EP 136-143: Post-Divorce Finances (Part 1-7) - How to Create Financial Goals

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This episode begins a multipart series about post-divorce finances. Even if you are early in the divorce process, this series will help you plan your life after your divorce.

Want to listen to this episode on your mobile device? Just use one of the following links: iTunes | Google Play Music | RSS Feed YouTube or click on the episode player above.

After making a settlement, many people find themselves wondering what the next step is for their finances. Should they start by making a budget, choosing a financial advisor, or deciding what investments to make? This process can be daunting, so this series will help you navigate those decisions.

Imagine that you are at the end of your divorce process. Your assets have been divided, and it dawns on you that you have to plan the rest of your life. Many people have to financially rebuild after divorce. You may need to recalibrate some of your goals. This episode focuses on the goals that you will need to think about regarding your post-divorce finances. 

We can narrow these goals down to three basic areas:

  1. Get out of debt
  2. Save for retirement
  3. Have money for an emergency

In order to achieve these goals, you will need a budget to plan your spending, which you should do while negotiating a settlement or going through mediation. As you get to the end of your divorce, take some time to refine the details of your budget. In order to achieve the three goals above, will you need to cut expenses or increase your income? Each of these areas are very in-depth topics on their own. There are many books, professionals, and other resources devoted to each one.

The issues we will cover in this series are complicated. In fact, professionals spend their entire careers specializing in these areas, so these episodes will just be introductions. Here are the topics that will be covered in the next five episodes:

  • What kind of financial advisor you should use
  • How to choose a financial advisor
  • What all of the financial terms mean
  • Which types of investments to consider
  • How to know if your financial advisor is doing a good job

In the next episode, you will hear some important warnings about the finance industry, and find out if a financial advisor is going to act in your best interest.

 

Part 2

This episode is the second part of a multipart series on your post-divorce finances. Part 1 discussed the three essential financial goals to think about as you plan your post-divorce life. Even if you are not very far along in the divorce process, your divorce will be over at some point. Therefore, this series will help you plan for the rest of your life.

Want to listen to this episode on your mobile device? Just use one of the following links: iTunes | Google Play Music | RSS Feed YouTube or click on the episode player above.

In this episode, you will get an overview of financial advisors and financial planners, including what these terms mean and how to choose one. Many people do not understand how the finance industry works. The fact is that the incentives in the finance industry are often not structured to benefit you (the investor). Financial firms are businesses, and like any business, their goal is to make money. It is very important for you to know about the different kinds of financial professionals, and how they make their money. There is one critical question to ask a financial advisor that you are thinking about working with: “How do you get paid?”

This question might seem intrusive to the average person, but it is important for you to know what kind of pay structure they are under. They may get paid directly by you, or they may receive commissions. But generally, they get a fixed fee that you agree upon. Regarding commissions, they may receive one every time you buy or sell an investment, or they may charge you a markup on the cost of the investment. Because they are compensated to sell you certain financial products, their incentives are not necessarily in your best interest.

Like stockbrokers, these professionals can be considered brokers, or they may be “dually registered,” which means they receive both fixed fees and commissions. If they state that their securities are offered by a certain financial institution, it is an indication that they are receiving commissions.

Fee-only financial advisors (not to be confused with fee-based) charge you a fixed fee— whether it is to create a budget or financial plan, or to manage your investments. In the latter case, they are often paid a fixed percentage of your assets each year. (The typical fee is 0.5 – 1%.) Fees can add up over time, so it is wise to negotiate for the best fee possible, which the next episode will discuss further.

Financial advisors are not necessarily required to act in your best interest, which surprises many people. But advisors who receive commissions can actually recommend things that are not in your best interest.

The finance industry has a word for a financial advisor who must act in your best interest: a fiduciary. This person is legally required to act in your best interest, and they do not receive commissions. They only receive a fixed fee that you pay them. So rather than asking prospective financial advisors how they get paid, you can simply ask, “Are you a fiduciary?” If the answer is “no,” you should strongly consider looking elsewhere. Brokers can be useful in certain situations, but it is important to understand how their business works. That way, you will not get harmed by it.

In the next episode, you will learn some key tips for interviewing your post-divorce financial professionals.

