4 Tips to Start Compounding Your Wealth Again After Divorce
You owe it to yourself to decrease stress and anxiety by securing your financial future after divorce. Here’s how to get your finances on track.
Divorce can be one of the most difficult things a person goes through, as it can impact you mentally, emotionally, physically, and financially.
The ending of a marriage often means seismic changes to all those involved. Divorce means separation of finances as assets are split up. Instead of possibly two incomes supporting a single household, now there is just one.
If children are involved, it means creating a smart plan that allows both parties to share time and hopefully a way to support them emotionally and possibly financially.
Compound Your Wealth
Financial planning is one of the most important steps for a successful divorce; not doing so can lead to financial ruin.
Beyond taking care of day-to-day expenses, those going through a divorce will also need to think about the future and start saving towards their retirement goals, which we believe can be accomplished by investing in the Dividend Aristocrats, which are those S&P 500 names with at least 25 consecutive years of dividend growth.
This article will examine several ways to get your finances on track following a divorce.
Tip #1: Update Your Budget
One of the immediate impacts of divorce is typically the decline in income. Whereas two incomes supported a single household, there is now just one. At the same time, the expenses are often similar to when both parties lived under one roof. The mortgage or rent, groceries, utilities, car payments, and health insurance still need to be paid. If you are the higher earner, you might be required to pay child support to the other party.
The shock and pressure of being the lone income can be daunting, but it is manageable if approached objectively. Examining every aspect of your budget is perhaps the most important step to reclaiming wealth.
First, figure out your fixed costs, such as rent and utilities. Finding a place that is more affordable to rent could reduce what is likely your largest expenditure. If you value being close to your children, this might not be an option.
Next, examine the other areas of your budget, such as groceries, shopping, eating out, and entertainment. You might find that shopping at a discount retailer and limiting the number of times you eat out are ways to curb expenses. Instead of paying for multiple streaming services, you cut them down to one or two. Setting up a carpool to work could reduce gas expenses.
Larger non-essential expenses might have to wait. This includes expensive vacations, shorter trips that can be done via car, or choosing to cut expensive lodging and food expenses can help your dollar go further.
Tip #2: Address Debt and Build an Emergency Fund
Part of making a budget plan also includes understanding and taking care of debts. One area that is a major concern for most Americans is credit card debt. According to a recent survey, the average person has a credit card balance of more than $5,200. With annual percentage rates ranging from 16% to 20% at the low end for many credit cards, this level of debt can be a major drain on your financial position.
Paying off the balance is an ideal workaround, but if that is not an option, then you should consider consolidating your credit card debts into a single card, ideally with as low an APR as you can find. You can also try contacting your credit card provider and asking for a lower interest rate.
Eliminating this debt should be one of your priorities, as interest on credit card debt is added to your balance daily.
Once you’ve gotten debts under control, it is time to establish an emergency fund. These funds would be used to cover unexpected expenses, or as a backup in case you lose your job.
Experts suggest that you hold three to six months of emergency funds separate from your savings and checking accounts.
This can be difficult to attain given how far your paycheck is now being stretched, but having these funds separate from your day-to-day accounts can protect you from an unforeseen expense, such as car repair, or if you lose your job.
Tip #3: Set Realistic Financial Goals
Another part of financial planning after establishing an emergency fund is to start thinking of your financial future. Saving for retirement on a single income can be more challenging, but it is an important aspect of planning.
First off, consider enrolling in a retirement plan through your employer if they offer one. This is especially important if your employer offers a match. At the very least, you should contribute enough to your 401K or 403B that triggers the match. Many people pass up this free addition to your retirement fund because they don’t contribute the minimum required for the match. If you can afford it and receive regular raises, consider increasing your contribution after each pay increase. The contributions limits are sizeable, up to $20,500 for 2022. Workers over 50 can make an additional $6,500 in catch-up contributions.
After that, consider opening up a traditional Individual Retirement Account (IRA), funded from payroll deductions and tax-deductible, or a Roth IRA funded through after-tax contributions, which grows tax-free.
Both types of IRAs are subject to certain payroll thresholds and maximum contribution levels, but most people qualify. Both types of accounts can be used to hold shares of stocks, mutual funds, exchange-traded funds, bonds, and other investments, making them ideal for placing a start if you want to manage your own money. Contributions limits are a total of $6,000 to either type of IRA, but workers over the age of 50 can contribute an additional $1,000.
