How much should this single mom put down on a new home, keep in cash for emergencies, and tuck away for a secure retirement? Jean Chatzky, the CEO and founder of Hermoney.com, is sharing her advice for Beth, a newly divorced mom with two children. Beth’s overall financial goal is to maintain long-term financial stability while overcoming her fear of making the wrong decision.
Getting back on your financial feet after a life-changing and—let’s just put it out there—incredibly stressful divorce is never easy. Even when you have resources, you want to make sure you maneuver the pieces into place in a way that sets you up not just for today but for the future.
That’s where Beth, 43, a recently divorced mom of two, sits right now. She wants to buy a home in the next 12 months while still making sure she’s on track with retirement savings and an emergency fund. In Birmingham, where she lives, homes to her liking run around $325,000. She’s got resources—$300,000 in retirement funds ($200,000 of which she got in the divorce), $45,000 in savings, an annual income of $55,000, and child support of $1,280 a month. Her car is paid off, and she has no credit card debt.
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So, on the surface, she could swing it—but something’s holding her back. “I want to make sure I’m making the best financial decisions in regard to those funds,” she says.
Her money type: “Producer”
As always, we asked Beth to take HerMoney’s Money Type personality quiz—a scientific assessment that has been featured in The New York Times and The Wall Street Journal—to get a sense of how she feels about money and why she handles it the way she does. The results surprised her. She found that she’s a “Producer,” which is someone who is grounded, diligent, and consistent when it comes to her money. Producers tend to watch over their funds closely and evaluate decisions about money methodically.
That bodes well for Beth’s future. But coming out of her divorce, Beth has been been feeling timid when it comes to some aspects of her financial life—not confident, as her type suggests. Producers have to watch out for that. They can be financially conservative—sometimes to their detriment, preferring to minimize their exposure to risk regardless of how much money they have. Beth wants to feel more secure, more prepared. “I want to have peace of mind in knowing I am able to budget for unexpected expenses,” she says.
What’s holding her back?
In a word: confidence. Married right out of college, Beth and her husband lived paycheck to paycheck for a while, as more than half of all Americans do. During their 21-year marriage, her husband micromanaged their finances, she says, while she was given a biweekly budget for “normal household spending.”
Beth went back to work outside the home two years ago, and since the divorce, she’s been managing her own finances. She used some of her settlement from the sale of the family home to pay off her credit card debt and car loan. Some of that money is now also parked in an account her ex-husband manages for their children’s college expenses.
In the current real estate climate, Beth chose to rent for a year with the hope that housing prices would cool off a bit so she could buy a house at a more reasonable price. But she is petrified of making a pricey mistake.
A road map for staying on track
We checked in with Natalie Colley, CFP, CDFA, lead adviser for Francis Financial, a New York–based firm that specializes in helping women going through challenging times. “Because housing is nearly always someone’s largest expense,” Colley says, “Beth has a huge opportunity here to set herself up for long-term financial success by making a smart decision.”
After reviewing Beth’s financials, Colley says a house is well within reach—in fact, it would save her money over what she’s paying now. Best practices are to keep housing costs (rent or mortgage, property taxes, insurance, and utilities) to 30 percent or less of gross income. For Beth, that’s her salary plus child support, and comes to about $1,800. She’s paying about $2,200 right now for rent and utilities.
Owning could in fact be cheaper (and help her build valuable equity)—but she needs to structure and time it right. If Beth takes a 5 percent 30-year fixed-rate mortgage for 90 percent of the home purchase price ($325,000), plus 5 percent closing costs, her monthly payment would be $1,463 before property taxes and utilities. That’s a big savings. And it doesn’t require her to pull money from retirement, which should be avoided because it would mean paying taxes and a 10 percent penalty.
But she may be able to do even better, depending how long she’s planning to stay in the home, Colley says. For example, if she plans to sell once her younger child graduates high school, then a seven-year or 10-year adjustable-rate mortgage (ARM) with an even lower interest rate may make sense and lower her monthly payment.
Finally, Colley notes that Beth should work to rebuild her emergency savings—while avoiding credit card debt—so that she’s keeping a minimum of $30,000 in cash on hand as an emergency fund. That represents about six months of her net income when including salary and child support.
The last step? Continue to save for retirement. If Beth makes contributions of $11,000 per year to a 401(k) plan (which is 20 percent of her gross salary), assuming a 6 percent growth rate, by the time she is 65, her retirement accounts could grow to more than $1.3 million. If she pulls 4 percent out of her account each year, that would be around $52,000, which, combined with Social Security (because she was married for more than 10 years, she’ll be able to draw on her ex-husband’s benefits if they are larger than her own), should enable her to live comfortably for a solid three decades or more.
Will she do it?
After reviewing the guidance from Francis Financial, Beth says she’s grateful to have a better understanding of her options: “It’s been very helpful and gives me a considerable amount to think about.” Her next move? She’s planning a meeting with her CPA to discuss her tax filing status.