 

Part 3

This episode is the third part in a series on managing your finances after divorce. Although it might feel far away, the day will soon come when you need to plan for the rest of your post-divorce life. This series will help you do that. In the first part, we discussed three key goals to keep in mind for your life after divorce. The second part covered different types of financial advisors, as well as the one question you need to ask to find out if a financial advisor will act in your best interest. If you have not listened to those two episodes yet, please do!

Want to listen to this episode on your mobile device? Just use one of the following links: iTunes | Google Play Music | RSS Feed YouTube or click on the episode player above.

In this episode, we will discuss how to choose a financial advisor in more detail. Feel free to meet with several financial advisors throughout this process. They will not charge you for the initial meetings until you hire them. It is recommended that you interview at least 3-5 financial advisors to find one that is right for you. Then you can compare proposals and get the financial advisors to compete with each other. This episode will give you tips about what to ask during the interview process.

There are three main questions to cover when interviewing a financial advisor. They will not be quick answers. You will have to work together to get to a final answer. The three topics are:


1) Can they make a budget and financial plan for you?

Remember the three key goals from the first part of this series:

  • Get out of debt.

  • Save for retirement.

  • Have an emergency fund.

A financial advisor can help you prepare a budget to meet these goals. You will need to share information about your income, assets, and debts to make a plan. Even if you are not in the place that you want to be (or you have made some financial mistakes in the past), a financial advisor can help you reach your goals. Ask them to prepare a budget and a financial plan. Make sure they explain it and that it makes sense to you. You can compare the different financial plans from the 3-5 advisors that you are interviewing, and see which one you prefer.

2) What kind of investment portfolio do they recommend?

They may recommend stocks, bonds, mutual funds, index funds, or a combination. A future episode in this series will talk about these different investments in-depth. Get a detailed proposal from each prospective advisor, compare them, and do your own research. You can even give each advisor the proposals from their competitors, and ask them to explain why their proposal is the best one.

3) What fees do they plan on charging you?

Broadly speaking, there are two levels of fees:

  • Fees for the specific investments they recommend

  • Fees that the investment advisor charges to manage your assets (typically a percentage of your assets)

There is an entire chapter in Managing Private Wealth: Principles that is devoted to fees. It is a complicated topic, so this episode will only cover the basics. To simplify, you can ask each financial advisor what the total annual fees will be for all of the investments they are recommending. Typically, they will quote it to you in terms of a percentage of your assets. Be sure to translate that percentage into a dollar amount, so you will know exactly what you will be paying.

You can often negotiate better fees by considering multiple advisors at the same time, because they will compete with each other. These fees will add up over the years. Depending on how much you are investing, you could save tens or hundreds of thousands of dollars by negotiating lower fees.

Conclusion

There is one red flag to keep in mind as you interview advisors: if they guarantee you a certain return, run away. Responsible financial advisors will not guarantee anything, but scammers will.

The next episode will cover some important financial terminology, so that you can be better prepared for conversations with financial advisors. Then you can plan for your post-divorce life.

Thank you for listening to the Divorce and Your Money Show. Visit us at www.divorceandyourmoney.com for personalized coaching services. If you enjoyed the show, please take a moment to leave a review on iTunes, as it will help other people discover this free advice.

 

Part 4

This episode is the fourth part of a series on your post-divorce finances. If you have not already heard the first three episodes, please go back and listen to them first. Even if you are in the early or middle stages of a divorce, this series will help you define your financial goals for the rest of your life. It is important to define those goals early in the divorce process, so that you know what is important to negotiate throughout it.

Want to listen to this episode on your mobile device? Just use one of the following links: iTunes | Google Play Music | RSS Feed YouTube or click on the episode player above.

This episode will discuss finance and investment terminology that you need to know while going through your divorce. We will just cover some of the most important terms, so that you can follow these finance conversations more easily.

Here are 13 key financial terms to know:

Asset – anything you own that has value (such as a house, car, computer, baseball card collection, or investment account)

Debts – money you owe to other people (such as loans and credit cards)

 

Balance sheet – a summary of all of your assets and all of your debts on one page. This sheet covers the same information as a financial affidavit in a divorce. It is important to note that a balance sheet is a snapshot of your financial situation on a particular date, because assets can fluctuate in value over time.

Stock – ownership in a company (same as equity). It can be a share of a publicly traded stock, or an equity in a private company (such as a small business).

