September 25, 2006 by wendy.

You’ve Received Your Divorce Settlement – What Next?
 
The divorce is final, and you are fortunate.  You have received your share of your marital assets.  What do you do next?  Did you know that many divorcing people burn through their settlement money at a rapid rate?  Without up-front thought, many people end up with almost none of the settlement remaining after two years.  Worse yet, some have accrued even more debt than they started single life with. 

 
The reasons for this vary.  Some individuals use money to help them with the emotional turmoil they may be going through.  Others are not accustomed to having or handling larger sums of money.  Money can seem to burn holes in some pockets, and can drift away much quicker than most people realize.  Regardless of the reason, emotions can prevent many people from making good financial decisions.  How can you avoid this? 

Take the time to review the following areas and begin planning for you future. 

• Consider having a cooling-off period where no major financial decisions are made.  Experts involved in counseling individuals who have received “sudden money”, such as inheritances or lottery winnings, advise that their clients make no important financial decisions for 6 to 12 months.  This gives the individuals time to plan for their future and not rush into decisions based on emotions.
• Be wary of relatives and friends who may request loans or expect gifts.  If your settlement contains a significant amount of cash, some acquaintances or family members will have no qualms about requesting monetary assistance.   Most financial experts suggest that you wait, if possible, to loan money or provide gifts until after you have assessed your own financial situation and you can consider the relative’s or friends’ requests in less emotional time period.  It is okay to tell the requesters that your money is “tied up” and you are in “time out” until you have finished your long term planning. 
• Estimate your cash flow, one of the most important causes of anxiety in most people.  Set up a worksheet, on paper or in a computer program, using three columns.  The first column contains your fixed expenses that must be paid regardless, such as your mortgage, insurance, taxes, car payments, etc.  The second column should contain your flexible expenses that are required for living but may vary and over which you have some control, such as food, dining out, clothes, and others.  The third column should contain expenses which are truly optional and on which you may or may not elect to spend, such as vacations, entertainment, and social activities. Most of these expenses are probably identified in your Financial Affidavit that you were required to prepare for your divorce.  Summing these figures can give you a working range of your required monthly cash flow requirements.
• Understand your lifestyle changes can impact your finances.  Many couples have found that it is difficult to live on two paychecks, and with a divorce, each will be living on a single paycheck, with some duplicated living expenses (two mortgages or rent payments, two telephone bills, etc.)  Returning to the workforce may require day care expenses for the children, lunches out, additional car expenses, and purchase of additional work clothes.  For some, entertainment expenses may increase.  Be certain to monitor your cash flow situation monthly to determine if it has changed, and if you need to adjust your spending habits.
• Taxes can play a large role in finances.   You will want to contact your tax consultant to determine if your income tax withholding should change, based on your marital status, credits for children (if any), receipt or payment of spousal maintenance (if any), etc.  Additionally, the sale of a house or investments can trigger capital gains or other taxes.  For example, if you sell the $200,000 house you purchased in 1995 for $900,000 you very likely will owe taxes on the gain.  Discuss how much you will owe with your tax consultant and be certain to set aside an appropriate amount to cover this expense.
• Retirement accounts represent an additional “bonus” because of the tax deferral benefit.  These are very valuable assets and because of the tax implications, require special care.  The IRS allows distributions from some types of retirement accounts that are free from the 10% penalty for early withdrawal, if accessed in the correct time period.  Income tax is still required to be paid, so if you have made such withdrawals, be certain to set aside additional funds to pay taxes.  Otherwise, most financial advisers recommend rolling over (in a trustee to trustee transfer) the retirement accounts to accounts of the recipients choosing.  See your financial advisor for assistance, if you need it.
• Having an emergency fund is critical even if you currently have sufficient funds available.  Most financial advisors recommend 3 to 6 months of expenses, and for some, even more if their income situation is somewhat fragile, or they receive income erratically.  Always keep such funds in accounts such as money market funds, certificates of deposits, or savings accounts.
• Growing your money is even more important after the divorce.  Because you have only one income on which to rely, it is important to ensure that your current funds are working for you.  Additionally, planning for your retirement is critical.  While it is natural to be concerned about the short term, planning for your future is at least as important!  If you don’t have the knowledge about investing, take classes, read books, do research, or ask for help from your financial advisor.

Getting a divorce entails a significant amount of work and financial assessment.  Let’s say you have reviewed and regularly monitor your cash flow, have fended off relatives and friends looking for loans, and reviewed your lifestyle changes.  Additionally, you’ve assessed your tax situation, rolled over your retirement funds to your own account, developed an emergency fund, and situated your money so it can grow for you and your retirement.   You are now on the path to a successful future and have made your divorce settlement work for you!

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September 25, 2006 by wendy.

   Clients occasionally come to me confused about their finances.  They may not have been the person to handle their finances, and so are unfamiliar with the account types, origins, tax status, and investment instrument, if any.  These types of clients can be either men or women, I have found from experience.  Obtaining clear information about investment, retirement, and other accounts is critical to making sound financial decisions. 

   One client, who only needed cash to make a sizeable down payment on a home, told me that her spouse was offering her “these accounts, which add up to $250,000″, and was wondering if I thought that was a satisfactory settlement.  After probing about what comprised “these accounts”, it turned out that they were various and sundry qualified (retirement) accounts, and would be be taxable if liquidated.  She did not need additional retirement accounts, nor did she need a higher tax burden.  Therefore, we pursued a settlement option with different assets. 

  If this client had agreed to the proposed settlement, she would have ended up with about 2/3 of the amount offered, and incurred a much larger tax bill than expected.

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September 19, 2006 by wendy.

    People often ask me what is the first thing they should do if they are considering divorce.  Because knowing the type and amount of all of their assets and liabilities is critical, I suggest that people begin collecting information, especially documents showing what is owned or owed. 

   These documents include, but are not limited to:  bank and brokerage statements, pay stubs, 40lk and pension information, loan applications and bills, individual and busines tax returns, stock options and other benefits statements, and more.  Make copies of these and other relevant documents and store them some place safely away from the family home.  Be aware that such documents have a habit of disappearing after information divorce becomes openly discussed.  It is often more difficult, if not impossible, to obtain the information later on if matters become strained between the spouses. 

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