Divorce – Recession Style: Income and Expenses

Divorce is never easy, but add on top of the emotional trauma, the uncertainly of a recession, it gets more difficult.  The next few postings here will deal with some financial issues in divorce and how they’re impacted by our current economic landscape.

If both spouses are able to make ends meet comfortably on what they individually make after a divorce, income doesn’t really come up as a bone of contention.  But if they can’t, then alimony – also called spousal maintenance – becomes an issue.  In divorce cases involving alimony, generally every state looks at the reasonable income of each spouse and their reasonable expenses to figure out what the amount of spousal maintenance might be.  The word reasonable – for both income and expenses – is key.  If I’d like to leave my financial planning firm and try to become an actress, a judge probably isn’t going to require my ex to pay alimony to make that possible.  Also, the courts don’t generally want me to live a substantially better lifestyle than my ex if we’ve been married quite a while.  (All this doesn’t take kids into account.  More on that in a future posting.)  And most people, after a divorce, have to cut back their lifestyles since most marriages don’t have enough excess cash flow to support an entirely separate household. 

So on the earnings side of the equation, in this economy, some people are taking a pay cut or losing their job.  And people entering the work force aren’t having an easy time of it.  Divorce isn’t intended to be a free ride or windfall to either spouse, but courts also don’t want people to have to stay married to survive.  People who aren’t going through divorce are making some temporary compromises in their career paths.  They’re taking a job to get their foot in the door at a company they’d like to work for long term.  Or they’re taking a job they’d otherwise never consider to put food on the table.  So people in the midst of divorce realistically may have to make some of the same choices.  That may lower how much one spouse will pay in alimony, but that certainly doesn’t eliminate the possibility of spousal maintenance being paid.  This may also be a time when people who wanted the security of knowing the amount of alimony was locked into their divorce decree may want the flexibility of having it subject to modification if circumstances substantially change. 

Unreasonable spending levels are one of the factors that caused the recession.  So this is a great time for everyone – in or out of divorce – to get back to sanity in their expenses.  But it should be an equitable approach to cutting back.  It’s not reasonable to have one spouse living in the penthouse with a view of the park while the other is living in a cardboard box in the park.

Truly Resolved

I’m not anyone’s idea of an athlete, but I generally manage to stay on a pretty good year round schedule of walking.  During the months when the weather is reasonably pleasant, I walk outside.  During the winter, I spend most of my walking time at a gym the family belongs to.  Right before January 1, I asked one of the gym employees how long it usually takes for the New Years Resolution crowd to stop coming.  He said it’s usually in early February.  I love seeing new faces – and shapes – coming to the gym and enthusiastically attacking their fresh goals.  But that crowd does thin out every year and it’s depressingly early in the year. 

From what I hear, most new years resolutions deal with either health and fitness or personal finance.  That makes the fact that too many people drop their resolutions a few weeks into the year all the more distressing, because those are both areas that are important.  So what can people do to stay on track?  Let’s look specifically at financial resolutions.

First, make the goal achievable.  For instance, this might not be the right year to double your income.  Second, approach your goal in bite size bits.  So you might not want to completely eliminate your dining out budget.   But maybe you can have eating out be a reward for some other goal you’re working on or you can start by going to places that are a bit less expensive than you usually do.  Third, allow the new goal to become natural and habitual in your life.  If you want to monitor your spending more, make sure your system isn’t too hard to keep going. 

So do what you must to make your financial goals for 2010 achievable.  If you need some help, send your financial resolution to linda@brightleitz.com .  If your goal is one that would benefit more people than just you, the action plan will be part of this blog in coming weeks.

Giving Thanks

During a recession, there may be some who are wondering what they have to give thanks for during this Thanksgiving week.  “Are we grateful for the good already received?  Then we shall avail ourselves of the blessings we have, and thus be fitted to receive more.  Gratitude is much more than a verbal expression of thanks. Action expresses more gratitude than speech.”  (Mary Baker Eddy)

So during this time that is set aside in the United States every year for gratitude, find the things that you appreciate.  Even in the midst of dire circumstances, there are aspects of every life worthy of gratitude.  If our thoughts and lives are driven by what we’re missing, we’re not making room for the good that can come our way.  And once you’ve realized what you have to be grateful for, do something that will bless someone else.  The return on that investment is huge.

