Divorce is an emotional time, but when it comes to making important financial decisions after a divorce, it’s important to resist reacting impulsively while emotions are raw. Sometimes one spouse’s portion of a divorce settlement agreement results in a significant lump sum amount after the division of their marital assets. Often this amount must fund their lifestyle and meet their basic needs, but what if they’re self-supporting and wish to invest their divorce settlement money?
What to Do Before You Invest
Before you think about investing your divorce settlement amount, it’s important to address any pressing debt—beginning with any high-interest debts like credit card balances. Paying off debt with high annual percentage rates (APR) saves a great deal of money in the long run. After your divorce, examine all debts and put them in order beginning with the debts with the highest APR. Investing before paying off debt rarely makes sense because you’re likely to pay out more on the interest on debts than you’d earn from your investments.
It’s also best to use a portion of your settlement to set aside an emergency fund. Financial experts recommend keeping enough in this fund to pay for rent/mortgage, utilities, medical insurance, gas, and groceries for six months in case of job loss, injury, or other unexpected occurrences. Place the emergency fund in an interest-earning bank account so the money is working for you.
Making Careful Investments Post-Divorce
Once you’ve paid off your high-interest debts and put aside an interest-earning emergency fund, it’s time to consider investing the remainder of your divorce settlement amount. It’s important to consult with an experienced, reputable financial adviser who can guide you into a portfolio with an acceptable ratio of returns and risk. A good investment advisor can help you navigate through uncertain market conditions. Real estate investing is another good option if you have a substantial sum from your divorce settlement. Purchasing a rental property is a good way to ensure a steady passive income.
There are also many online resources to learn the basics of financial investments if you are unfamiliar with the investment world so you can participate in decision-making for your own portfolio. Turning a cash settlement amount into a diversified investment portfolio to deliver returns at a limited risk can be a challenge that requires both a basic understanding and a trusted financial advisor. It’s never a good idea to invest your divorce settlement impulsively.
Should You Pay Off Your Mortgage?
Some divorced spouses decide to invest their settlement amount into their home mortgage. Paying it down or paying it off completely depending on the amount of the settlement is one good way to invest your divorce settlement in a way that provides multiple benefits. Real estate property is always a secure investment and freeing yourself from a monthly mortgage payment can relieve a significant burden and benefit your lifestyle.
What About Retirement Accounts After a Divorce?
In most divorces, retirement accounts are part of the assets equally divided in the divorce agreement or final judgment. It’s a good idea to take your share of the retirement fund and place it into a new retirement account in your name alone. Keeping the money in a retirement account saves withdrawal penalties and provides tax advantages.
Deciding what to do with your divorce settlement is a big decision with long-lasting impacts. It’s important to carefully weigh every decision and seek advice of a financial expert with a strong positive reputation.