Financial planning

What your spouse is doing financially behind your back could come back to hurt you

Depending on which state you live in, you might just be responsible for any and all spending incurred by your spouse, even if you didn’t sign a thing (other than a marriage license). Quite scary huh? I would agree. The fact is, you better protect yourself and take precautionary measures to best ensure you don’t get burnt. This article will take a brief look at the 9 states which are called “Community Property States” and the remaining states also referred to as “Equitable Distribution States.” Moreover, I will give you my opinion on how you can try and protect yourself from falling victim to a major surprise down the road (this article is not giving you any legal advice – consult a local attorney for specific advice for you and your situation).

Most couples go into marriage thinking they will always be together, the stats prove otherwise. Look at these staggering stats below:

The divorce rate in America for first marriage, vs second or third marriage 50% percent of first marriages, 67% of second and 74% of third marriages end in divorce, according to Jennifer Baker of the Forest Institute of Professional Psychology in Springfield, Missouri.

According to enrichment journal on the divorce rate in America:
The divorce rate in America for first marriage is 41%
The divorce rate in America for second marriage is 60%
The divorce rate in America for third marriage is 73%

Now that we’ve established that things often go wrong, it’s important to note that when they do, and a divorce is imminent, that’s when most people find out that their spouse has racked up a bunch of personal debt without your knowledge.

In general, states have adopted one of two ways of dealing with your divorce, so let’s distinguish which states are what. Below that, I will speak to the differences in how courts deal with your case depending on the law.

The nine states that are referred to as “Community Property States” are as follows.

- Arizona
- California
- Idaho
- Louisiana
- Nevada – New Mexico
- Puerto Rico
- Texas
- Washington

“Equitable Distribution States”

- Alabama
- Alaska
- Arkansas
- Colorado
- Connecticut
- Delaware
- District of Columbia
- Florida
- Georgia
- Hawaii
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Maine
- Maryland
- Massachusetts
- Michigan
- Minnesota
- Mississippi
- Missouri – Montana
- Nebraska
- New Hampshire
- New Jersey
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Utah
- Vermont
- Virginia
- West Virginia
- Wisconsin
- Wyoming

In a community property states, debt acquired during the marriage (as opposed to debt acquired prior to the marriage) is owned jointly by both spouses and is divided upon divorce, annulment or death. Joint ownership is automatically presumed by law, unless there is specific evidence that would point to a contrary conclusion for a particular debt. If you live in a community property state (listed below), both spouses are held accountable for any and all debts acquired during the marriage, even if the account was is listed exclusively in one spouse’s name. (source)

Equitable distribution. In all other states, assets and earnings accumulated during marriage are divided equitably (fairly), but not necessarily equally. In some of those states, the judge may order one party to use separate property to make the settlement fair to both spouses. (source)

According to Wikipedia, in a community property jurisdiction, most property acquired during the marriage (except for gifts or inheritances) is owned jointly by both spouses and is divided upon divorce, annulment or death. Joint ownership is automatically presumed by law in the absence of specific evidence that would point to a contrary conclusion for a particular piece of property.^[2] The community property system is usually justified by the idea that such joint ownership recognizes the theoretically equal contributions of both spouses to the creation and operation of the family unit.^[3]

Division of community property may take place by item, by splitting all items or by value. In some jurisdictions, such as California, a 50/50 division of community property is strictly mandated by statute,^[4] meaning that the focus then shifts to whether particular items are to be classified as community or separate property. In other jurisdictions, such as Texas, a divorce court may decree an “equitable distribution” of community property, which may result in an unequal division of such. In non-community property states property may be divided by equitable distribution. Generally speaking, the property that each partner brings into the marriage or receives by gift, bequest or devise during marriage is called separate property (i.e., not community property). See division of property. Division of community debts may not be the same as division of community property. For example, in California, community property is required to be divided “equally” while community debt is required to be divided “equitably”.^[5]

Property that is owned by one spouse before the marriage is the separate property of that spouse, unless the property is “transmuted” into community property. The rules for this vary from jurisdiction to jurisdiction.

Whereas, with equitable distribution states, property and debt can be divided equitably, not necessarily equally. Creditors have very different rights in collecting their debts, depending on state law.