Tip #4: Invest in High-Quality Stocks
Now that you’ve decided to start saving towards retirement, you have a decision to make about your investments, as determining where to invest your money is extremely important when it comes to financial planning after a divorce.
Asset allocation depends on your age, years from retirement, and risk tolerance. If you’re not comfortable managing your own money, lack time to research investments, or don’t know how you would respond in a market downturn, your best option might be to invest in an S&P 500 index fund. This would give you access to the largest companies and instantly provide some level of diversification.
You could also pick a target fund that automatically resets its asset allocation as you get closer to your retirement age.
Tip #5: Learn About Dividends
On the other hand, if you’re willing to put in some time to study companies and markets, then creating an investment portfolio can be accomplished as long as you formulate and maintain an investment plan.
We strongly believe that the average investor can successfully create a portfolio that can cover expenses in retirement.
To accomplish this goal, we encourage investors to purchase shares of dividend-paying stocks. Dividends are a commitment from the company to shareholders that requires the former to have a sound business model that allows for regular payments. Most companies distribute dividends quarterly, but some do offer monthly payments.
Some downplay the importance of dividends as the companies paying them are often more mature businesses than the high-growth names that tend to dominate the discussions on financial programming.
But underestimate the importance of dividends at your own risk as they have driven much of the success of investors over long periods of time. Going back 100 years, the S&P 500 Index has an annualized total return of 10.4%. Dividends alone accounted for 4.1% of this return. Over the last century, almost 40% of the total returns have come from company payments to shareholders. These payments have occurred whether the economy has expanded or contracted.
Now, dividends can be cut or eliminated anytime and for any reason. During the 2007 to 2009 financial crisis, many financial companies, including some of the largest banks in the world, were forced to slash their dividends to the bare minimum. More recently, many names in the restaurant and retail space cut their dividends during the worst of the Covid-19 pandemic.
But for the most part, most other areas of the economy were still able to raise their dividends through both periods. This reflects strength as even economic downturns weren’t enough to stop dividend growth.
One of our favorite places to look for the strongest companies is the Dividend Aristocrats Index. To be included in this index, a company must be a member of the S&P 500 Index, have at least 25 consecutive years of dividend growth, and meet certain size and liquidity requirements.
This index is composed of some of the most well-known companies in the world, including Caterpillar Inc. (CAT), The Coca-Cola Company (KO), Johnson & Johnson (JNJ), Lowe’s Companies (LOW), PepsiCo, Inc. (PEP), The Procter & Gamble Company (PG), and Target Corporation (TGT).
These companies have all faced multiple recessions and still raised their dividends. In the case of some companies, such as Coca-Cola and Johnson & Johnson, the dividend growth streaks stretch back more than 60 years.
Nothing is guaranteed when it comes to investing. Still, the track records of these companies and the other Dividend Aristocrats provide evidence that they have solid and recession-tested businesses that can still raise dividends even under difficult operating conditions.
One final piece of advice is that stomaching an economic downturn can be difficult. Seeing your hard-earned investment dollars drop 10%, 20%, 30%, or more can be very demoralizing and cause you to cash out at extremely low levels.
But regularly adding to your investments, whether its high-quality stocks or index funds, can allow you to buy more shares at reduced prices. Then, when an individual stock or the market eventually turns higher, the additional shares your capital purchased at lower prices help regain the losses quicker.
That difficulty can be offset by successful financial planning. Examining your budget, getting a handle on debts, and creating a plan can go a long way in making sure your finances are where they need to be.
Once this is accomplished, saving for retirement should be a top priority. Index funds are a great way for investors to diversify their portfolios while giving you access to the largest companies in the world. If you feel comfortable picking stocks on your own, we encourage investors to make dividend-paying stocks, particularly those with multiple decades of dividend growth, the foundation of their portfolio.
Financial planning can be difficult and stressful, but it is doable. More importantly, you owe it to yourself to secure your financial future to remove as much stress as possible following a divorce.
About the author: Nate Parsh has been writing about dividend growth investing since 2016 and has been a part of the Sure Dividend team since 2018. When not writing about investing, he enjoys spending time with his two young sons.