Holiday Spending During a Recession

The holidays are upon us and many people are saying “Bah Humbug!”  There is a way to enjoy the holidays without overspending.  Here are a few tips:

-         Plan your shopping.  Don’t go out shopping without a list of what you’re looking for and the price range you have for each purchase.  No impulse purchases!

-         Make gifts.  Take a little time to put together gifts with materials you already have or are inexpensive.  It can be a knitted scarf, a photo collage, homemade bread, or a bird house.  The personal touch is better than anything money can buy.

-         Make personal gift certificates.  We’ve done this with family for everything from an extended curfew for our teenagers to a home cooked dinner to doing a chore for someone.  The gift is appreciated and you can make it more festive by printing the certificate on nice stationery.

While economic indicators say that we’re on the way out of the recession, many are still feeling the pinch.  It’s not a time to burrow back into debt.  The holidays are a great time to give yourself the gift of making financially responsible decisions.

The Best Financial Advisor

There are some great checklists for choosing a financial advisor.  The good ones include asking about education, professional credentials, how long they’ve been in the business, and what services they offer.  But some of the most important information you’ll need isn’t on a checklist.  And it’s very hard to find.  You can’t ask it in a question and count on a reliable answer.  Your gut or the financial planner’s other clients might be able to answer it.  But some of these planners might not even have clients yet.  So what is it?

 Can you trust the planner?

 Because if the answer to that question is “no”, don’t bother asking other questions. 

 I’m fortunate to have many trustworthy financial planning colleagues.  One of them told a story recently that illustrates this.  About five minutes before a client came in for an appointment, he found an error his staff had made in her account.  It was – for him – a large error of about $10,000.  So the first thing he did when she arrived was explain the mistake and write her a check that made her whole.  That check pretty much cleaned out his firm’s operating account on that day.  That was several years ago and the woman is still a client.  He didn’t try to gloss over or hide his mistake.  And she appreciated that people make mistakes, but the best people own up to them and deal with the consequences. 

 So trust your instincts when choosing a financial advisor.  Technical knowledge and expertise are important.  But honesty is priceless.

The Right Time Without Timing

Many financial planners – including me – will tell you that market timing is not a good idea.  But that doesn’t mean that we should all bury our heads in the sand and ignore opportunities.  It’s a fine line, but there is a difference.

One example is the current mortgage rate environment.  Look at whether it makes sense to refinance your mortgage while rates are still low.  Whether you want to lower your payment, stretch out your payments over a longer time, or let a lower rate so you can get the mortgage paid off more quickly, now is a time to explore that.  But be careful.  There are mortgage lenders who will refinance anyone who asks without looking at whether you improve your situation with a refinance or not.  So get some good referrals on who to work with.

It’s also a good time to buy up in terms of housing.  Yes, you may get less for your little house than you feel it’s worth.  But all factors being equal, you lose less on selling your small house than what you save on buying a bigger house.  In other words, let’s say you get 10% less on your $200,000 house (lose $20,000), but you save 10% on a $350,000 house (save $35,000).  You’ve come out ahead.  Once again, having a realtor who can tell you if that’s the case is vital.  So don’t just pull out the phone book and start shopping.  Get a good referral.

If you think it’s time to change your portfolio approach, this may be the perfect time to do it.  If you took a bath on your individual stock portfolio and want to move to mutual funds and ETFs, this is probably a great time.  That portfolio change might have cost you big bucks in taxes a year or two ago.  But you might actually get some tax losses if you make that move now.  And – at the risk of sounding like a broken record – talk to a good financial advisor about it.  This is definitely a time when you want a fee-only and not a commission or fee-based professional.  If someone makes big bucks over making the changes, you may never know if the change was in your financial interest or theirs.  The good ones are still alive and well in this economy.  Look at http://www.acaplanners.org/Advisors.aspx  or http://findanadvisor.napfa.org/Home.aspx  to find one.