In summarizing the two different types of state law it’s critical to note that there are still significant differences in the way say Texas and California laws are written. No two states laws are identical, for simplicity we’ve lumped them together in two separate categories. Moreover, in equitable distribution states you may still be required to pay back personal debt incurred by your spouse. Generally speaking though, spouses can file bankruptcy individually and more easily in Equitable distribution states and it’s much tougher for creditors to come after you for debt your spouse has incurred.

What can you do to protect yourself? Don’t get married. Just kidding, but it’s not bad advice if you want to stay untangled financially, then again common law may treat you as married for legal purposes. For those of you who don’t have that option? Monitor your spouses credit file with their permission! You cannot legally acquire a spouses credit report without their permission. Before you get married, agree to monitor each others report on a semi annual basis. Be open about your finances, and pay attention to their spending. Chances are you don’t need to see a credit report to know they’re spending frivolously!

My point in writing this article was to raise awareness that in several states you can be held responsible by creditors for your spouses personal debt that they may have accrued with or without your knowledge. I’m also raising awareness that you must strive to be open with your spouse about everything financially. It would be a good idea to be open with each other and to keep some spending money on the side, in the form of cash, so that you can both spend freely and within budget. But just because you live in an equitable distribution state, doesn’t mean you won’t or can’t be held partially responsible for personal debt your spouse incurs. Remember, equitable doesn’t necessarily mean equal.

Will Congress raise the age at which you can withdrawal from a 401k or IRA without penalty?

I love when people Ask FinanceDad questions, it gives me a chance to see what people are interested in, and provide them with answers that both make sense and which give actionable advice. Moreover, half of the questions I receive, I would have never thought about myself. Therefore, your questions gives me the opportunity to often learn new things on my own and share them with you.

Reader Nick recently asked me some great questions:

I was recently told that Congress is considering raising the age at which you can begin withdrawing from a 401(k) or IRA without penalty?  Is that true?  What age are they considering raising it to?  As a young worker just beginning my career, it troubles me to think that not only will social security not be available for me, but I also won’t be able to access my own retirement savings until so late in life.

First, Nick thanks for your questions. Now, let’s move on to answering your questions. With regards to speculation that congress is considering raising the withdrawal age, I’ve seen or heard nothing of the sort, even after an exhaustive news and blog search. On the contrary, I’ve seen proposals from the Obama administration to eliminate required minimum distributions, and to remove in partial, penalties for early withdrawal. However, for the sake of argument, let’s say congress one day does decide to pass a bill that would raise the age limit for penalty free withdrawals from 59 and 1/2 to say, like 65 years of age. Any such move would likely come as a result of increased life expectancy. Although, that doesn’t address your concern, having access to your money should you decide to retire earlier than the imposed penalty free withdrawal age.

Currently, there are completely legal ways around these penalties, for people to access their retirement funds much younger than 59 and 1/2. I wrote an article ironically, two years ago yesterday about accessing your retirement funds early without paying a penalty. With the 72(t) and 72(q), the IRS allows you to make extended, regular withdrawals penalty free. The key here is, you have to make the exact same withdrawal (with very little exception) or the IRS will slap you with the penalty along with additional interest and fines for not abiding by their rules. My point is, there are usually ways around the penalties that allow you access to your retirement funds.

But for Nick and my other readers, even if congress raises the retirement age for accessing your retirement funds and takes away the 72(t) and 72(q) and other options, you can still retire early if you plan properly. Retirement planning is a reltively simple excercise (once you understand it), which I will describe breifly below.

Say your desire is to retire at 40. You must determine what it will take to get there by looking at your starting point, and deciding how much you will need to have to be able to retire at 40 and maintain whatever lifestyle you desire. Lets say Nick is 23 years old right now, he determines he will need to have 2 million in savings and investments to be able to retire at 40 and live to 85. Nick must determine how much money he will have to have save and invest each pay period to reach that goal over the next 17 years. He must decide how much risk he needs to take to acheive his goals. If the law says he can’t touch his 401k or IRA until he is 65, or he will face a stiff penalty, he must have enough in savings to last him through retirement until he can access his other funds. He may need to have 1 million in savings, combined with half a million in investments (which will need to grow to 1 million in investments by the time he is 65 to reach his two million dollar goal in investments – if you combine his 1 million in investments with his million in savings, it totals his 2 million dollar retirement goal needs), this way he is not dependent on 401k or IRA funds in entirety for early retirement.

