Ask Paula: A Year Off Work, a Career Change, and a Divorce: How to Make It Work

0:00And now, for your listening pleasure, an audio only exclusive from Afford anything. Joe, we're recording in person. It's unbelievable. Unbelievable. We're here. We're in person. I'm actually looking at you like live and in the flesh. We are violating the restraining order. I know, right? They said it shouldn't happen. They said it couldn't, but here we are. Yes. So do you want to announce where we are? We are live at the FinCon booth on some awesome equipment in the huge expo hall at one of our biggest industry conferences called Podcast Movement. Yes. And it's at the Gaylord Rockies Hotel, which is in Denver.

0:44Yeah. Wow. Very comprehensive. Why, thank you. Incredibly comprehensive. Joe, you flew here on a private plane. Well, yes, you do. Because you're fancy like that. Yes. I flew commercial. Oh. Because I'm a commoner. Little people. But we are here live answering questions that come from you, the audience. So welcome to the Afford Anything podcast. This is a show that understands you can afford anything but not everything. Every choice you make is a trade-off against something else. And that doesn't just apply to your money. That applies to your time, your focus, your energy, your attention. It applies to any limited resource that you need to manage.

1:20My name is Paula Pant. I am the host of the Afford Anything podcast. My buddy, former financial planner, Joe Salcihai, looking dapper in a pair of glasses. Why, thank you. I can actually see you now. So we are here answering your questions. And this first caller, I'm going to read her question out loud. She's anonymous. And for the sake of added anonymity, she requested that we read a transcript of her question rather than she didn't want her voice to be played on the air. Joe, given that she's anonymous, we do need to name her. We just recorded. Paula was awesome enough to sit in on yet another Stacky Benjamins.

2:03I almost said a Fortnite thing. Stacky Benjamins show, and we did a great recording. And we had my friend, Shauna Game, who is awesome, from a show called Everyone's Talking Money. And so let's call her Shauna. All right. Well, then this anonymous caller is named Shauna. And here's her question. My marriage may end in divorce. I don't know how to navigate this from a financial perspective. We have children, and we own a house with$250 ,000 of equity. We live in a no-fault state, and we'd split the assets 50-50. I have modest non-retirement savings, including a health savings account, Roth IRA annuity, and an illiquid pension with$20 ,000 to$30 ,000.

2:52I've gone through a rent-to-own analysis from an emotional and financial perspective, and I want to buy a house that would cost$350 ,000. What should I prioritize as I look at the possibility of needing to purchase a house and live on a very tight budget as a single parent? But Shauna, what a difficult time. I just feel for you having to go through an emotional time and make financial decisions at the same time. Because Paula, the one thing we always counsel people to try to do is don't do that. But in this case, you have to. You have to. The thing about divorce, and I've been divorced myself, at the lowest, worst, most trying time in your life, You have to make irreversible, irrevocable decisions about your entire lifetime's worth of assets and income and potentially also future money that you will receive.

3:56right? At the lowest point in your life, you have to make irreversible decisions about everything you've ever built and everything you will ever build. And I think in this case, that's why, at least for my answer, Paula, I'm not going to focus on the assets that she has now and much more on the rubric of how she needs to think about this situation. Yeah. The first thing that I want to say is I would not necessarily be so confident that the assets will be split 50-50. It doesn't sound from your question as though you have been through the process. I know you live in a no-fault state. That means jack.

4:41I've lived in a no-fault state. It means absolute jack. The bigger question, do you live in a community property state versus do you live in an equitable distribution state? That's going to determine some of how the assets are split. Beyond that, the other major question is, what kind of paperwork do you have related to who came into the marriage with what? Because if your soon-to-be ex-spouse is going to try to make a claim on a bigger share of the assets, then he may claim however much was separate property from prior to the marriage, he's going to make claims on that. If there was property that he acquired during the marriage that was funded by cash that he made from before the marriage, then he may try to claim that these assets acquired during the marriage were funded by what was originally separate property and therefore ought to be his.

5:33There are a lot of arguments that he can make that can try to tilt the balance to something that is very not 50-50. I think it could be even greater than that, as if that wasn't bad enough, right? Which is this, if she feels this right now, he may also feel it, Paula. And there becomes a time when people start hiding stuff from each other. And so discovering where your husband's assets are is a big thing, or at least keeping track of what money you have now is going to be super important for the rest of your marriage. It is not uncommon to see accounts get drained. Well, I can talk about it from mine.