Experiential Learning for Parents

Parenting is an art as much as a science.  What nurtures creativity and responsibility in one child may breed wanton disregard in another.  What is a great instructional tool one day is seen as useless and starts an argument the next.  And while there are many helpful and well documented methodologies for parenting, the best informed parent will make some mistakes – and learn from them.  As someone who has literally written the book on teaching kids about money (The Ultimate Parenting Map for Money Smart Kids - $10 including free shipping at www.brightleitz.com), I continue to learn from mistakes when I put theory into practice. 

One of the hard learned lessons for me as a parent is that every stage of life for kids brings new lessons for the children and for their parents.  The child who saved all her allowance as a grade schooler may have spent all her pay check within three days of every pay day as a teenager.  What can be learned from this is that phases in kids’ lives are temporary.  The outlook of the grade schooler isn’t lost, it’s just on vacation.  And the teenager will learn to pace her spending if her parents resist the temptation to either lecture her about budgeting or give her extra money.

Another lesson is that most operating procedures work best when well defined. Here’s an example.  This summer my family had multiple teenage drivers as well as my husband and me sharing cars.  In the past we pretty much had a one-driver-per-car ratio, so the rule had been that each teen driver paid for their own gas.  As we started playing musical chairs with car usage, I decided to generously allow the kids to use our gas card.  We had them pay for a few more things we generally pay for.  Feeling particularly kind, I’d often encourage the kids to get a soda at the gas station store. Hey, it’s summer!  Live it up! 

Then the gas card bill came in.  OMG!  The bill for the first month of summer was literally over four times the size of our average bill for that card.  None of the kids was around when I opened the bill, so no shouting or bloodshed ensued.  But the system changed immediately.  Of course, it wasn’t entirely their fault.  My card, my decision.  So defining things up front – and thinking through potential outcomes – can make for less painful learning for everyone.

Picking A College

I’m fortunate to have intelligent friends.  This blog will have some guest postings from some of these folks.  Rob Reed is a financial planner in Ohio and also has experience working in academia.  In regard to understanding how to choose a college, I literally couldn’t say it better. 

WHICH COLLEGE?

 Parents spend more time thinking about how to pay for college than what kind of college their children should attend. Yet the kind of college students attend affects not only what parents pay but—much more important—their children’s educational experience and chances for success.

The issue is not how smart a child is but where a child has the best opportunity to succeed. The relationship between students and their professors is the basis for that success. Therefore, I classify colleges by what they pay professors to do.

NOTE: This list focuses on general education institutions offering undergraduate degrees. It excludes technical schools, military institutions and strictly sectarian schools.

At Community Colleges professors are hired and promoted based solely on their teaching. These schools are an excellent start for students who feel they need extra preparation or who are unsure about attending college. Community colleges are inexpensive and offer a solid grounding in college basics. They have small classes and highly personalized instruction.

These schools offer unique advantages. For example, if a student discovers he has little interest in a general college education, he can transfer directly into one of the school’s vocational programs. This training offers a solid preparation toward a well-paying career. If on the other hand a student discovers an aptitude for college-level academics, she can transfer to a four-year college or a state university and thereby save several years of higher tuition cost.

At Four-Year Colleges professors are hired and promoted based primarily on their teaching, though they are also expected to do research. These mid-sized schools (10,000–15,000 students), have mostly regional reputations and typically grant only undergraduate degrees. Most classes are small and taught by full-time faculty who are expected to personally mentor students.

These are good schools for students who are ready for college but have not settled on an interest area or who need personal attention from professors. There are many schools in this category and consequently there is much variation in quality and character. Tuition reflects this variation. Some strong Ohio colleges include Dennison, Kenyon, and Otterbein.

A university is a collection of colleges (humanities, medicine, law, etc.) under one banner.  At Large State Universities professors are hired and promoted based primarily on their research. These schools have a national reputation, student populations of 30,000 or more and boast a world-class faculty. Especially in the freshman and sophomore years however, your child will probably be taught by the professor’s graduate students. Indeed, typically at these schools there is minimal interaction between full-time faculty and undergraduate students.

Unlike smaller schools, university professors are so overloaded with research demands and responsibilities toward their graduate students that professors do not have the time to seek out undergraduates to mentor. While this sounds grim, engaged undergraduates with initiative can find professors who are genuinely interested in working with them. Students, however, must be assertive enough to seek out professors.