But you’re probably thinking, what if I plan on that basis and the government decides after I’m 40 to bump up the age for penalty free withdrawals to 70. Plan conservatively, plan with that potential worst case scenario. Planning is your friend, and will make life much less complicated and will help take away many of your worries. I’ve wrote a cool series on understanding the basics of retirement planning, I encourage you and my readers to take a look when you get a chance, it’s no more than a couple hour read and will help squelch many of your fears. It details how to make goals and evaluate them to see if they are feasible.

You’re right on about social security though Nick, however, if you plan accordingly, there’s no need to worry whether social security will be there for you when you decide to retire, I’m certainly not counting on it. In summary, think of your retirement plan as a set of stairs, you may have to live off of savings (the bottom stairs) until you’re able to access investments (the top stairs), but you can still retire early if you save, invest and plan properly.

I hope this helps!

What should you do if you’ve got extra money or get an inheritance?

There will be times in your life when you will earn more money than you need to live or maybe you run into inherited money. What should you do with this extra money? Here are a few things that you can do with that extra cash:

• Pay off any unsecured loans or credit card cards that you hold. Credit is very expensive. Credit cards are the biggest source of unsecured loans in the World today. Credit card companies charge you different rates of interest on different types of money. Cash from an ATM taken with a credit card is a lot more expensive than ordinary shop purchases. Credit cards take your repayments towards shop purchases first and then only later towards the cash withdrawals so that you pay the maximum interest possible for the longest time. Getting a credit card with zero percent interest on balance transfers is always a smart move. There are many deals around so check my credit card reviews, why pay more than you have to?
• Build an emergency fund so you don’t have to use credit when something bad happens. A rule to use would be to reserve as much cash as you would need to live if you were to become unemployed tomorrow. A professional may need 12 months worth of living expenses in order to find a job. A factory worker may only need 3 months of living expenses, as they can find a job faster (this may no longer be true though). Also, set aside an emergency stash for car or home repairs on top of living expenses to cover the time it would take you to find a job.
• Build up your equity in your home and pay down principal. Once you have accomplished paying down high interest unsecured debt, the second step is to build the equity in your home. If you’re considering purchasing a home soon or in the future, push yourself to put down the maximum down payment that you can afford at the time you buy your property (as long as credit card debt is paid off). Avoid including arrangement fees, legal fees or Realtor fees in your mortgage, try and negotiate to have the seller pay for these. Mortgages interest can cost you huge amounts of money over the lifetime of your loan. Whenever you can, pay more than your monthly payment minimum, as most mortgages are front end loaded with interest. This means if you’re in a 30 year note, most all payments in the first half of the life of the loan will be applied to interest, not principal. To build equity outside of property value increases, take surplus money that you come into and pay down your mortgage principal (after credit card debt is paid off). Check out your loan options as well, for example, some mortgage payments can be made on a a bi-monthly repayment schedule, helping you pay down principal faster. There’s a huge difference in interest paid between 30 year and 15-year mortgages, and you can save a small fortune in interest without a significant increase in payment.

• Maximize your 401(k) and or other investments after you’ve paid down debt. When you change jobs, don’t touch that 401(k) retirement fund either. Roll the balance over to an IRA and keep it invested. If your employer is giving you money in the form of matching contributions in a 401(k) or similar, be sure to take advantage of it. Quite often, people use the excuse that they don’t like the investment company offered by their employer, but you can more than make up for any poor selections or returns provided by your company selections with the matching dollars you’ll get, even if that means sticking your dollars in money market funds. At minimum, maximize your contributions to maximize their match.

Instead of taking your extra money and buying toys, boats, TVs or new cars, take that money and pay off debt and start investing. Not only will you save paying thousands of dollars in interest, you can start making your money work for you, instead of always working for your money.

Stop associating retirement with being old

Too often we fall into the trap of associating retirement with being old and by doing so we create a self fulfilling prophecy. We delay planning because we think retirement is something you do when you get older, and instead mostly focus on the now. Instead of thinking of retirement as something you do in your 60′s or 70′s, why not shoot for retiring in your 30′s, 40′s or 50′s? But how will you ever retire young if you never try and figure out what it will take to do so?

