How Tapping Home Equity Can Pay the Taxes on a Roth IRA Conversion

Here’s what to know about using a reverse mortgage to convert retirement assets.

The post How Tapping Home Equity Can Pay the Taxes on a Roth IRA Conversion appeared first on Real Estate News & Insights | realtor.com®.

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Financial Lessons Learned During the Pandemic

As we wrap up this year, it’s important to reflect on positive lessons we want to take into 2021. Here are some of the top financial lessons.

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The post Financial Lessons Learned During the Pandemic appeared first on MintLife Blog.

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Understanding Long-Term Care Insurance

A lot of us don’t like to think about this, but inevitably there will come a time where we will all need help taking care of ourselves. So how can we start preparing for this financially? Many people opt to purchase long-term care insurance in advance as a way to prepare for their golden years. […]

Understanding Long-Term Care Insurance is a post from Pocket Your Dollars.

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Financial Considerations When Getting a Divorce

In a recent episode, I shared that I would be doing a 4-part series on divorce.  I’ve been divorced for 5 years now and wanted to share what has worked for me, my ex-husband, and our 8 kids during this time. While divorce is not easy, time does help heal, and when your focus is putting your kids first, it is absolutely possible to maintain a healthy, happy family relationship.

My first episode in this series was 5 Expert-Approved Ways to Talk to Your Kids About Divorce.  My second episode in this series was 5 Ways to Co-Parent with Your Ex-Spouse. 

There really isn’t anything easy about divorce. Thankfully, as I discussed in the first two episodes, there are strategies and thoughtful ways to navigate through some of divorces issues, especially if the two parents are willing to put their personal differences aside and focus on their kids. In addition to the emotional turmoil that encompasses divorce, there is also another difficult component that couples must deal with and that is the financial aspect. 

After 25 years of marriage and 8 kids, Mighty Mommy had to get her financial house in order and make some significant adjustments going from a two-income household to a single income.

Here are four financial considerations, as backed by the experts, to keep in mind if you are thinking of or getting a divorce.

1. Get Your Financial Documents in Order

The entire divorce process is completely overwhelming, and when you begin to delve into the financial ramifications, the stress is taken to a whole new level. Once we began having our small tribe of kids, we decided I would leave my career to be home with our family. During the last 10 years of our marriage I went back to work part-time as a freelance writer but by no means was I contributing significantly to our income. My ex-husband managed the majority of our financial affairs so when the reality of our divorce settled in, I knew the first thing I had to do was get a handle on every aspect of our financial status. I honestly wasn’t sure where to begin, but my divorce attorney recommended I start by gathering all my financial documents.

Maryalene LaPonsie, contributor to USNews.com writes in 7 Financial Steps to Take When Getting a Divorce that “as soon as you know you’re getting a divorce, collect all the financial documents you can.” She continues, by stating that these include:

  • “Bank statements”
  • “Credit card statements”
  • “Tax returns”
  • “Retirement account balances”
  • “Appraisals for valuable items, if available”

In addition, other documents to consider are:

  • Mortgage Statement, including any Home Equity Loans and purchase information
  • Checkbook Registry for the last year
  • Any other long-term debt account statements you may have, including car loans

2. Know Your Income and Expenses

When we began our divorce proceedings, I admit I was far more focused on my emotional state than my finances. 

When we began our divorce proceedings, I admit I was far more focused on my emotional state than my finances.  Because my ex was the one who paid all the bills and the sole provider for most of our marriage, I never worried much about the details of our 401(K) plan, life insurance policies or what our overall assets and debt totaled.

One piece of advice I received many times over was that I needed to know what our budget was so I could begin to realistically know what my living expenses would be. 

Jason Silverberg, CFP at Financial Advantage Associates, Inc. and author of The Financial Planning Puzzle, told me via email: “If there was one singular, most important piece of financial advice that I could offer someone going through a divorce, that would be to understand where everything is and what everything’s worth. Without knowledge of what you own and who you owe money to, you really are going to have a hard time moving forward. You’ll also want to understand all of your sources for income and all of your monthly expenses as well. This will help you have a good handle on your budget to provide you critical understanding, so you can make smart financial decisions.”