6:16I'm not divorced, but I had many clients that went through divorce over my 16 years and the draining - As a financial planner? As a financial planner, yes. You saw it a lot. Yeah. Yes. Accounts will get drained. Even if you have high airline miles, right? Even that can get drained. I mean, stuff that you don't even think about. Ridiculous. Yeah. Also, if you have assets that will generate future income. So, you know, and Shauna, I'm not just saying this for you. I'm saying this for all listeners who might be going through this or who might know somebody who's going through this. If you have any assets that could generate future income, such as a business, for example, that might generate future income, your divorcing spouse might claim a share of that, particularly if that business was started during the marriage or if the assets were acquired during the marriage.

7:07So it isn't, oh, well, we live in a no-fault state. That really doesn't matter. There's a huge industry around divorce. The divorce industry exists because it is so high stakes and so complex. And attorneys in that business will tell you that the fees are high and the fees get much, much higher when people haven't figured out what they want. They have no idea what it is that the other person has. And then obviously the conflict on top of that, that people have when they just, they're in the mood to burn it to the ground, makes those fees go even higher. Yeah. And you know, the thing, honestly, when I was getting divorced, some of the worst advice that I ever got was from people who were like, Oh, don't fight it because you don't want to pay these fees.

7:54Oh my goodness. So many people. And their justification was twofold. One was like, you don't want to pay the attorney's fees. and the other was, don't you have better things to do? You have a business to run, just like move on. And that was such stupid advice for two reasons. Number one, paying an attorney, let's say 50 ,000 or$100 ,000. I mean, Sean, I'm not saying that's that, how much you're gonna pay, but like$250 increments, the number of hours that you pay is often proportionate to how complex your situation is. And that is proportionate to how much you stand to lose, right? If I pay an attorney$50 ,000, but from that I am able to save an asset that's worth$300 ,000, or at least if I have a higher likelihood of saving an asset that's worth$300 ,000 or $500 ,000 or$800 ,000, right?

8:46then that is a plus EV decision. It's a decision that has a positive expected value because it's essentially an investment that you're making in defending the robbery that is being perpetrated on you. I have a resource to recommend here, Paula. I have a friend, she's appeared three times on the Stacking Benjamin show because this is such a big area. She is a forensic accountant and her job is to help people find out when a partner is stealing from you. Partner, by the way, in every sense of the word. She's even talked about cases where somebody thinks their partner at work is stealing from them.

9:28And so she goes through the numbers, but she has put together a guide. It is not free, so I'll say that right away. But if anybody wants to look into this, her name's Tracy Conan. Her website is fraudcoach.com, and it's called The Divorce Money Guide. it's so good at helping people get that piece together so that at the very least we're not paying the attorney that cost. Right. Attorneys are not business people. They're not accountants. They're not financial planners. My attorneys had zero understanding of how to value my houses or my business or my assets in any way whatsoever. Attorneys are good for predicting how a judge will respond to a given set of stimuli.

10:10That's their expertise. If we go in with X, the judge will likely do Y. And particularly if they know the family court judge in their particular county, they know the personalities of the five or six family court judges in that county. You know, they know this judge is better than that judge for the situation that you're in. We'll see if we can get it reassigned to this other judge. Here's how we put our best foot forward. Yeah, I mean, attorneys are good at that. They're not good at understanding the mechanics of who bought a house and then we refied it against it. And then we took the refi and we used half of it to buy these other assets.

10:46Or on the other side, we have a 401k with a loan against it. I mean, or the present value of a pension you're not going to get for 20 years. Right, exactly. What is the present value of future dollars, right? And so when they start making arguments that, hey, I deserve a share of this future revenue, I want to backdate that and collect a bigger share of the assets now. Man, in my experience, divorce attorneys are absolute garbage at that. No offense to any divorce attorneys who are listening. Maybe you're one of the few who's good, but there are a lot of them who just do not know how to do that.