So how do you get started? Below, I’ve sequentially listed several of things you should do to start planning your retirement early (this list is not meant to be comprehensive, rather a starting point to get you thinking). You need to see if your goals are feasible and or what you need to do to make retiring early a reality (this exercise will be for someone in their 20′s, simply use the same concepts if you’re older):

• Determine how you want to live in retirement: Everyone wants to live comfortably, but define that comfort level. Determine your anticipated living expenses on an annual basis out through your life expectancy. Some expenses to consider would be monthly rent, leisure, insurance, health care, emergency funds, etc.
• Determine how much money it will take in the bank to support your lifestyle. For example, if you’re 25 now and want to retire by 30, will you have enough funds saved up to cover your lifetime expenses? If not, readjust your retirement age or lower your expenses. Also consider how your income will be distributed throughout your retirement. You start off with a chunk of money in the bank and that money earns you money, however, as you draw down that balance, the income you make off of those investments will also go down.
• Make an investment plan to meet your savings goals. Anyone can pull a number out of the air of how much money in the bank they need to support their retirement needs, but can you amass that amount of money or not? This process will help you determine whether or not you can or cannot meet your savings goals. For example, if you’re 25 and have determined you will need $1,000,000 to retire at 35, and you anticipate making around $50,000 in income for the next 10 years, you may come to the reality that 35 is unrealistic and you have to push your age back another 10 years.
• After you’ve determined realistic savings and retirement plans, put your plan into action and monitor your progress. Your situation may change and or the markets may change. You may be promoted or lose a job and need to adjust your goals along the way. The market may explode or implode.
• As you move throughout the life of your retirement plan it’s critical to adjust your risks accordingly. When you are younger or earlier on in your investing you’re more willing to take risks, as you progress through your plan it doesn’t make sense to take as many risks, as you move from wealth accumulation to wealth protection.

If you wait until you’re older to plan for retirement you will concentrate too much on the now instead of the future. You will continue to work for your money instead of having your money work for you. It’s important to start planning as early as possible. Why not figure out what it would take to retire at 30, 40, 50… instead of waiting to figure out what it will take to retire in your 60′s or 70′s? You really have little to lose by going through an exercise like this of your own. If it seems too complicated, consider working with a financial planner or other professional that can help you along the way.

The importance of a Budget to your personal finances

In the business world, management lives and dies by their budgets. A budget’s importance cannot be overstated,without one you cannot know how well you’ve performed over the time period your analyzing nor take any corrective actions if you don’t know whats gone wrong.

Most businesses are started and built upon debt, thus the most meaningful way to ensure the debt will be repaid is through maintaining budgets and setting goals. You must look at your personal finances like a business does, and lay out all your anticipated expenses within a given time frame. Everything starts with a budget for a business, and ends in analyzing and evaluating spend against budget, and taking corrective action after goals are not met.

Businesses create short term budgets and long term budgets. The companies that I have worked for start by looking at sales (projected sales in most cases – similar to your anticipated revenue stream, otherwise known as your take home pay), then financial management builds up monthly, quarterly, annual, and 3 to 5 year budgets. With this, management can determine such things as; What will our bottom line look like if we stick to this budget. Are sales revenues truly going to cover costs and debt, or not? How come we weren’t able to stick to our budget – or why did we finish more favorable than we thought we would (did we make our budget too loose, meaning did we not make budgets tight enough).

Basically, management uses the budget as first a reasonable or sanity check. By this I mean, are there monthly goals going to make them any profit or at least break even. If not, back to the drawing boards. Where can they cut costs or increases revenues? After management agrees to their best budget, they proceed with operations, buying and selling as they set they had planned. At the end of the month, management goes back and reviews all of their cost and revenue, and they analyze their actual costs and sales against budget. From here, they can start to interpret what happened, good or bad. Why we’re labor costs so high, why we’re utilities costs lower than budgeted, and so on. The message here is, they now have the ability to know if they’ve met their goals or not, and they can start to figure out why they have or haven’t met their goals. After doing this for a continued period of time, say over a couple of years, management can start analyzing how they did year over year and so on.

Without management budgets, like personal budgets, you could never know if you have done well or not, or if you could have changed the outcome if you had known something was going wrong mid month for example. Personal budgets are critical to your personal finances, without them you’re essentially not managing your finances.

Our roadmap to understanding personal finance will next take you on the journey of setting up a personal budget, so that you can start taking control of your finances and reduce your debt. After you’ve mastered that, you can then more easily move on to setting up a retirement plan and following through on it.