He went on to say, “This exercise should be done both prior to as well as after the divorce. This way you can get a sense for how your household budget will operate on one income.” To help divorcing couples realize these figures, Silverberg has created the Personal Financial Inventory (1 page worksheet) inside the Picking up the Pieces eBook.

This exercise was extremely enlightening as I realized exactly where every penny (and then some) was going on a monthly basis. I was also able to gauge how much income I would need to start making in order to support these bills in addition to the child support and alimony payments I was receiving. One important factor to consider with child support is that it will decrease as your children get older, so I had to continually modify my budget based on this decrease. At first, it was overwhelming to see how much money I would need to keep our household running, but when you are armed with the figures and you pay attention to your monthly cash flow, it becomes easier to make adjustments. The fact of the matter is that some of the extra splurges such as frequent trips to the hair salon or buying my kids their usual top-of-the line items like sneakers or sports equipment had to be adjusted to what I could now afford. My kids have had some disappointments in this department, but they appreciated how we were trying to work together as a family-unit so that their lifestyle wasn't affected as drastically as it could've been which balanced everything out.


3.  Consider What Professionals Will Represent You

There are important considerations to keep in mind when choosing which divorce professionals will represent you. Adrienne Rothstein Grace writes on the Huffington Post, 3 Steps to Prepare for Your Divorce, that you must align yourself with the right professionals.  She explains “First, think about the divorce process you and your spouse will want to undertake and ask yourself the following questions:

  • “Is this going to be an acrimonious divorce? Or will my spouse and I cooperate?”
  • “Do I already know about all of our household and personal finances? Or do I suspect that I may be out of the loop on some assets, debts or income sources?”
  • “Do I trust my spouse to be cooperative and forthright?”
  • “Do I have any reason to believe that I will feel intimidated by my spouse during these proceedings?”
  • “Are we both focused on the wellbeing of our children?”

Grace says that “If you believe that you and your spouse will cooperate and will have joint best interests in mind while negotiating, then you might want to choose a divorce mediator or embrace a collaborative divorce. Those options are less costly, more private, and usually result in a more peaceful settlement process. However, if you’re not certain about finances, or cannot trust your spouse to be completely above-board and cooperative, then you might hire a traditional divorce attorney, who will only have your interests in focus while they help negotiate the complexities of your divorce.”

My ex-spouse and I decided to retain individual divorce attorneys. In addition, we also hired a Certified Divorce Financial Analyst, (CDFA) at the recommendation of each of our lawyers, who met with us jointly to give us a complete overview of what our financial future was going to look like. It's a huge wake-up call when you see all the numbers in front of you on paper.  At our first meeting with the CDFA I learned quickly that I was going to have to go back to work, full-time to sustain the home we lived in as well as the upkeep, taxes, insurance, and basics like groceries for our large family. 

It's a huge wake-up call when you see all the numbers in front of you on paper.

If you surround yourself with competent, caring professionals who will guide you through this very delicate journey, you will have made an important investment in your family’s future, financial well-being.

4.  Stay in the Financial Know Throughout Your Divorce

Throughout your divorce, you’re bound to get all kinds of advice from friends, family, co-workers and other concerned individuals that will be looking out for you and have your best interest at heart.  This can be both helpful and draining depending on your relationship with these people.  When I began divorce proceedings, I too received lots of comments and suggestions from well-meaning folks, but I also decided I wanted to be armed with my own facts so I began reading lots of articles and books as well as listened to informative podcasts about divorce, particularly financially-related pieces.

My QDT colleague, Laura Adams, Money Girl, recently did an wrote about divorce in Getting Divorced? Here's How to Protect Your Money. She interviewed Stan Corey, a divorce expert and author of a new book, The Divorce Dance. This podcast had some terrific insight and some of the topics she and Corey cover in this interview include:

  • Different types of divorce proceedings that you can choose
  • The biggest mistakes that can cost you financially in a divorce
  • Why relying on a single family law attorney can be a bad idea
  • Tips for dividing up financial assets the right way—especially when you’re not so financially savvy
  • How to get divorced when you don’t have much money to pay for it

As you continue down the path of your divorce, surround yourself with as much information as you can, so that you will be able to make the best decisions possible for you and your children.

