If you don’t already have a budget, NOW is the time to create one.
Before you make any decisions about what to do with your settlement, you must first have a clear understanding of the relationship between your cost of living and your income. There are a number of places where you can find budget templates; however, you really don’t need anything more than a piece of paper and a pencil.
Draw a line, dividing the page in half lengthwise. On one side of the page list all your known monthly expenses, including reasonable estimates for food, clothing, movies, etc. and the amounts of each expense. For example:
On the other side of the page list all known sources and amounts of income: maintenance, child support, work income, dividends from investments or cash flow from rental properties, etc.
You will likely find that the first several months after your divorce are a “transition” time, and nothing seems clear. Expenses are in flux setting up your new residence or replenishing your existing home after assets have been divided. Maybe you have never paid the utility bills or kept track of the cost of gas for your car. That’s understandable, but not insurmountable. You should be able to come up with some estimates for planning purposes, and the final, real numbers will eventually settle into place.
Totaling both columns will reveal the picture of your financial health. If the column of expenses is more than the column of income, do some creative thinking of how you can equalize those two figures. How can you cut your expenses? How can you increase your income?
If the income total exceeds the expense total — good for you! Now it’s time to make some intelligent decisions to plan for your future.
The money you accumulate between the ages of 20-60 years must do double-duty. Not only must it provide for your current living expenses, it must also provide for your retirement years, when, typically, our income drops or stops. With life expectancies expanding at a quick pace, thanks to medical innovations and more active and healthier lifestyles, that number could be as much as 30-40 years of retirement, as long as our earning years!
If you are not knowledgeable or experienced with finances and investing, find someone who is. Ask a friend or an associate for their advisors name, or interview several financial professionals. Yes, there will be an expense associated with hiring a professional, but as many people can attest, it’s not nearly as expensive as trying to do-it-yourself and making any number of serious mistakes. There are many potential pitfalls and the penalty and tax consequences of those pitfalls can be enormous. If you depend on a professional to change the oil in your car, repair your appliances or prescribe medications for you and your family, do you consider your finances less important?
If you are receiving a settlement that is not from a retirement plan, put it into an interest-bearing bank account until you have created a budget, have a clear picture of your financial health, and have identified an advisor you trust and an investment plan that you are comfortable with.
If you are receiving a settlement that IS from a retirement plan, you must first establish an IRA (Individual Retirement Account) and then conduct a “Direct Rollover” from your ex-spouses retirement plan, into your IRA. Do not withhold or withdraw any of these funds until you have spoken with an investment professional and fully understand the tax and penalty implications of this action.
Natalie Nelson is a financial planner and mediator with 20 years experience of assisting people with divorce. She helps them understand their financial situations, obtains their fair share during the divorce process, and establishes a solid financial plan for the future. View her website.