11:20Every divorce attorney I've run into or that we've interviewed on Stacking Benjamins has been very open about that and said that they outsource that to people, Paula. So they will sometimes charge you a fee to bring in this expert person, or you can do it on the side yourself. Or you can do both. I mean, it's worth the money upfront. Like insurance. Yeah, exactly. Because what you stand to lose is so much bigger than the fees that you're going to pay. There's this particular class of financial planners, and Joe, you're probably actually more acquainted with this than I am called, what is it? CDF certified divorce?

11:57Yeah. Yes. Correct. There's a particular certification. If I knew we were going here, I would have had it pulled up. Let's see if I can do that while you keep going. Yeah. And so it's a particular certification that financial planners or financial advisors can get that indicates that they are specialized in financial planning in a divorce context. The best advice that I ever got came from one of those. The acronym, Joe's looking up the acronym right now. CDFA. CDFA. Certified Divorce Financial Advisor. Is that what it stands for? Certified Divorce Financial Analyst. Ooh. Certified Divorce Financial Analyst.

12:38Okay. Yes. Look for a CDFA because the thing about getting divorced is that not only is it high stakes, not only is it irreversible or irrevocable, not only does it happen at the worst time in your life, but also you have no experience with it. You're a novice. You have zero practice. So you're doing this thing that you've never done before. No practice, no preparation, right? No training for how to go through this. And it's happening at the worst time in your life, the emotionally worst time in your life. And the stakes are the highest, from a financial perspective, it's the highest stakes set of decisions you will probably ever make because it deals with all your past assets and all your future assets.

13:27Everything you've ever built and everything you ever will build. And so it's this horrible, horrible, horrible combination. Wow. We have our poor anonymous caller. It was like, this was not the question I asked, but let's get to that though. Yeah. Because there is good stuff there too. Yeah. Because I think all of that is great. And I don't think that Shauna is the only person going through this. Right. Yeah. And, and Shauna, I don't mean to like salt on the wound here. I I normally like to be positive, but I think you can tell that I also don't want to sugarcoat it. Generally, I maintain an optimistic and positive vibe.

14:07If you're a longtime listener to this podcast, you know that. But unless you're very lucky, it's not going to be simple and it's not going to be straightforward. If you are one of the lucky ones and it's simple and straightforward for you, that's great. I'm happy for you. but be prepared for this to become much more complex than you might be anticipating. That was common also. It was always common for a couple at the beginning of a divorce process to tell me, hey, wanted to let you know we're getting a divorce, but it's going to be really simple. We've already worked things out. And then six months later, they're fighting over something.

14:50There's some complication. Or many complications. Or many. You know, they're fighting over a dozen different things. You hope it's just a couple. Right. Yeah. Yeah. Yeah, it's incredibly common. And for everyone else who's listening, by the way, this is why it drives me crazy when people are like, we're not getting a prenup because we're so in love. The worst decision I have ever made in my entire life is not getting a prenup. Hands down. Absolute worst decision of my life, of my financial life. Did you talk about it? I mean, well, I guess we sort of did, but we didn't talk about it seriously.

15:28And we just basically said, look, we're committed and we're going to be together for life. So this is just not going to be an issue. And if it is, we're going to be really fair to each other and we're going to be adults and we're going to handle everything responsibly. And that was basically the extent of our conversation. and it's so naive you know it's so did you have assets had you brought assets to the marriage both of us came in with basically nothing but it's easy to make the argument that such and such was separate property from prior to the marriage if for example something was deposited in one person's account rather than the others and it happened four months before the actual marriage became official, you know, when things like that happen, then you can go in and say, oh, well, this is separate property from before the marriage, right?

16:18See? And likewise, it's also easy to say, well, technically, you know, because oftentimes when people get married, they don't, they might still retain their accounts that are in their own name. And then you also open some joint accounts, but just inertia, you don't necessarily close the accounts that were in your name. if you had an account that you opened when you were in high school or in college that you've just had forever, you might keep it open. And like various things get, you know, and so it can be easy. It's messy. Yeah. And it can be then easy for someone to say, well, see, granted, we acquired this asset during the marriage.

16:55But look, forensic accountant, look at how much of it came from my account. So, well, you know, the thing about a prenup is is people like to believe it's basically the equivalent of not getting health insurance because you're like, I'm healthy, or not wearing a seatbelt because you're like, I'm a safe driver. It's arrogance. That's what it is. It's arrogance mixed with naivety. And I'm guilty of it. I did it. I made that mistake. I think 99 % of people are guilty of that one. Yeah. Yeah. The good news is - I know. Yeah, let's get to some good news. Well, the good news is, is once you're past that point, and now we deal with the$350 ,000 house and your own things, the first thing you have to do is think about your stream of income.

