I just want to honor all single moms out there who never grew tired of taking care of their kids while managing their finances. I hope this will give you clarity. Not all single moms are in a similar situation but these are my recommended items in your personal finance kit. This is a multidisciplinary approach that includes spiritual, mental, emotional and social aspects as we explore the world of financial planning. It will take a lot of your time to master everything but the process is worth it.
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Get closer to God You may either have sufficient funds or not but without peace inside you won’t last this journey. Tough battles are ahead of you but being with God will keep your sanity within. Many single moms are distress with too much stuff in their minds. Without faith to the One who holds the future you may end up in chronic depression that may lead into suicidal thoughts. According to circleofmoms.comthe most common problems of single moms are no sounding boards when making decisions, taking care of the kids without someone to consult with during the middle of the night. You are not on your own. God cares for you His daughters no matter what happens specially with your life .
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Decide what you really want in life Remember that you are still alive and not dead, dream more for yourself. Your self- concept should not focus on your past rather focus on what you can achieve. You need to get back up because you were born to be a champion. You might be in a tight budget right now but again once you try to focus how to look for the opportunity things will turn out differently, finances will surely be positive. Lack of money doesn’t mean scarcity of favorable circumstances. nothing beats you when you Decide NOT to glorify the past.
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Talk to a legal expertIn the family code of the Philippines it says that whether you got a legitimate or an illegitimate child, the father should be responsible in supporting your kids financially. This is not voluntary but a responsibility of the father. Never be afraid to ask for financial support because your child deserves it. Dismiss the issue with the father and claim the rights of your beloved child. Withholding the father from supporting won’t make the situation better. Single moms are often smart, hardworking and a champ! Do not let those guys who messed up with you,continue living the way they want to. Let them be involved. Talk to the public attorney’s office Philippines. They can help you answers with your questions.
Support is defined under the Family Code of the Philippines (1988) as follows: Art. 194. Support comprises everything indispensable for sustenance, dwelling, clothing, medical attendance, education and transportation in keeping with the financial capacity of the family.
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Master the art of budgeting Doing this means understanding more about your priorities in life. As a single mom you will always juggle a lot of things. You will always be in lack when you don’t organize your money. The best friend of chaotic life is a troubled plan. I suggest you to have fun with a personalize excel file or an app that will remind you the allocation that you got for this week. You can experiment and analyze your behavior towards it. It’s like looking in a mirror. As a Financial Planner I used an excel file to keep me on track. I visit it everyday for 2-3 mins and this keeps on reminding me about how I manage my funds well. Again it is a matter of preference, whatever fits you and make you progress, go for it.
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Create an emergency fund There will be an earthquake that may shake your life but most of the time you don’t know when this will happen. That’s the principle behind the emergency fund. This will preventyou to be in debt and beg from other people when you encounter this kind of emergency. Preparation is the key. If you are currently saving some funds make sure to name that account. Study the behavior of billionaires, entrepreneurs because they know the value of this. When you get your paycheck, transfer automatically at least 5-10% of it. Build it on time and you will have an umbrella when it pour it all out.
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Get an insurance When you die accidentally without any safety net your immediate family especially the young ones will suffer. Think about your kids future. If you will use the cost benefit analysis, You will only pay for a certain amount so that you can be covered with a bigger amount that can help your love ones survive. Nothing can replace you, especially the joy that you bring while you are still alive but you will take that away when you suddenly demise. Insurance will give them a way to start a new life knowing that you cared for them. This will help them back up. For more info about the legitimate insurance companies check the insurance commission.
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Long term financial goals In order for you to win long term you need to act and think long term. Your kids are looking up to you, they are inspired to see you waking up every single morning working hard. Look at yourself 10-20 years from now. What are the aspirations that you want to attain. Heller Keller said “The only thing worse than being blind is having sight but no vision” Don’t look too much with the side mirror. Look at the windshield. Your life is much more bigger.
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Credit card debt Never ever use your credit card as your emergency fund. If you are already in debt don’t lose hope. There are a lot of ways how to take care of those things. Talk to someone who is financially inclined. Don’t talk to your family members or friends who are also broke. They will not give you the best advice to win. Just find a winner who have gone the same issue and found a way. Keep asking. Look for forums. Use the internet and the mighty power of google. There a re a lot books who talks about debt. U2 said a famous line Sometimes you can’t make it on your own.
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Invest in the education of your kids After you carefully manage to put up emergency funds, eradicate debt and built your savings. Yes, you can still invest long term. Beware of scams and always check the legitimacy of the company. As early as your child was born whenever you have extra resources put it to a mutual fund specifically to an equity fund. Historically our funds in the Philippines are doing great. Even at the peak of financial crisis we were able to recover.
