all your time with your child to be a good parent. There’s nothing wrong with asking friends and family to watch your child for a couple hours each week so you have time for yourself. If those options aren’t convenient, you can also hire a babysitter. There are always options.
• Take time for yourself – You may be a single parent, but your life doesn’t have to be constant work and child rearing. Make sure to take the time you need for yourself and make space in your life for your hobbies. Seeing you overworked and tired all the time is not good for your child either. It’s always better to be happy.
• Take financial control – As a single parent, there’s no need to compromise your plans for the future and your vision for financial independence. You have full control over your money and your spending and all your assets belong to you and your child upon inheritance. If you do pursue FIRE in earnest, you won’t need to save as much to achieve because you only have your own retirement to worry about.
• Teach your child good money habits – Children don’t need to be kept ignorant of money, in fact, as long as all their needs are provided for, it’s good to teach them how best to save, spend, and invest money. Once your child is made aware, they will understand, and keeping your expenses within budget becomes a much easier task.
• You’re a single parent for a reason – No matter the circumstance that led to your single parenthood, being a single parent is a decision you made and a challenge you chose to take on. To be a single parent is a blessing, not a curse. You owe it both to yourself and your child to live a fulfilling life so you can provide them with the best possible future.

What matters is changing your mindset, so you’re thinking of ways you can grow and develop instead of ways you’re restricted. After all, only you can say where your limits lie.

The Actual Steps

To achieve financial independence, there are steps virtually everyone would benefit from following. Although they are laid out in an order of priority, you should ideally be doing all of them at the same time, at least until the first few steps have been completed.

Step 1) Pay off Non-Mortgage Debt

Put simply, there are 5 main categories of debt that face the American public, they range from bad, to neutral, to good.

Bad:

• Consumer Debt – Technically “consumer debt” refers to any debt you take on in order to purchase a good, but for our purposes, when we say “consumer debt” we really mean “credit card debt” and “payday loans.” These are your high-interest debt that should be avoided as much as possible and paid off as soon as possible. 
• Car Debt – Car loans don’t have nearly as high of an interest rate as consumer debt, but overly expensive car loans are generally a waste. New cars drop dramatically in value the moment they’re driven off the lot so there’s no much benefit to going into debt for your car. With some diligent saving, you’ll be able to purchase a perfectly good second hand vehicle entirely with cash.

Neutral:

• Student Debt – Depending on the amount you owe, the interest rate and if you’re currently investing in stocks, you might want to hold off paying back your student loans. We go into more detail about student loans, and debt repayment more generally, in this article but suffice it to say, if your student loan interest rate is 5.5% and the stock market has an average return on investment of 10%, it makes sense to prioritize investing in the stock market.

Good:

• Housing Debt – Mortgages are the largest debt the average person will take on but in many ways it’s also the most necessary. A house is a place you can live, and very affordable too, after you’ve paid off your mortgage. You can also sell your house in the future for a big profit, or rent it out for a monthly income. Although there are many benefits to taking on a mortgage, mortgage is still debt which means there are risks to keep in mind. Housing debt will cost you in interest, drain your income as you pay if off, and it’s not a guarantee that you’ll sell it for a higher price than you purchased it.
• Business Debt – Not every person will go into debt for starting a business but while the risk is high, so is the reward. Many entrepreneurs also opt to save their money to start a business rather than go into debt. As this category is less common, we will for now leave it aside.

Step 2) Emergency fund

Having an emergency fund in place can go a long way to easing your financial burdens and mental burdens. An emergency fund will cover unexpected expenses like car breakdowns or your child’s sudden peanut allergy forcing you to take time off work.

How much do you need in your emergency fund?

Ideally, you want to track your expenses for one month, and then multiply that number by 6. This will give you roughly the amount you need to sustain yourself and your child for half a year. This amount can be revised upward or downward, depending on how secure your job is and how risky your investments are. If your job is very secure with steady pay and you can afford to keep a smaller emergency fund (say 3 months), if your job is less secure with less expected pay then perhaps more (say 1 year).

It takes a bit of work, but you can track your expenses on a notebook, or through excel. If you’d prefer a faster, more efficient method, WeFIRE is currently running a limited time offer. Download the WeFIRE app and come try out our secure account tracking features and the AI Copilot for 1 month for free by clicking on this link. 

The best place to keep your cash.

While your emergency fund can be kept in a checking or savings account, we strongly recommend opening a new high yield savings account with a new bank and keeping your emergency funds there. The reason for this is because having money in a different bank makes it more difficult to spend and therefore easier to save.
Today HYSAs offer competitive rates as high as 4.5% in annual interest. As long as the institution you bank with is FDIC-insured, you can rest assured that your money will be safe.