Bond – money that you loan as an investment, typically to a company or government. You will be paid interest until they are ready to repay the loan. Keep in mind that bonds are a very complicated topic.

Portfolio – the combination of investments that you own. They can be stocks, bonds, real estate, any other type of investment, or a combination of different types.

Asset allocation – the percentage of your portfolio in stocks, bonds, or other investment types. For example, a younger person may have an asset allocation of 80% stocks and 20% bonds, whereas an older person might have a higher percentage of bonds and real estate.

Risk – uncertainty about how your assets will perform. Some forms of investment carry more risk than others.

Index – a group of stocks or investments. They may group similar stocks (such small companies, large companies, and international companies), bonds, or other investments. Often, they are followed over time to measure how the group is performing, or how a country’s economy is doing. Therefore, they are often used as benchmarks (such as NASDAQ and S&P 500). One related financial concept (that we will not be able to cover in this episode) is a type of investment called index funds, but you can research it on your own to learn more.

Mutual fund – a common type of investment that involves a company pooling money from different investors. This combined money is invested by a manager, and each investor’s returns are carefully measured. The investment strategies for mutual funds vary; they may invest in stocks, bonds, real estate, or international companies.

Hedge fund – similar to a mutual fund, but typically with a very high minimum investment ($500,000 and up, depending on the fund).

Capital gain – the amount of money that you receive when selling an investment that exceeds the price you paid for it. For example, if you bought a house for $100,000 and sold it for $120,000, you would have a capital gain of $20,000. This term is important because you will owe capital gains tax on that $20,000. During your divorce, you will need to be aware of how much capital gain each of the assets you will receive will have, so that you are not stuck with a large, unexpected tax bill.

Inflation – the concept that prices of goods and services generally increase over time. Costs of everything from gas to bubblegum to homes are higher today than they were fifty years ago, because of inflation.

If you would like to learn more about finance, start regularly reading the Wall Street Journal. If you look up terms and companies that you do not know, you will learn a lot about the finance world. In the next episode, we will talk about which types of investments to consider when you plan your post-divorce finances.

 

PART 5

Robbin-rockett

"After a divorce or a big life change, whatever it is, and you’re on your own, just take some time to get acquainted, get back with yourself, figure out what you’re doing, what’s important to you, and get up running. That’s really the first place you start before making any rushed financial decisions because that’s a good way to make a big error without thinking about it.”

Marriage over. Divorce papers signed. Money transferred. Rest of your life begins. Now what?

One challenge after divorce is figuring out who can help you plan your finances for the rest of your life. There are many different financial advisors (and people who call themselves financial advisors), investment strategies, terminology, and calculations to consider after divorce. How do you begin to make the right decisions?

In this episode, Shawn is interviewed by Clinical Psychologist Dr. Robbin Rockett, Psy. D, the host of “Solo Parent Life” podcast.

Want to listen to this episode on your mobile device? Just use one of the following links: iTunes | Google Play Music | RSS Feed YouTube or click on the episode player above.

 

Thank you for listening to the Divorce and Your Money Show. Visit us at www.divorceandyourmoney.com for personalized coaching services and a full transcript of this episode. If you enjoyed the show, please take a moment to leave a review on iTunes, as it will help other people discover this free advice.

 

PART 6

This episode is the sixth part in a series about your post-divorce finances. This series will help you make more informed decisions about your finances during and after your divorce. If you have not already heard the first four parts of this series, be sure to listen to them because they build upon each other. This episode will use a lot of the terminology that was explained in the last episode.

Here, we will discuss the investments you will need in your post-divorce life. Investments are a very complicated topic, and people spend their entire careers specializing on a single facet of investing. Therefore, this series will only be a brief introduction.

Want to listen to this episode on your mobile device? Just use one of the following links: iTunes | Google Play Music | RSS Feed YouTube or click on the episode player above.

 

When you sign your divorce papers, you will usually find yourself with a sum of money. The amount will vary, but you will probably not want to leave it in a bank account. Rather, you will more than likely want to invest it so that you will see better returns.

Most of you have many years left ahead of you, so you will want to plan for the rest of your life. Keep in mind that you do not need to rush to invest as soon as the divorce is settled. Many people take some time to settle into their new lives before making major financial decisions.

