I have written previously about the importance of your spouse in achieving financial independence, but the almost unspoken thing about your spouse is that losing them can also destroy your dreams of financial independence/early retirement entirely.
For those of you who have not read read the Millionaire Next Door, you should know that being divorced is a factor that makes it much less likely that you will become a millionaire in the first place. Now I’m not saying that you need to be a millionaire to become financially independent, but getting divorced can really cripple your finances and reduce your chances of retiring early, no matter how much (or how little) money you need for that goal.
This whole situation has been highlighted to me recently by a couple close to me finalising their divorce. I wouldn’t have considered them to be a well-heeled couple at all, but after the break-up their financial positions will be much tougher than they were beforehand.
To understand the picture a bit better I thought it best to look at it from a before and after perspective:
Here are some basic facts about their pre-divorced situation:
- He works full time for a local construction supply company, making approximately $80k per annum plus a company car.
- She works part time as a primary school teacher, perhaps two to three days per week, at say $30k per annum.
- They own their own home that is valued at $400k (I think this valuation is unrealistically high) and have debts of $150k.
- They own their family car, which is worth about $8k.
- They have a bit of consumer debt that was offset by cash savings.
- They have three children in primary school.
- He isn’t very good with finances, and has largely been kept in check by her for most of their married life.
- She isn’t necessarily great with finances either, but at least she knows many of the basics that are necessary to avoid financial ruin.
Their biggest problem as I saw it was their desire to chase a dream life of increased consumption based on what they thought others were doing. This meant that they were continually upgrading their house (three houses in 13 years of marriage), which was only possible from continual growth in the property market, and were always looking over the fence to see how the grass was greener for others. As a result, they were never happy, always complaining about money, and receiving financial support from her parents in many small ways (as well as some larger ways too).
In the whole time that they were looking at the dream lives of others, I always thought that due to their limited understanding of basic personal finance, they saw a much rosier picture than would have actually existed. Most of the people that they thought looked rich actually weren’t, and the people that didn’t look rich were actually closer to being wealthy. We then confused them even more because they thought I would be rich being a partner at a large accounting firm, but we don’t have the house or car that they expected us to have.
I shouldn’t have been surprised that it would end in divorce based on the above, but it still came as a bit of a shock to me when I found out.
After divorce – his situation:
His post-divorce situation looks a bit like this:
- As their net assets were $250k (being the house $400k less debt of $150k), she took 60% (or $150k) and had custody of the children. This meant that he had to take on the existing mortgage of $150k, plus another $150k in debt to pay her out, leaving him with a $300k debt and the house.
- In addition to this, he has to pay child support to her until the youngest turns 18. I don’t know for sure how much child support this would be, but I could see how it could easily be $1,200 per month.
- By the time you take into account repayments of approximately $1,610 per month ($300k debt at 5% interest over 30 years), his monthly income and expenditure could be something like this:
Now you might think that $2,261 is still a decent amount to life off each month (and I would agree), with his personal finance skills I can see how he (and the kids when he has them) will be starving in no time at all. Without her there to manage his finances (which previously frustrated him and no doubt contributed to their divorce), he will be another financial train wreck in no time.
I just hope for the sake of the children that he can educate himself in relation to his finances before it’s too late.
There are signs that he may be realising his position is quite difficult, especially since I heard that he wanted to ask a friend of his to move in to help pay the bills, He was going to kick one of the kids out of their rooms to make this happen, but she heard about it and put a stop to it. Perhaps he really was getting desperate, thinking that he could have his footy-jock mates move into a house with him and his three young children? If this is a sign of his problem-solving abilities then the outlook is grim indeed…
After divorce – her situation:
Her post-divorce situation looks a bit like this:
- She knew that on her income she wouldn’t be able to afford to pay him out and keep the house, and therefore thought it best that she leave it to him. It meant that they didn’t have to wait for a buyer (I didn’t think that it was a property that would be in demand anyway), and the divorce could therefore be finalised much more quickly than it otherwise would have.
- So she walked away with $150k and child support of $1,200 per month (that’s my guess anyway), and has moved in with her parents. It’s a pretty cramped household, but it’s rent-free and allows her to get herself back on her feet and work out what life will be like.
- While I know from an emotional point of view that she is glad to be away from her ex-husband, I can see that her life is much harder now in a number of ways, including:
- She is living with her parents in a much smaller space than they (her and the kids) previously occupied.
- She has to work full time now (something that she has always resisted doing, quite unrealistically in my opinion), and given that she has always been a bit of a stress-head her life will seem more hectic than ever.
- Yes she has $150k in cash, but she is too conservative to invest it in anything that will achieve a decent return so it will probably sit in the bank earning 3% interest. I don’t know if this will ever be enough for her to buy a house that she would consider acceptable, so I can’t see what she will ever do with it. The cash will probably burn a hole in her pocket and she will end up buying the wrong house.
- Her life of comparing to the Joneses (who were never on a firm financial footing anyway, they just looked rich to the poorly-informed) is over, as any aspirations of even being able to afford the debts that they have are completely unrealistic now. That’s probably not a bad thing, but I’m sure she doesn’t see it that way.
- Her dreams of travelling the world aren’t even dreams anymore – she has well and truly slid down the ladder of middle class aspiration.
When we were younger, my wife and I always looked at this couple as one that desperately aspired to live the hyper-consumption lifestyle, but didn’t know that it would take a lot of hard work and discipline to achieve it. They were always thinking up schemes for how to get there, churning through houses and buying and selling a business (at a significant loss) thinking that they were going to make their fortune in no time. Somewhere along the way though I think that they confused activity with achievement, and didn’t realise that staying put in the same comfortable (but not flashy) house might have been the best way to achieve happiness.
If they have taught me nothing else, it is that if anyone is going to achieve some measure of financial independence (or even just build some more stability than the typical hyper-consumer), they need to realise (and capitalise on) the benefits of stability. That could mean different things to different people, for example:
- not moving house every five minutes;
- focussing on building a strong relationship with your partner (obviously this takes effort from both sides);
- giving stability to your children with a stable home life, if possible; and
- building a stable source of income (a job, a business, whatever it may be) that you commit to, even if it isn’t as glamorous or exciting as working for Google.
If we get into the habit of thinking that the grass is always greener we will be forever changing things in our lives without ever achieving anything. As the saying goes, the rolling rock grows no moss.
All is not lost though
While their situation initially looks quite bleak post-divorce, it’s important to note that all is not lost. I can see how their lives can be improved significantly, and this could mean any or all of the following:
- He might finally build some personal finance skills and then get a handle on his finances. Educating yourself costs nothing, it can just be a bit painful adjusting but it’s not like he has any choice.
- Her parents are currently building a new house that they will be moving into very soon, so she can stay in the old house for 1-2 years rent-free, and will have a bit more space without her parents there
- She can finally use her teaching qualifications to build a good-paying career (like most university-educated people do nowadays), and this would provide a significant boost to her financial position
- She could take her $150k plus some other savings, and then with a small mortgage she could buy a decent house for under $300k. She would need to adjust her expectations back to the real world to be able to accept this.
If they are able to achieve all of the above things (and many of you are probably thinking that none of these are really earth-shattering in terms of difficulty) then their lives really could be improved significantly. I will try to tell her this when I see her, but I suspect that it will be quite some time before she can see the positive side of things.
So what about you – have you or anyone close to you experienced divorce and its painful financial (not to mention emotional) implications?