Five years later, I am still watching my financial picture very carefully.  I work full-time and do freelance work on the side in order to maintain my home and other living expenses.  I am extremely grateful that my ex-husband is very supportive of many of our 8 children’s extracurricular expenses, but the reality is I’m responsible for my own financial future so I have learned to be extremely careful with purchases and expenses.

The final topic in this divorce series will revolve around putting your kids first after the divorce.

How have you managed your finances during a separation or divorce?  Please share your thoughts in the comments section at quickanddirtytips.com/mighty-mommy, post your ideas on the Mighty Mommy Facebook page. or email me at mommy@quickanddirtytips.com. Visit my family-friendly boards at Pinterest.com/MightyMommyQDT.

Be sure to sign up for the upcoming Mighty Mommy newsletter chock full of practical advice to make your parenting life easier and more enjoyable. 

Images courtesy of Shutterstock.

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How to Build Financial Resilience in An Economic Downturn

Do you remember all those soothing economic numbers that were floating around as recently as February? You know – the record low unemployment rate of 3.5%, and the record high stock market, with the Dow Jones Industrial Average closing at almost 30,000? It seems like ages ago, doesn’t it? The coronavirus happened and changed it […]

The post How to Build Financial Resilience in An Economic Downturn appeared first on Good Financial Cents®.

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How to Avoid the Financial Blunders People Make in Their 20s

Nobody’s perfect with their money. We all slip up. These are the biggest blunders 20-somethings make — and how they can redeem themselves.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

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Which Debts Should You Prepay First? A 6-Step Plan

Maya asks:

“Is it better to pay off student loans or a mortgage first? I’m asking for my brother, who took out $80,000 in student loans about 20 years ago and has only paid off about $10,000. He recently bought a home in Southern California and took out a 30-year mortgage that might be as much as $400,000. I don’t know the interest rates he’s paying on these debts. I think he should pay off his student loans first because the total debt is smaller, older, and can’t be discharged in a bankruptcy. What do you think?”

Thanks for your question, Maya! This dilemma is common, especially now that most federal student loans are in automatic forbearance from March 13 to September 30, 2020, due to coronavirus-related economic relief. That means millions of student loan borrowers suddenly have the option to stop making payments without adverse financial consequences, such as hurting their credit or getting charged additional interest or fees.

If you have qualifying student loans and you're dealing with financial hardship due to the pandemic or another challenge, you may be grateful to have your payments suspended. But if your finances are in good shape and you don’t have any dangerous debts, such as high-rate credit cards or loans, you may be wondering what to do with the extra money. Should you send it to your student loans despite the forbearance, to your mortgage, or to some other account?

RELATED: 10 Things Student Loan Borrowers Should Know About Coronavirus Relief

6 Steps to Decide Whether to Pay Off Student Loans or a Mortgage First

Let's take a look at how to prioritize your finances and use your resources wisely during the pandemic. This six-step plan will help you make smart decisions and reach your financial goals as quickly as possible.

1. Check your emergency savings

While many people begin by asking which debt to pay off first, that’s not necessarily the right question. Instead, zoom out and consider your financial life's big picture. An excellent place to start is to review your emergency savings.

If you’ve suffered the loss of a job or business income during the pandemic, you’re probably very familiar with how much or how little savings you have. But if you haven’t thought about your cash reserve lately, it’s time to reevaluate it.

Having emergency money is so important because it keeps you from going into debt in the first place. It keeps you safe during a rough financial patch or if you have a significant unexpected expense, such as a car repair or a medical bill.

How much emergency savings you need is different for everyone. If you’re the sole breadwinner for a large family, you may need a bigger financial cushion than a single person with no dependents and plenty of job opportunities.

If you’re the sole breadwinner for a large family, you may need a bigger financial cushion than a single person with no dependents and plenty of job opportunities.

A good rule of thumb is to accumulate at least 10% of your annual gross income as a cash reserve. For instance, if you earn $50,000, make a goal to maintain at least $5,000 in your emergency fund.

