The Power Of One

Building a sound fiscal foundation while you are living single

income in a liquid account (e.g., a money market). It serves as an emergency fund–three to six months of living expenses–something every single person should have.

Single women–heads of household, especially–have a lot of reasons to be conscientious about planning for their financial independence. “They live longer than men; they work about 111/2 years fewer than men (time out for pregnancies and raising small children), so they don’t have as many years put in for a pension; they earn less than men for the same work [67 cents out of every dollar for black women]; and they get less in Social Security benefits,” Barlow explains.

She goes on to say that there are two things that build wealth: time and money. “The more you have of one the less you need of the other.” For instance, “A person who is age 25 could build a very nice nest egg by saving only $25 a month. If they wait until they are age 45, they are going to have to save $240 a month to achieve that same nest egg at age 65. So they have to save almost nine times as much if they wait 20 years.”

A recent survey by Ariel Mutual Funds and Charles Schwab revealed that African Americans tend to wait until they earn six figures before they invest no matter how old they are. This gives couples with two incomes a head start on singles in building a nest egg. But the key is not how much money you make; it is what you do with your money, says Barlow.

In fact, being solo can work to your advantage, if you plan properly. Singles can take advantage of the fact that they only have one mouth to feed and one body to cloth and shelter. Set realistic goals about how you would like to live now and in the future, and then develop a financial plan to help you achieve those goals–even if you are living from paycheck to paycheck. Theoretically, single people should find it easier to pay themselves first.

You have probably heard it before: Contribute as much as you can to your 401(k) or 403(b) plan. After those plans are fully funded, contribute to a Roth IRA. The participation level is still low, although the only stipulation is income, says Jonathan Sard, a certified financial planner with Financial Alternatives in Atlanta. For a single person to contribute to a Roth, he or she can’t earn more than $110,000 (adjusted gross income). Starting in 2002, the maximum annual contribution allowed will increase from $2,000 to $3,000, and in 2008, it will increase to $5,000 (For more tax advice, see “What the New Tax Law Means to You” this issue).

“Both the Roth IRA and 401(k) plan come into play for retirement planning and tax planning,” adds Sard. “By contributing up to the current allowable limits, you automatically lower your taxable income. Employer plans grow tax-deferred while the Roth IRA is tax-free income at age

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