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Find support from a community. Life will knock you down but remember that you have your own tribe. You are designed to be with a community who will support, love, hug , cry out with you when you are on your lowest point. When you are highly emotional you will commit more mistakes including on handling on your finances. When you are confuse with your situation there are mentors, friends, encouragers, winnerswho can help you. This will prevent you from losing more money and manage the funds while you are enjoying the journey of single motherhood. After all the struggles with your finances there’s a light at the end of the tunnel..
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Be an entrepreneur or ready to change your careerNothing is certain specially in your career. You try to embrace the fact that you have a higher calling. Being a single mom should not confine you within the box of your current situation. You got dreams that you want to achieve like baking, making lovely dresses, selling your coaching services. Whatever makes you productive please pursuit it.
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Self evaluationYou got the most awesome job in the world and like any other job there's always this performance evaluation. Rest days should be for self reflection. This is mandatory and not optional. Evaluating yourself will give you opportunity to drive your finances to the next level and prevent common mistakes.
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Create a will or trust This is related to estate planning. Never underestimate this tools. It is really important for you to have a knowledge with this to make things easier for you once uncertainty take place. According to Elder Law Answers, A will is a document that directs who will receive your property at your death and it appoints a legal representative to carry out your wishes. A will covers any property that is only in your name when you die and it allows you to name a guardian for children and to specify funeral arrangements.
A trust can be used to begin distributing property before death, at death or afterwards. It is a legal arrangement through which one person (or an institution, such as a bank or law firm), called a "trustee," holds legal title to property for another person, called a "beneficiary." A trust usually has two types of beneficiaries -- one set that receives income from the trust during their lives and another set that receives whatever is left over after the first set of beneficiaries dies. a trust can be used to plan for disability or to provide savings on taxes.
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Teach your kids about moneyKids look up to you everyday. Being a role model will create an impact to them. Once you neglect to explain to your child the way you spend they will immediately assume something. When gray area struck confusion sets in. Remind them about your inner values and priorities in life so they can put the money in a proper place..
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Romans 5:3-5 ESV
More than that, we rejoice in our sufferings, knowing that suffering produces endurance, and endurance produces character, and character produces hope, and hope does not put us to shame, because God's love has been poured into our hearts through the Holy Spirit who has been given to us
Turn on any business TV channel, and it is impossible not to be in awe of wise sounding financial analysts giving opinion about the market and stocks. Fundamental analysts will be analyzing economic conditions and their impact on a company’s business, and technical analysts will be analyzing chart formations. I don’t understand any of it because I am no Warren Buffett. And I don’t want to spend all my time figuring all this out. Do you feel the same?
Let me spell out my constraints, see if these are applicable to you:
I am not a finance wizard, I don’t earn my living by investing
I want my money to work and beat inflation instead of rotting in saving bank account or fixed deposits, but I am not chasing maximum return, I just want returns to meet my financial needs
I want to live my life and not spend it all just watching my investments
Based on my personal experiences and that of people around me, I don’t quite trust financial advisors; only thing guaranteed with them is their fees or commission, and they seem to suggest investments to maximize their income, not mine.
I call myself passive investor. My solution has been to practice passive investment philosophy of asset allocation and rebalancing, in a detached, systematic, methodical way. And I will explain it in this article. It has served me well, but I must caution that it might not be suitable for you, and it is not a financial advice of any kind. You should not blindly follow anything or anybody, not even Warren Buffett. Evaluate it, find out whether it makes sense to you. First and foremost, I advocate financial literacy.
Asset Allocation
First step is to understand your risk appetite, financial goals and timeframe. Evaluating this troika of risk-return-liquidity will help you in picking a suitable mix of asset classes. I keep aside contingency funds and short term needs in low-risk cash-equivalents (fixed deposit, liquid mutual funds), and medium term needs in medium-risk debt/bond mutual funds. Only for long term needs, I use asset allocation and rebalancing.
Figuring out risk appetite is quite hard. How am I supposed to know how I will feel if my portfolio falls by 10%, 20%, 30%, 50%? So I follow a popular rule of thumb for asset allocation: if your age is x, then portfolio asset allocation should be x% in medium-risk assets (bonds, gold) and (100-x)% in high-risk assets (equity, real estate). It is a good rule to start with, and based on learning and experience, one can fine tune it. The basic premise is that risk appetite decreases with age.
Let’s take a concrete example. Say, the age is 30 years, and for sake of simplicity, only investment options are bonds and equity. The suggested asset allocation is: 30% in bonds and 70% in equity.