To keep it simple, you will probably want to invest in a mix of stocks and bonds. More elaborate investments are unnecessary. The sooner you expect to withdraw that money, the more bonds you should have.

Stocks suffer from the volatility of the market. Therefore, if you are older and your portfolio is stock-heavy, you may find that an economic downturn has a severe financial effect on you. However, if it will be many years before you need to use that money, it makes sense to invest in stocks. As long as the economy continues to grow, your stocks could increase in value over the long-term. If you wait out any short-term volatility, you will receive higher returns.

Bonds have less volatility, although they also have lower returns. If you are near retirement, then your investment portfolio will probably have more money invested in bonds than stocks. You want to have the certainty that the money will be there when you need it.

Depending on your financial advisor, you may consider commodities (e.g., gold, oil, wheat) or real estate. However, mutual funds and hedge funds are still essentially investments in stocks and bonds that are managed for you.

Investment returns are uncertain, but one thing that is certain is that lower fees will give you better returns over the long term. For both stocks and bonds, index funds have lower fees. There is nothing wrong with a simple, boring investment portfolio.

Ultimately, it will be best if you understand what you are investing in. If you do not understand it, you do not have to put your money into it. You will need to do further research to understand all of your options, but remember that a lower-cost option will ultimately benefit you in the long run.

In the next episode, we will discuss how to tell if your financial advisor is doing a good job for you.

 

Thank you for listening to the Divorce and Your Money Show. Visit us at www.divorceandyourmoney.com for personalized coaching services. If you enjoyed the show, please take a moment to leave a review on iTunes, as it will help other people discover this free advice.

Part 7

This is the final episode in a 7-part series on your post-divorce finances. Some documents and accounts need to be updated by the time your divorce is finalized (or as soon as possible after it is finalized). This practice can potentially prevent many future problems.

Want to listen to this episode on your mobile device? Just use one of the following links: iTunes | Google Play Music | RSS Feed YouTube or click on the episode player above.

 

One set of documents involves estate planning. They contain details about what should be done in the event of your death or incapacitation. The first thing to consider is the last will or trust, which lists the beneficiaries who will receive your assets or property when you pass away. If your ex-spouse is included, this information may need to be changed.

Another set of documents is called a medical power of attorney or medical proxy. This document lists the person who will be in charge of making medical decisions if you cannot.  A similar document is the financial power of attorney, which also needs to be updated if you do not want your ex-spouse making financial decisions in the event of your incapacitation. These documents are fairly easy to set up, but if you do not have them, a judge will be forced to make these decisions for you.

The next item is a checkbox about most of the financial accounts you may have, which is called the beneficiary designation. Here, you will list the person who will get your account or assets should you pass away. Whether you are preparing for divorce or have finalized it, you should update this information.

Other miscellaneous accounts also need to be updated post-divorce. You can check the accounts you have in common with your spouse by checking your credit report. They include bank accounts, credit cards, vehicle registration and titles, insurance policies, and retirement and investment accounts. Depending on the settlement, you should either remove your name or your ex-spouse’s name from these documents and accounts.  You also need to update documents with emergency contact information.

 

Thank you for listening to the Divorce and Your Money Show. Visit us at www.divorceandyourmoney.com for personalized coaching services. If you enjoyed the show, please take a moment to leave a review on iTunes, as it will help other people discover this free advice.

Shawn Leamon, MBA, CDFA

Dallas, Texas

Shawn C. H. Leamon is Managing Partner of LaGrande Global, a firm that helps successful families manage large financial transitions like divorce, inheritance and selling a business.

He earned his Bachelor of Arts from Dartmouth College, double majoring in Economics and Philosophy, and his Masters in Business Administration at Spain’s IE Business School.

Before founding LaGrande Global, Shawn helped manage $1.1 billion in client assets at Bernstein Global Wealth Management. He also worked as a credit research analyst at J.P. Morgan. He is a Certified Divorce Financial Analyst, and he has been an advisor to numerous high-stakes divorce cases.

Shawn is the author of two well-received finance books: Managing Private Wealth: Principles, and Divorce and Your Money: The No-Nonsense Guide, both published in 2016.

In his spare time, Shawn is an ultra-endurance athlete and has competed in events as long as 24 hours. He is an Eagle Scout and a member of the Alumni Board of Greenhill School.