Assessing your financial situation after divorce
Whether by settlement or final court order, the pie has been divided. Let’s say you were awarded the house your vehicle, some gold, the savings account, and one of the retirement accounts. How do you assess your financial situation after divorce?
It’s time to plan for your future. That plan is largely going to depend on your earning capacity, expected retirement age, and risk tolerance. For example, if you’re young and have a high tolerance for risk, your focus moving forward is probably on building wealth rather than preserving it. Either the way, the point is you should be doing something intentional with the assets from your divorce. Here are some different scenarios to give you food for thought.
Should You Keep The Marital Residence?
How do you maximize the value? If you were awarded the marital residence, then it probably means you wanted to keep the marital residence. However, remember that the marital residence is an asset that can be sold any time. Let’s say for example you have $300,000 of equity in the marital residence and that it’s paid off. You wanted to be awarded the house in the divorce to reduce your cost of living.
A Realtor friend of yours told you that the housing market is going to be relatively stable over the next decade. In this case, if you are close to retirement age, it’s more likely you are going to want to keep the house because in retirement, reducing expenses is a priority. By contrast, if you are 30 years old, it may make sense for you to sell the house and invest the money in an asset that has a higher potential for growth.
Ton determine whether this makes sense, you have to look at the cost of sale, your potential investment options, and the cost of renting or leasing a new place to live. The nice thing about this asset is that whether you are living in the house, renting the house, or you sell the house and invest the equity, you are getting value out of the asset.
Should You Sell Your Vehicle?
Outside of high-end or classic models, vehicles are generally not the best asset own because they always lose value. Since vehicles depreciate in value very quickly and are often financed at interest, that mean many cars are underwater.
Even if your car is not underwater, it probably does not make sense to liquidate the vehicle unless you have payments that are too high in a single income household. If you sold the car, you would have to buy another vehicle which would also rapidly lose its value, and you could end up worse off. Depending on the affordability of the monthly payment – if you have one – it’s probably best to hang onto your vehicle.
Should You Keep Gold Coins or Collectibles?
Evaluate gold coins and collectibles like fine art the same way you would evaluate individual stock. Your job is to research the outlook for projected increases and determine whether you should hold or sell and put the money in a different investment. However, even if it goes up in value over time, you may want to sell depending on the rate of return.
For example if you project that gold coins are going to go up in value by 2% each year for the next decade, and inflation is at 3% annually, your money might be better placed in the S&P 500 which has a 10 year average of much higher than 2%.
How Should You Maximize Savings?
It’s important to have an emergency fund to back up any financial situation that may arise. Experts suggest keeping three to six months worth of income on hand. Beyond that, liquid hard cash does nothing for you, so anything above that should be put to work. If you have outstanding debt, other than your home, such as credit card or student loan debt, you may want to strongly consider using the cash to pay down that debt because your savings account is likely to get less than a 1% return on your investment while you’re paying higher interest rates on the debt.
For example, it’s not uncommon for a credit card to be 17% interest, so if you pay down your credit card you are guaranteed to save money since that interest rate of 17% is likely higher than any other return you would generate otherwise. If you are debt free you want to consider investing in tax deferred investment options such as Roth IRAs to put the money to work so that it begins making you money
Should You Tap Your Retirement Account?
Other than in the case of a medical emergency where the funds were necessary to save a life, we have never come across anyone who did not regret taking an early distribution from their retirement account. Not only do you take a penalty but you also pay income tax. Your retirement account is your future. Don’t touch it, if there’s any way to avoid it.
By taking a good long look at your assets and making a few decisions about the direction you’re heading in after a divorce, you can put yourself on a path to a comfortable new life where you’re in charge and making smart choices.