Step 3) Increase Income

Making a living for yourself and your child while being a full-time caretaker is difficult even with a good job. Whether the compromise is to work more hours and spend less time with your child or to work part time and earn less, single parenthood is rife with difficult decisions.

The path we advocate for is finding more flexible free-lance work and speaking to management about getting a pay raise. As the head of household, it is within your rights to advocate for yourself so you have the money to take care of yourself and raise your child.

On the subject of suitable side-hustles, you can consider…

• Uber/Lyft – If you have a car, signing up as a driver for a ride-sharing app is always a viable side-hustle. On average, uber drivers earn $18.75/hr and lyft drivers earn $22.12/hr. Although these numbers don’t take the cost of gas or car maintenance into account, these are still respectable wages, and you stand to make even more during busier hours like the afternoon rush.
• Instacart – A grocery delivery service where you are paid per delivery. Generally, higher income and metropolitan areas pay better, so your mileage with this app may vary. Instacart is great for if you don’t like other people getting into your car and aren’t able to drive long distances.
• Doordash – An excellent option if you live in an area with a lot of restaurants. Unlike the two other options, delivery side-hustles, doordash doesn’t require you to drive a vehicle. If you live in an area that allows for it, you can get around on a cost-efficient moped and make a lot more per delivery. On average, Doordash pays anywhere from $15-25/hr depending on when you work.
• Babysit for other parents – Just as you need time to unwind, so too do other parents. As a parent yourself makes you a trustworthy candidate and you’ll likely know many fellow parents personally from picking up your child. Granted, this side-hustle is time sensitive, either when your child is very young and doesn’t mind unknown playmates in their home or when your child has grown older and left home. Otherwise it can be difficult to find the opportunity to babysit.
• Tutor – Online tutoring is easy to manage from home and allows for flexible scheduling, especially if you’re tutoring for children from other countries. For a list of viable online tutoring platforms, we suggest having a look at this article. Speaking with your fellow parents and offering your service is also an option.
• Dog-walker/pet-sitter – Being a dog walker or pet sitter can be a job you do alongside taking care of your child. As long as you teach your child to be careful around animals, walking dogs together is not just a way to make money, but also a bonding activity and opportunity to exercise with your child.

Although a long list, it is far from exhaustive. Read more about side-hustles.

Step 4) Tax Shelters

In order to help the average American reach retirement, there are many government-run tax shelters that offer a discount on the taxes you pay. The 4 most popular of such tax shelters are listed out below in a comparative table so you know how they match up.

Aside from 401(k), Roth 401(k), Traditional IRA, and Roth IRAs there are other ways to reduce taxes as well. The more common of these are…

• Health Savings Account (HSA) – HSAs exist to help you pay for healthcare but can also serve as an effective retirement savings tool. Contributions to the HSA are tax deductible and withdrawals from the HSA for healthcare are also tax free. The contributions rollover year on year, meaning you’re able to make up for past years. After 65, you can withdraw as much as you like and only be subject to income tax. Until then, all withdrawals from the HSA must go towards medical expenses (check out this article for more information), or else income tax and an additional 20% tax penalty will be incurred.
• 529 Plan – The purpose of 529s is to help parents pay for their child’s education. Contributions to the 529 Plan are tax deductible and withdrawals to pay for schooling are also tax-free ($10,000 can go towards elementary and high school expenses). Contribution limits are very high and differ by state, the lowest being $269,000 in North Dakota. 529 Plans have little impact on your child’s eligibility for FAFSA because they are considered the parents’ asset. Unspent money in the 529 can be rolled over to a different beneficiary or a Roth IRA.

Step 5) Invest

People who aim for financial independence use the 4% rule to determine whether they’ve reached their target. In theory if you stick to withdrawing only 4% of your stock portfolio every year, you’ll be guaranteed at least 30 years of withdrawals without running out of money. You can find the amount you need, aka your FIRE number, by multiplying your annual expenses by 25.

By maxing out your Roth IRA and 401(k) and taking advantage of other tools like the Health Savings Account and 529 Plan, you’ll be able to make the best use of your investment earnings without being subject to undue tax.

An unexpected boon

Although single parents earn less in income than dual income households, a single parent also spends less. As a single mother, your FIRE number is lower than that of a couple. With more control over your finances, you have more say in how much money you save and how much you spend.

Note: These aren’t all of the ways you can invest but the other options like cryptocurrency and foreign emerging markets have high risk and aren’t as suited to single parents so we decided not to cover them here.

Stocks

Since the creation of a tracking system for the US stock market, it’s been recorded that the US stocks has grown by an average of 10% every year. If we assume an inflation rate of 3%, that makes for a real annual return of 7%. As long as you invest in a broad-based index fund like S&P 500, you’ll be able to capture the stock market return at very low management fees.

