Financially Surviving Divorce

In 1999 I took the Certified Divorce Financial Analyst (CDFA) course and now realize the full potential. Divorce is an extremely emotional time and I believe it is extremely important to have someone help you with the financial aspects of divorce.

There are four basic things that you will need to survive a divorce financially: a place to live, little or no debt, retirement assets, and liquid money. You should strive for a balance of each of these. You need a mix of each of these categories, not an abundance of one and none of the others.

A Place to Live: In 1997, the tax code changed relating to home ownership. A married couple is now able to exclude up to $500,000 of gains, and a single person is able to exclude up to $250,000 of gains on the sale of their home as long as you have lived in the home for two out of the last five years.

Depending on the divorce, it may be advantageous for one spouse to take the home, while in another situation it could be a disadvantage for the spouse to take the home. You should understand how your divorce settlement will affect you now, as well as in five, ten, fifteen and twenty years from now. A house is not a liquid asset and if you look historically at the stock market, a house may have less appreciation potential compared with money set aside for retirement. This is where it is very important to establish a financial plan.

Little or No Debt: You should understand what the cost of credit means. Because there is a high cost to having debt, you need to know the difference between good debt and bad debt. You should be careful when it comes to using credit to protect your assets and your future because we live in a negative savings society. Contact credit bureaus to get a copy of your credit report. If there are credit cards that have a zero balance, call and cancel those cards.

As part of a divorce, remember that the creditor wants the debt paid regardless of the situation. So, if your spouse takes a credit card with your name on it and does not pay that debt, the creditor will come after you.

Retirement Assets: When you are looking at retirement assets there are many different vehicles in which you can save money for retirement. Make sure that you do not forget some accounts and leave money on the table.

If you receive retirement assets from your spouse's 401(k) plan you may need a QDRO (Qualified Domestic Relations Order) to separate those assets. The QDRO is a legal document that is separate from your divorce decree. This legal document is sent to the benefits department of the 401(k) plan provider to instruct them how the assets should be divided. Make sure the QDRO is written correctly BEFORE the divorce is final to ensure that you receive your retirement assets.

Some benefit plans cannot be divided. In this case, you want to look at other assets of marriage and receive those instead. For example, if a pension cannot be divided, take more of the 401(k) assets of the other spouse.

If you receive retirement assets from your spouse's IRA, you will need a copy of your divorce decree and a few other financial forms to separate those assets. With the 401(k) and IRA, you should change the account into your name and roll the assets into another IRA account. This process is known as a "direct rollover." This is another area where it is important to have a financial plan in place so you can realize the foundation you are setting for your financial future.

Liquid Money: There are three different general phases of the divorce process: The beginning of the divorce, the middle of the divorce, and after the divorce. In each of these states, your budget may be different, so you should make sure that you have liquid money available at all times.

In the beginning, you will need liquid money for the retainer to hire an attorney. You should consider putting this liquid money in a money market account rather than a savings or checking account. This is a vehicle where you are able to earn more interest on your money.

Make sure you understand what a money market account is and what it can do for you. Make sure you understand the difference between assets, regardless of whether you are single, married, or divorced. Gather as much information as you can about your financial situation. Know where your money is. Find out as much information as you can on your own. It is always a good idea to have copies of statements and to start listing all of your assets and liabilities.

A Good Time To Finance Your Purchases

An elderly client of mine recently met me and casually spoke about wanting to buy a car, so I asked him what he planned to buy and how. He said he was looking at something in the $40,000 range and wanted to pay for it from his savings because he just did not believe in debt. And while I understood where he was coming from and the generation he represented, I just knew that I had to talk him out of the idea of plunking down $40,000 cash when debt was so cheap and abundant.

So, I pulled out my iPad and ran a few numbers for him even though I knew the math and the answer in my head. I knew that the smart thing to do in these low interest rate times was to finance... not buy all at once. It's an idea in this debt averse times that needs to be addressed.

I ran a few numbers and showed him how most of his liquid assets were tied up in retirement accounts and nicely invested, and from which pulling out $40K would incur a harsh income tax bite. So it was best to let go of the idea of taking it out of his IRA and look for other sources of cash. He said he could take the $40K out of the roughly $44K he had sitting around in the bank, but that brought on some other issues.

Fundamentally, I wanted him to have enough cash on hand to tide him over a rainy day... and while $44K was way more than he needed to keep liquid, leaving $4K that would remain after he spent $40K on a car would be way too little given his health, family obligations, etc. I showed him how he could get low-cost financing with rates as low as 2.5% at certain institutions which would result in very manageable monthly interest payments. I also told him to not just go straight to his major commercial bank but to use auto loan calculators freely available at sites such as bankrate.com to do a little research before buying.

I also cautioned him against going in for too short a financing period because at such low interest rates, he'd be better off picking at least a 48-month payment plan. I told him he could make a down-payment of $10,000 because I knew he was concerned about taking on too much debt, and could finance the rest. He could then invest some of his capital to earn more than the 2.5% he was paying on the car. Rates are low, but it's not that hard to beat a 2.5% rate and you don't have to take a lot of risk to do so. In cases like this it is usually better to use other people's money if you use common sense.

I also suggested consider buying a used car with low miles directly from a dealer or other legitimate source so he'd have the peace of mind of buying a certified pre-owned car that had a clean title.

A few other tips I gave him... which apply to just about any big-ticket item you want to buy...

Get on the Internet and look at prices on sites like Kelly Blue Book and at other sellers of the product you want to buy.

Use handy on-line calculators to figure out things like monthly payments and fees.

Do not reveal your monthly payment capacity to the seller because they will find ways to hook you up with an expensive purchase that still meets your monthly payment capacity... instead, focus on price first even though the seller will keep pushing you for a monthly payment amount.

Do not get sold into buying more than your budget... see, you could well buy a $50,000 car for just a slightly higher monthly payment but remember, at the end of the day, you're putting your hard earned cash into something that depreciates in value the instant you buy it... it just does not make sense to throw money into depreciating assets especially when you have bigger things to worry about such as home loans, college expenses and so on.

Remember, you can either raise the bridge... or lower the water... Raising the bridge is about earning more to afford an expanded lifestyle, perhaps a dubious choice just to own a fancy car -or lower the water - voluntarily cutting back on your expenses to fit your income.

At the same time, if you have money, be smart about weighing your options and consider using loans in this low-interest rate environment so you can invest your cash somewhere else and have it deliver more than the interest rate you'd pay on your loans. So, be smart about how you manage your finances and keep all your options on the table.