17:50That is job number one. And this may be even a bigger job than people think it is. Like, well, my income is my income. Well, it doesn't really have to be. you know, how much money can you bring in now that you're going to be sole provider for your family and you're responsible for bringing in all the income. So where is that going to come from? How reliable is it? And is there a way that we can beef it up? And once we do that, and that, that maybe is a whole separate discussion. Then I like separating things into four separate, four separate buckets. And I kind of look at it, if people make like a plus sign in their head, the top half of the plus sign are the two things we're going to live by.

18:34And those, when you're first starting out, are by far the two most important areas. Then we have below the bottom half of the plus sign are the two areas that we're going to grow by. We don't even really worry about growing yet. Let's worry about living and getting that together. So in the upper left quadrant, we have our cash flow, which means if she knows she's buying a$350 ,000 house, what is that going to do to the budget? And then what expenses am I going to have around that? And I would begin then plotting out those expenses against that income. So once I've made the income as high as it can be, what are the super important expenses so I get a feel of what it's going to take to turn on the lights every single day?

19:19And then the non-negotiable is you have to be able to have enough money to build an emergency fund. Because the emergency fund, especially initially, when that boat is pretty rocky, you need that emergency fund in place. So you have to have enough cash flow. I don't care if you can put money in for retirement or not, or if you can put money in for long-term. Forget about all that. Forget that. Forget that. This is not the time. You have to be able to put as much money into an emergency fund to build that thing as much as possible. because you can't rely on two incomes anymore. You're relying on you.

19:53And if something happens there where you get disabled, have to take time off work, whatever it might be, you need to have that in place. So for me, that is job one. Income in and then how much money we have going up. The risk though is that if she increases her income, then he might try to claim a portion of it, particularly in they've got kids. I'm not saying to increase it now, to know what my strategy is around increasing my income. Right, right. Because, you know, if they have kids, now I don't know which one is the higher income spouse, but if she's the higher income spouse, she may need to be paying child support.

20:27And that changes the equation at the last minute. Right, exactly. And so if she increases her income right now, that just increases the amount of child support that she would owe him and the amount of alimony that she would owe him. It's a great distinction. Planning for what your income stream is going to be versus rolling it into action. I want to know though, when that divorce is final, that I can roll into action. I don't have to think about where I go first. I'm going to my boss first and I'm getting this. I'm starting this side hustle. I'm doing this second job, whatever it might be, so that I can lock down my income stream to create that emergency fund.

21:06Right. Have the plan in place. Yeah. By the way, once we know that we're cashflow positive, because I look at Shauna as if she's a business. A business is only healthy if it's cash flow positive, and you're bringing in some money. The second area to live by is that upper right quadrant of the plus sign, and these are what if something goes wrong. So that actually is the cash reserve itself as you're building it is in that upper right quadrant, but so is your need for life insurance is going to change. Your need for health insurance is going to change. What are these protections you have? because you're going to need those things to make sure that the wheels don't come off the bus.

21:45Right. But it's funny because a lot of people, Paula, don't think of an emergency fund as insurance. And you know me. I think that is your number one insurance policy. The ability to self-insure gets rid of the need for short-term disability coverage. You can raise your deductible on your homeowner's policy. You can raise the deductible on your car insurance. You can buy a lot less outside insurance. once you have that emergency fund and great cash flow in place. Right. And, you know, the kids are going to need health insurance. And so which parent pays for that? Well, this can also, doing this planning, you can see doing this ahead of time, can inform your divorce strategy.

22:26And you can dictate to your attorneys what negotiations are the most important to you. Right. Which, to your point earlier, they don't know that. They don't know that ahead of time. Exactly, yeah. Now, with a$350 ,000 house, she's going to need a down payment. Yeah. So she says she's got modest non-retirement savings, right? But part of it's HSA. Obviously, you don't want to touch that. An illiquid pension, obviously, you don't want to touch that. Probably can't. Right. You know, a Roth IRA. I mean, the non-retirement savings that she has are things that she wouldn't want to touch. No. So the first thing I would do would be to look for what program she's eligible for.