You might use another standard formula based on average monthly living expenses: Add up your essential costs, such as food, housing, insurance, and transportation, and multiply the total by a reasonable period, such as three to six months. For example, if your living expenses are $3,000 a month and you want a three-month reserve, you need a cash cushion of $9,000.

If you have zero savings, start with a small goal, such as saving 1 to 2% of your income each year. Or you could start with a tiny target like $500 or $1,000 and increase it each year until you have a healthy amount of emergency money. In other words, it might take years to build up enough savings, and that’s okay—just get started!

Your financial well-being depends on having cash to meet your living expenses comfortably, not on paying a lender ahead of schedule.

Unless Maya’s brother has enough cash in the bank to sustain him and any dependent family members through a financial crisis that lasts for several months, I wouldn’t recommend paying off student loans or a mortgage early. Your financial well-being depends on having cash to meet your living expenses comfortably, not on paying a lender ahead of schedule.

If you have enough emergency savings to feel secure for your situation, keep reading. Working through the next four steps will help you decide whether to pay down your student loans or mortgage first.

2. Reach your retirement goals

In addition to saving for potential emergencies, it’s critical to save regularly for your retirement before paying down a student loan or mortgage early. So, if Maya’s brother isn’t contributing regularly to meet a retirement goal, that’s the next priority I’d recommend for him.

Consider this: If you invest $500 a month for 35 years and have an average 8% return, you’ll end up with an impressive retirement nest egg of more than $1.2 million! But if you wait until 10 years before retirement to start saving, you’d have to invest over $5,000 a month to have $1 million in the bank. When it comes to your retirement savings, procrastinating can make the difference between scraping by or have a comfortable lifestyle down the road.

When it comes to your retirement savings, procrastinating can make the difference between scraping by or have a comfortable lifestyle down the road.

A good rule of thumb is to invest at least 10% to 15% of your gross income for retirement. For instance, if you earn $50,000, make a goal to contribute at least $5,000 per year to a tax-advantaged retirement account, such as an IRA or a retirement plan at work, such as a 401(k) or 403(b).

For 2020, you can contribute up to $19,500, or $26,000 if you’re over age 50, to a workplace retirement account. Anyone with earned income (even the self-employed) can contribute up to $6,000 (or $7,000 if you’re over 50) to an IRA.

The earlier you make retirement savings a habit, the better. Not only does starting sooner give you more time to contribute money, but it leverages the power of compounding, which allows the growth in your account to earn additional interest. That’s when you’ll see your retirement account value mushroom!

3. Have the right insurance

In addition to building an emergency fund and saving for retirement, an essential part of taking control of your finances is having adequate insurance. Many people get into debt in the first place because they don’t have enough of the right kinds of coverage—or they don’t have any insurance at all.

Without enough insurance, a catastrophic event could wipe out everything you’ve worked so hard to earn.

As your career progresses and your net worth increases, you’ll have more income and assets to protect from unexpected events. Without enough insurance, a catastrophic event could wipe out everything you’ve worked so hard to earn.

Make sure you have enough health insurance to protect yourself and those you love from an illness or accident jeopardizing your financial security. Also, review your auto and home or renters insurance coverage. And by the way, if you rent and don’t have renters insurance, you need it. It’s a bargain for the protection you get; it only costs $185 per year on average. 

And if you have family who would be hurt financially if you died, you need life insurance to protect them. If you’re in relatively good health, a term life insurance policy for $500,000 might only cost a couple of hundred dollars per year. You can get free quotes for many different types of insurance using sites like Bankrate.com or Policygenius.com.

If Maya’s brother is missing critical types of insurance for his lifestyle and family situation, getting it should come before paying off a student loan or mortgage early. It’s always a good idea to review your insurance needs with a reputable agent or a financial advisor who can make sure you aren’t exposed to too much financial risk.

4. Set other financial goals

But what about other goals you might have, such as saving for a child’s education, starting a business, or buying a home? These are wonderful if you can afford them once you’ve accounted for your emergency savings, retirement, and insurance needs.

Make a list of your financial dreams, what they cost, and how much you can afford to spend on them each month. If they’re more important to you than paying off student loans or a mortgage early, then you should fund them. But if you’re more determined to become completely debt-free, go for it!

