Take this short quiz to find out whether you get a clean bill of financial health – or if you require emergency care.
Do you know how financially healthy you are right now? Money is an issue for most people going through divorce, and many experience a drop in both cash-flow and net-worth during and after divorce. If you score low on the following quiz, then you need to start setting priorities and goals and allocating your resources accordingly.
1) Do you have life insurance?
c) Don’t know
d) Through my spouse
2) In terms of 401(k)s/IRAs/RRSPs, you:
a) Maximize contributions every year
b) Make sure you contribute something every year
c) Seldom make contributions
d) Wonder what are 401(k)s/IRAs/RRSPs?
3) When dealing with credit card bills, you:
a) Pay off the full balance every month
b) Try to pay off the full balance, but at least make the minimum payment
c) Suspect I’m in trouble, but can’t live without them
d) I don’t have any credit cards
4) Your approach to managing your finances could best be described as:
a) My spouse always handled the money
b) I balance my checkbook and put away a little money every month
c) I have a monthly, yearly, and five-year plan
d) When I have money, I spend it all (and then some)
5) Do you know where your money goes each month?
a) Yes – down to the penny
b) Yes – give or take $100
c) I think so, but I never seem to have as much as I thought I had.
d) It just magically seems to disappear
6) How much of your income do you save and invest for short- and long-term goals?
d) Nothing: I live from paycheck to paycheck
7) Are you saving for your children’s college costs?
a) Yes: I’m right on track
b) Yes, but it isn’t going to be enough
c) No: they will have to pay their own way
d) I don’t have children
8) Do you have an up-to-date inventory of your separate or personal property (generally, this includes property you owned before marriage, or received as a gift or inherited during the marriage)?
a) Yes: down to the last set of drink coasters
b) I know what’s mine, but it isn’t written down anywhere
c) I haven’t gotten around to it yet
d) What do I need that for?
9) Do you have an up-to-date inventory of your marital or community property (generally, anything you earned or acquired during the marriage, no matter whose name it’s in)?
a) Yes: and it has all been accounted for and valued
b) I am pretty sure of about 70%, but I don’t know whether the remaining 30% is marital or separate
c) My spouse made a list of our marital property and has removed everything else from our house
d) What do I need that for?
10) Are you going to be shopping for a mortgage or home loan after your divorce is finalized?
b) I think so
c) I don’t think so
11) With regard to you tax returns, you:
a) Review them with the tax-preparation professional who worked on them and file on time every year
b) Hand a shopping bag full of receipts to a tax-preparation services company a day or two before the deadline
c) Trust a friend who recently purchased tax-preparation software to get everything right
d) Have never filed a tax return
12) If disaster struck (your house was destroyed, your child needed emergency surgery, or you lost your job), would your family be provided for?
a) Yes: I have insurance policies to cover all these
b) Maybe: I’m not sure what my insurance covers
c) I would have to ask family and friends for help
d) No: I don’t like to think about bad things happening to me or my family
13) With regard to your marital home, you:
a) Know its current value, including how much is still owed on the mortgage
b) Know its current value, but not how much is still owed on the mortgage
c) Trust my spouse to give me my fair share
d) Are determined to keep it no matter what: my kids were born here!
14) Do you know the location and amounts of all of your investments: including savings, stocks and bonds, real estate, art, jewelry, and collections?
b) I think so
c) I’m not sure: my spouse took care of these sorts of things
d) I have no idea
15) If either you or your spouse own a business, how much do you know about it?
a) Everything: I have a current valuation, including liabilities and assets
b) Quite a bit: I meet with the bookkeeper for quarterly updates
c) Very little: my spouse takes care of the business
How to Figure out your FHQ (Financial Health Quotient)
- For each “A” response, give yourself 3 points;
- For each “B” response, give yourself 2 points;
- For each “C”, you’ll earn 1 point;
- For each “D”, you get 0 points – except for #3 and #7, where “D” is worth 3 points.
How Financially Healthy are You?
- 30-45 points:
Congratulations! You seem to have things under control, and are planning
for a secure financial future.
- 15-30 points:
Not bad, but you need to start taking better care of your financial
health. Seek help in areas where you know you’re weak: from tax
planning to budgeting.
- 0-15 points:
You need to seek professional advice Yesterday! Your financial pro can show you where you are today, and where you’ll be tomorrow – helping you to create goals as well as a realistic plan for achieving them.
Do you know where your money goes every month – or is there still some month left at the end of your money?
If you scored low on this quiz, then you must begin managing your cash-flow immediately. You also need to set priorities and goals, and start to allocate your resources accordingly. Look at your spending patterns and see if they are in line with your priorities and goals; whenever possible, you should reduce the amount spent on low-priority items to make more funds available for your high-priority goals.
A CDFA professional can help you analyze the short- and long-term impact of your divorce
as well as the pros and cons of different settlement proposals, so ask your CDFA to explain the costs and benefits of a particular proposal before you sign it.
Some Financial Issues to Consider
- Insurance – If you do not have appropriate insurance coverage, then you are putting your investment assets and retirement assets at risk. Also, if you will be receiving spousal or child support, you should consider insuring your ex-spouse against death, disability, or critical illness to ensure the payments will continue if he/she passes away or can no longer work.
- Retirement – You might be tempted to use these assets to cover any cash shortages, but they should only be used as a last resort. You may incur financial penalties or taxes for early withdrawals from retirement accounts; speak to a financial professional specializing in divorce issues before making any withdrawals about how to avoid or minimize these fees. Your financial professional can project how much you will have and how much you will need for your retirement. Get this analysis before dipping into or depleting your retirement nest egg.
- Marital Home – If you wish to keep your home, ask your financial professional to show you whether or not you can afford it. You might end up house-rich, but have no cash to spend on basic necessities. You can’t sell a window to put food on the table or pay for utilities and maintenance, for example.
- Debts and Mortgage – If you take the home, you will probably have to refinance your mortgage to obtain a mortgage that does not obligate your ex-spouse – and if you wish to buy a new home after divorce, you’ll have to get a mortgage in your name. Can you qualify for a mortgage without your ex-spouse’s income? If so, how much will you qualify for as a single person?
- Cash Reserves/Savings – A portion of your assets must be liquid to cover emergencies – which could include anything from job loss to unexpected medical bills.
- Sending the kids to college – This should be negotiated before divorce to ensure both parents will be contributing to these expenses. Consider investing in a college savings plan (a 529 plan in the USA or an RESP in Canada) and making annual contributions part of your divorce agreement. If not, college may be simply unaffordable if your ex-spouse refuses to contribute when the children reach college-age.
- Assets – You should know where all of your assets are located: from cars to real estate to stock portfolios to art collections. Begin collecting financial information immediately. If you review your tax returns, you may find assets that you may have forgotten about.
- Taxes – Obtain copies of your tax returns for at least the past three years to provide to your financial professional and lawyer. Also, be aware that there are tax traps and windfalls in the divorce process. For instance, spousal support is generally taxable to the recipient and deductible by the payor, and child support is neither taxable nor deductible.
- Business – If you or your spouse own a business, gather as much information as possible about it – including having a business valuation completed. If you do not run the business, you should consider filing a separate tax return.
Diana Shepherd (Hon. BA, CDFA®) is an award-winning editor, published author, and a nationally-recognized expert on divorce, remarriage, finance, and stepfamily issues.