Of course, the market is volatile and unpredictable in the short term. It can be up 15% one month, only to drop by a third in the next. Trying to time the market doesn’t work, which is why it’s better to ignore short term price increases or dips and focus instead on the very long term. Only then will the 10% average returns prove out.

Bonds

A bond is a contract between you and a company or the government, where you agree to lend them a certain amount of money and they agree to pay you back by a certain date plus an additional amount in interest. 

Bonds are graded according to how trustworthy the burrower is. If you’re lending money to the US Government (Treasury Bonds), you’re guaranteed to get your money back but the interest will be lower. If you’re lending money to a company that has a history of defaulting on bonds (junk bonds), the risk is much higher and so the interest will also be much higher. Exactly like how someone with a lower credit score have to pay high interest rates to borrow money

In today’s economy, bonds don’t offer very high interest rates. The 10-year US Treasury bond offers a yield of 3.78% which only barely covers inflation. Meanwhile CCC junk bonds have a yield of 13.38%, but come at the fairly high risk of losing your principal (initial amount you lent out).

At these rates, bonds do not make for an effective method to store wealth. A high yield savings account offers rates from 4.5-5% and because they are FDIC-insured, they’re almost as safe as US Treasury bonds. 

You may want to keep a certain amount of money in bonds for the purpose of diversification as you near retirement but at their current rates, they are not good for building wealth. Interest rates often change, if bond yields increase in the future, then we’ll reconsider.

Real Estate

Unlike stocks or bonds, real estate serves a purpose beyond growing wealth; shelter. People need places to live and well-situated locations are especially in demand. If chosen correctly, a real estate property can be a very good investment, both as a property you rent out, and as an asset you sell after its value increases.Before diving into the choppy waters of real estate investing, there are somethings to consider:

• Real estate is not a passive investment. Unlike monthly contributions to a broad-based index fund, real estate ownership requires finding a good property, bidding, maintaining the property and vetting renters if you intend to rent it out. Finding a good place to rent out requires a good eye for consumer demand. Although rent income is a great income stream, the process can be time consuming.
• The US housing market is currently in a bubble. Does this mean that buying a house now will definitely lead to a drop in value and cause you to lose money? Not necessarily, we wouldn’t dare try to predict when the bubble will burst (or if it even will, for that matter). The fact is, mortgage application is at its lowest since May 2023 and home prices are still far above what the average salary can afford.
• Houses take time to buy and sell, which means a big opportunity cost. As an illiquid asset, your money can be tied up in real estate for years and decades. During this period of time, you won’t be able to put it anywhere else, whether you spend it, in stocks, or in bonds.

Further Concerns

Aside from the topics covered above, there are some further concerns unique to single parents.

Child Support

In the case that your child’s other parent is still alive, they are obligated by law to make child support payments as the non-custodial parent. In most cases, this is 15%-25% of their gross income for one child, with the percentage increasing per additional child. With child support going towards raising your child, more of your own income can be put towards investing.

Insurance

As sole caretaker for your child(ren), having insurance in place can do a lot for their future and your peace of mind. Life insurance is a heavy consideration for anyone but it’s particularly weighty for single parents. To learn more about the ins and outs of life insurance, specifically for single parents, check out this article.

Claim Your Tax Benefits

As a single parent, you are eligible for an array of different tax benefits. Take advantage of these by making sure you…

• File as head of household – If you earn at least 50% of household income, you qualify as head of household. Compared to filing as “Single” or “Married Filing Separately”, you can claim a lower tax rate.
• Claim child tax credit – According to Turbo Tax, “A single mom making less than $200,000, can claim a $2,000 child tax credit for each child when using the Single or Head of Household filing status.”
• Deduct childcare expenses – Under certain circumstances, the cost of daycare is tax-deductible if you rely on it in order to work or look for work.

Conclusion

As much as the prospect of single parenthood is daunting, it’s also full of joy and opportunity. Just because you’ve become a single parent doesn’t mean your life is over. You can still take the time to do the things you want to do, plan for your own financially independent future and, who knows, maybe meet someone who will become the love of your life and help you raise your family together.

At the end of the day, the steps to financial independence are the same for single parents as they are for everyone else and the challenges are much the same. 

How can we make more money than we spend? 

How can we put that money to good use so it grows in the future? 

These are the questions that every person must face in their journey to financial independence, whether they’re married and child-free, or single with a high income. So what if your road is a little longer? It’s a good solid path all the same.

Did you find this article helpful? Check out our other articles for more tips to accelerate your journey to Financial Independence! 

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