Sandra Thompson, 50, is part of a growing trend: she is a single mother by choice—not by circumstance. In 1995, Thompson decided she was financially secure enough to care for a child on her own. She adopted then 3-year-old James through the One Church, One Child organization in Los Angeles. "I always hoped to be married and have children, but then I realized that I was getting older," she says with a smile. Thompson, who is adopted, earns $48,000 as a music professor at the University of Central Oklahoma. Each month, she allocates $200 directly to her 403(b) account and places $150 in a teachers' retirement fund that is matched by the university. Currently, she has about $100,000 saved for retirement. Thompson owns a home and pays $1,000 each month—double what is required—to pay off her $80,000 mortgage (at 5% interest) before age 65. The rest of her household expenses average about $400 a month. One of Thompson's main concerns is debt. When her mother died in 1991, she began spending money on vacations to get away from home. When she adopted James four years later, she says, "He didn't come with much, and I wanted to spoil him." She charged more than $22,000 on gifts but has been able to eliminate most of that debt using money earned from summer jobs. She still has about $4,300 on three credit cards with interest rates ranging from 21% to 24%. Thompson says her goal is to get rid of the remaining debt so that she can concentrate on saving for James' college education. At present, he has about $500 from birthday and Christmas gifts in a savings account. His godfather also invested an unknown amount of money for him. Like most single mothers, Thompson's challenge is to use her modest income to pay her daily expenses, save for retirement, and invest for her son's education. According to the Women's Institute for a Secure Retirement (WISER), two out of three working women earn less than $30,000 a year. With such limited resources, financial advisor Cheryl Creuzot says it is imperative for single mothers to put certain basic elements in place: ESTABLISH A STRONG FOUNDATION "Single mothers need to lay a solid foundation before they think about long-term investments and asset allocation," says Creuzot. "Their primary goals should beto create an adequate emergency fund, establish a budget, live within the confines of that budget, and eliminate debt." Financial planner Kathy Williams, Thompson's advisor of three years, says Thompson should use the extra $500 that she's putting toward her mortgage to pay off her high interest credit cards. Once that debt is paid off, the $500 should go toward establishing an emergency fund, says Williams. Most financial planners advise having at least six months of living expenses put away, but Williams suggests that single mothers aim for at least three months, as they may not have the resources to do more. Having an emergency fund is critical for a single mother because she may not have anyone to rely on if she loses her job. The emergency fund should be kept in either a savings account or credit union—a place where money can earn interest but still be accessible. Creuzot recommends the no-fee ING Direct Orange Savings Account, which offers a variable 1.8% annual percentage yield. Another part of the foundation is having adequate disability and life insurance as well as a will. "Risk management is extremely critical for a single mother," says Creuzot. "If the woman becomes sick, disabled, or dies prematurely, she has a dependent, so she's got to make sure that all the 'what ifs' are taken care of." Thompson has a $25,000 life insurance policy through the university, and she doesn't have a will. Williams suggests Thompson increase her life insurance to at least $150,000, which will give her enough to pay off funeral expenses, the mortgage, and other debt, with a little money left over for James. SAVE SENSIBLY With the foundation in place, single mothers can begin saving for retirement and their children's education. "Adoption is a growing trend," says Creuzot, "but what's more common is single motherhood achieved because of divorce, and most divorce decrees don't speak to college costs." Williams suggests concentrating on saving for retirement first, advising single mothers to put as much as possible into their 401(k) plans and Roth IRAs. "Women have to look at this as funding for the long term," Williams says. "Single mothers will have three to five different jobs before they retire, but instead of rolling over their 401(k) accounts, they often withdraw the money and spend it." In terms of investing, Williams recommends a growth and income asset allocation, where the objective emphasizes modest capital growth with a focus on generating income. The risk tolerance for this allocation is moderate, with an investment time horizon of five years. This portfolio mix includes 25% large-cap growth, so that the focus is on large, mature companies that are still growing. This allows for an increase in assets over time with moderate risk. While experts estimate that parents would have to save $200 a month from the time their child is born to send him or her to a state school for four years, that figure may be a bit unrealistic for single mothers. Creuzot suggests that single mothers determine how much they can afford to save and set the money aside in a 529 plan. These state-operated plans have investment features similar to mutual funds or variable annuities. And as long as the money is used for college-related expenses, you won't pay taxes on interest gains. PRESERVATION Finally, single mothers must do estate planning. The federal estate tax, which must be paid after death on estates worth $1 million or more, is something many people don't consider. "If you add up the value of your home, life insurance, and other assets, it isn't hard to get to $1 million," says Creuzot. "If you're married, you get a marital deduction that defers the estate tax, which starts at 41%, until the second death; for a single person, the tax is due nine months after death." Women need to ensure that their estate is not eaten away by taxes and administrative costs, and they should also identify a guardian for their child. Addressing these issues might be challenging for single mothers, who may have limited resources to provide for themselves and their children. But Williams' advice is simple: "It's not the amount of money you earn, it's what you do with it that matters." WHAT YOU SHOULD KNOW 1. Single moms should make savings a high priority. Since there is only one income, you should immediately begin saving for emergencies. The funds should be kept in a savings account or money market account, where the money can earn interest but is still accessible. 2. Preparing for the "what ifs" is critical for a single mother because she has a dependent to care for. Adequate disability and life insurance create a foundation necessary for single parents. 3. You should concentrate on saving for retirement first. Put money into a 401(k) or an IRA since this saving is for the long term. The sooner you begin, the faster you'll start benefiting from the magic of compounding interest. 4. Experts also suggest investing in large, mature companies that are still growing. Begin investing for children by placing at least $200 per month into college savings plans. Also, set up the account so relatives can contribute here in lieu of giving birthday and holiday gifts.