Rebalancing
Rebalancing is a technique to maintain the desired asset allocation. Let’s say, one year back, you have invested ₹1 Lakh in chosen asset allocation of 30:70, i.e. 30% in bonds and 70% in equity. Suppose in last one year, bonds and equities gave 8% and 15% returns respectively. That will take allocation to 28.70 : 71.30 as shown in following table. To bring it back to 30:70, you will need to sell ₹1,470 worth of equity and invest that amount into bonds.
Asset
Desired Allocation
Investment
Growth
Current Value
Current Allocation
Rebalance
Post Rebalancing
Bonds
30%
₹ 30,000
8%
₹ 32,400
28.70%
₹ +1,470
₹ 33,870
Equity
70%
₹ 70,000
15%
₹ 80,500
71.30%
₹ -1,470
₹ 79,030
Total
100%
₹ 1,00,000
₹ 1,12,900
100%
₹ 0.00
₹ 1,12,900
Let’s see what would have happened if during last equity has fallen by 15% (instead of rising):
Asset
Desired Allocation
Investment
Growth
Current Value
Current Allocation
Rebalance
Post Rebalancing
Bonds
30%
₹ 30,000
8%
₹ 32,400
35.26%
₹ –4,830
₹ 27,570
Equity
70%
₹ 70,000
-15%
₹ 59,500
64.74%
₹ +4,830
₹ 64,330
Total
100%
₹ 1,00,000
₹ 91,900
100%
₹ 0.00
₹ 91,900
Rebalancing would require selling ₹4,830 worth of bonds, and investing that amount in equity. As you probably noticed, the rebalancing strategy forces to book profit in the asset class that has gone up, and invest in the asset class gone down (buy when low, sell when high).
Rebalancing Triggers
There are different tactics for triggering rebalancing. The example above is when rebalancing is done after a year, that works fine since it avoids short term capital gains that are taxed at higher rate. But you can also pick 6 months or 15 months. Whatever period you pick, do it with discipline. Doing it at gap lesser than 3 months is futile, it just increases time overhead and transaction cost.
Another trigger that I use is the imbalance threshold of 5%. When the gap between desired and actual allocation for a asset class is more than 5%, I rebalance. For example, when my equity allocation goes above 75% or below 65%, I rebalance.
Rebalancing along with further investments or withdrawal
If you are in accumulation or withdrawal phase of your investments, i.e. you are putting in or withdrawing some amount every month from your investments, you can incorporate rebalancing into it such that after putting-in or withdrawing, your portfolio is at the desired asset allocation. That reduces transaction costs as well as potential tax outgo.
Let’s take the example above, and suppose you were investing ₹10,000 at the current month, you would need to invest ₹4,470 in bonds and ₹5,530 in equity:
Asset
Desired Allocation
Investment
Growth
Current Value
Current Allocation
Invest
Post Rebalancing
Bonds
30%
₹ 30,000
8%
₹ 32,400
28.70%
₹ +4,470
₹ 36,870
Equity
70%
₹ 70,000
15%
₹ 80,500
71.30%
₹ +5,530
₹ 86,030
Total
100%
₹ 1,00,000
₹ 1,12,900
100%
₹ +10,000
₹ 1,22,900
Similarly if you were withdrawing ₹10,000 the current month, you would need to withdraw ₹1,530 from bonds and ₹8,470 from equity:
Asset
Desired Allocation
Investment
Growth
Current Value
Current Allocation
Withdraw
Post Rebalancing
Bonds
30%
₹ 30,000
8%
₹ 32,400
28.70%
₹ -1,530
₹ 30,870
Equity
70%
₹ 70,000
15%
₹ 80,500
71.30%
₹ -8,470
₹ 72,030
Total
100%
₹ 1,00,000
₹ 1,12,900
100%
₹ –10,000
₹ 1,02,900
You do not need to do these computations every month by hand, instead it can be incorporated into an excel sheet.
Summary
My passive investment strategy for long term investment has two parts: asset allocation and rebalancing. Asset allocation is to decide weight of various asset classes in the portfolio based on risk profile. I use x : (100-x) thumb rule for asset allocation between medium : high risk asset classes. Rebalancing is to keep portfolio at desired asset allocation by selling/buying asset classes that have gone above/below their allocation percentage. Rebalancing can be done periodically or at some imbalance threshold. Further investing or withdrawal can be folded into rebalancing to save transaction cost and taxes.
In the next article, I will share an Excel sheet to automate asset allocation and rebalancing. In future articles, I will discuss investments in various asset classes such as bonds and equity.
Have you used asset allocation and rebalancing? Please share your thoughts and tips in comments.