In essence, Large State Universities are the Wal-Marts of education: they offer a tremendous selection of courses at rock-bottom prices but there is little personal service unless the consumer (student) actively seeks it out. These schools offer the greatest educational opportunity for each tuition dollar but students must be able to take advantage of it.

Many Large State Universities have branch campuses throughout the state. These campuses offer the advantages of small class size, personalized professional instruction and often a more relaxed admission policy. Later transfer to the main campus is typically a straightforward process and, in any case, students receive the university’s diploma regardless of which campus they attend.

In Elite Institutions professors are paid and promoted based on outstanding teaching and research. These internationally known schools boast small classes taught by renowned scholars. This is the ‘best of both worlds’ and tuition reflects this fact. Admission is highly competitive but for many bright kids with strong high school records attendance is a life-altering experience. Attendance is a serious commitment though, both for the parent who pays the bills and for the student who strives to succeed in this high pressure environment.

For bright students who cannot afford or gain admission to an Elite Institution, the Honors Program at a Large State University is a cost effective alternative. These programs are essentially mini-Elite Institutions set inside a larger university. Professors actually compete to personally teach these students who often have their own classes, dorms and mentoring programs.

This is only a general overview. Within each college-type there are good and bad schools, better and worse bargains. This classification does not single out the “best” colleges; hopefully it helps you identify the type of college best for your child. 

College Loans Now

Our nation – both the citizens and the government – is drowning in debt right now.  Too much debt, much of it poorly structured, has put our economy in a slump.  So it may seem foolhardy to consider getting a loan for college now.  But there can be good reasons for getting a loan and higher education is one of them. 

 A “good debt” is one that allows the borrower to have something of value that will appreciate over time.  And the debt allows the person to obtain this asset with growth potential much sooner than if they had to wait to pay for the asset in cash.  An education that will allow greater earnings for the rest of your life can be worth borrowing for.  Government subsidized loans with low interest rates are optimal.  The Plus loans generally carry higher interest, so make sure that you can’t get tuition reduction or do a work/study program before getting into that tier of student loans. 

An element to examine closely now is taking a loan now that you’ll repay with an existing 529 plan or other savings that have been in the stock market.  There may be future growth in these accounts that would be worth waiting to receive.  You can pay the loans back early, but you generally can’t get college loans after you’ve take the courses and paid the tuition.  This is one of the areas where some professional advice can help you make an informed decision relative to your particular circumstances.

The Potential of W

Don’t worry.  This isn’t a political posting about our former president. 

Most people expect a recovery from this recession to come in a V shape.  The economy was at a peak, it has fallen into a valley and seems to be heading in a generally upward direction – in other words it looks like the letter V. 

We Americans tend to think about the economy in what I call “The Eternal Now”.  I don’t mean that in a positive metaphysical way of living for the moment.  I mean that we tend to think that whatever is happening now will happen forever. 

When the stock market was booming, people didn’t want to keep any money in safe cash type investments.  They wanted all their money in the stock market where it would – they assumed – always be growing.  People borrowed against the value of their home because the house would be worth more tomorrow than today and they could always just sell it if they needed to.  They paid for everything with a credit card because their income would always go up. 

Sound familiar?  And now too many of the folks who were thinking this way have no money for emergencies, had to sell stock market investments at a low to pay for necessities and can’t pay their mortgages because they lost their job. 

The economy has started a shaky move up, but some of the things that are helping it could cause it to take another sizeable dip before it’s truly recovered.  The government obviously can’t bail out everyone forever.  And the influx of government money in the economy could cause inflation, which could cause another dip in the markets and our general productivity.

So if you’re starting to get back to some of the bad habits that got us into a recession in the first place, stop.  Spend less than you make.  Build up an emergency fund in something really boring like a bank savings account.  Don’t fund your life with debt.  The recovery may look more like a W.  It may go up, then go back down, before it starts a more steady recovery.  Your job isn’t to predict the economy.  Your financial responsibility to yourself is to be prepared if things aren’t smooth in the economy.  Then you’ll be part of the solution, not part of the problem.