5. Consider your opportunity costs

Once you’ve hit the financial targets we’ve covered so far, and you have money left over, it’s time to consider the opportunity costs of using it to pay off your student loans or mortgage. Your opportunity cost is the potential gain you’d miss if you used your money for another purpose, such as investing it.

A couple of benefits of both student loans and mortgages is that they come with low interest rates and tax deductions, making them relatively inexpensive. That’s why other high-interest debts, such as credit cards, personal loans, and auto loans, should always be paid off first. Those debts cost more in interest and don’t come with any money-saving tax deductions.

Especially in today’s low interest rate environment, it’s possible to get a significantly higher return even with a reasonably conservative investment portfolio.

But many people overlook the ability to invest extra money and get a higher return. For instance, if you pay off the mortgage, you’d receive a 4% guaranteed return. But if you can get 6% on an investment portfolio, you may come out ahead.

Especially in today’s low-interest-rate environment, it’s possible to get a significantly higher return even with a reasonably conservative investment portfolio. The downside of investing extra money, instead of using it to pay down a student loan or mortgage, is that investment returns are not guaranteed.

If you decide an early payoff is right for you, keep reading. We’ll review several factors to help you know which type of loan to focus on first.

 

6. Compare your student loans and mortgage

Once you have only student loans and a mortgage and you’ve decided to prepay one of them, consider these factors.

The interest rates of your loans. As I mentioned, you may be eligible to claim a mortgage interest tax deduction and a student loan interest deduction. How much savings these deductions give you depends on your income and whether you use Schedule A to itemize deductions on your tax return. If you claim either type of deduction, it could reduce your after-tax interest rate by about 1%. The debt with the highest after-tax interest rate is typically the best one to pay off first.

The amounts you owe. If you owe significantly less on your student loans than your mortgage, eliminating the smaller debt first might feel great. Then you’d only have one debt left to pay off instead of two.

You have an interest-only adjustable-rate mortgage (ARM). With this type of mortgage, you’re only required to pay interest for a period (such as several months or up to several years). Then your monthly payments increase significantly based on market conditions. Even if your ARM interest rate is lower than your student loans, it could go up in the future. You may want to pay it down enough to refinance to a fixed-rate mortgage.

You have a loan cosigner. If you have a family member who cosigned your student loans or a spouse who cosigned your mortgage, they may influence which loan you tackle first. For instance, if eliminating a student loan cosigned by your parents would help improve their credit or overall financial situation, you might prioritize that debt.

You qualify for student loan forgiveness. If you have a federal loan that can be forgiven after a certain period (such as 10 or 20 years), prepaying it means you’ll have less forgiven. Paying more toward your mortgage would save you more.

Being completely debt-free is a terrific goal, but keeping inexpensive debt and investing your excess cash for higher returns can make you wealthier in the end.

As you can see, the decision to eliminate debt and in what order, isn’t clear-cut. Mortgages and student loans are some of the best types of debt to have—they allow you to build wealth by accumulating equity in a home, getting higher-paying jobs, and freeing up income you can save and invest.

In other words, if Maya’s brother uses his excess cash to prepay a low-rate mortgage or a student loan, it may do more harm than good. So, before you rush to prepay these types of debts, make sure there isn’t a better use for your money.

Being completely debt-free is a terrific goal, but keeping inexpensive debt and investing your excess cash for higher returns can make you wealthier in the end. Only you can decide whether paying off a mortgage or student loan is the right financial move for you.

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What Causes of Death are not Covered by Life Insurance?

The death of a loved one is hard to take and while a life insurance payout can ease the burden and allow you to continue leaving comfortably, it won’t take the grief or the heartbreak away. What’s more, if that life insurance policy refuses to payout, it can make the situation even worse, adding more stress, anxiety, anger, and frustration to an already […]

What Causes of Death are not Covered by Life Insurance? is a post from Pocket Your Dollars.

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5 Best Places to Find Insurance for Freelancers

According to the U.S. Bureau of Labor Statistics, 10 million workers are self-employed in the country. Being a self-employed worker can be liberating, but it also means you’re your own HR department, too. One of the biggest challenges you’ll face is finding affordable insurance options. With a traditional employer, you had a limited array of […]

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