23:10As an example, if she spent any time in the military, there are special housing loans for people in the military. Some communities have programs that are available. There are USDA loans. If she lives in a rural area, Shauna, if you live in a rural area, USDA loans are an option. you know if you put aside the divorce itself beyond that then it becomes the same calculation as anyone who says hey i want to buy a home i need to start saving up for a down payment really it appears the only thing she has available then would be the equity from the current home yeah yeah they've got 250 000 in equity but i just wouldn't be so confident that that's going to be a 50-50 thing.

23:56There are so many ways that that can go. He might claim all of it. He might claim that plus also claim a share of her pension and then also ask for child support and alimony. And even if it is 50-50, where are the attorney fees going to come from? Yeah. How much of that will there be? Right. Which are worth it, I will say. Don't listen to the people who tell you to roll over and give up for the sake of saving on attorney's fees. I think I've heard that recently. Yeah. But divorces are expensive in multiple ways, not just the fees, but the assets that you lose. Shauna, when I look at your question, it seems to me that the non-retirement savings that you have, those are not buckets of money that you can tap to make a down payment on a home.

24:41And the, at most,$125 ,000 that you would get from the equity in your home, I'm not going to count on it. So I'm going to run this scenario in my head as though you're starting from zero and you need to save up a down payment on a$350 ,000 home. And so then I'm going to say, well, what is 3.5 % of$350 ,000? Yeah. And that is the down payment that you would need if you got an FHA loan. So let's do that math right now. So$350 ,000 times 3.5 % times 0.035 equals$12 ,250. Okay. Then the question is, how do you save$12 ,000? There it is. Right? And then it's, depending on your income, maybe that means you're saving$1 ,000 a month.

25:41Maybe it means you're saving$500 a month and you'll be able to do it in between 12 to 24 months. But I mean, certainly if you are able to get any equity from the sale of your home, that's better. What I like about that strategy too is that I often saw too many, I see, don't you want to use past tense, but I see too many strategies that are too optimistic. And I think if you have optimism in your soul, but your strategy is pessimistic, it's a way better plan. It is a way better plan because now anything good happens, Paula. Anything good happens. A, you have so much gratitude, which is incredible.

26:25But then B, it just makes the plan so much better. Right. Versus what's going to happen if you go the other way. Hope for the best, prepare for the worst. Absolutely. But Shauna, the main points that we've brought up throughout this answer have not necessarily been specifically your question. We've talked about forensic accounting. We've talked about hiring a CDFA. We've talked about good advice versus bad advice. Strengths and weaknesses of attorneys. Right, exactly. And the reason that I bring all of this up is because, Because, Joe, as to what you said, oftentimes when people are at the beginning of a divorce, they think it's going to be simple.

27:11And it turns out to be much more complex and much more contentious than they had anticipated. And as a result, Shauna, my biggest concern for you is that you are not asking the right questions right now or that you may not be. Because I think it's great that you want to buy a home. fundamentally your question on its face is I want to buy a home for$350 ,000 how do I do it and then the context around that is I am just beginning the process of a divorce and I think it's wonderful that the goal is I want to buy a home for$350 ,000 but the context around it is

27:56potentially a bigger, deeper, and more treacherous minefield than you may realize. And I hope it's not. Some people get lucky, you know? And Joe, I'm sure you probably saw that as well. You know, I'm sure you saw the full range in your clients. Yeah, but not as often. It was never, ever that simple. So with regard to what questions should you be focusing on, I love the goal of buying a home and a 3.5 % down payment on a$350 ,000 home, you're going to need$12 ,000. Add a little buffer to it, let's say$13 ,000,$14 ,000,$15 ,000, right? And then it just becomes a question of what's the gap between your income and your spending?

28:40How do you save$12 ,000,$13 ,000, $14 ,000, right? And what does that come to? How does that divide out into a monthly amount? And so the process of saving up the down payment for the home is relatively straightforward. But the other issues that potentially you might have to face, you know, if he decides that that illiquid pension worth between 20 to 30 grand, what if he decides that he thinks that a portion of it should be his? the retirement assets that are in your name, he can try to make a claim for a part of it. If you get a raise, he can try to claim a portion of that. So that's the situation that you should be bracing for right now.