Do you know your (net) worth? It’s Week Two of Financially Fab-ruary
This week is all about your assets and debts. You’ll know what you’ve got on the positive side (assets), as well as on the negative side (debts).
This can help you when negotiating a settlement. More importantly, you won’t be blindsided by unexpected debts after you’ve divided the property.
Collect the latest versions of all your account statements, and sort the piles into assets and debts.
· Banking: checking, savings, etc.
· Retirement accounts: 401(k)s, 403(b)s, IRAs, Roth IRAs.
· Brokerage accounts: investment accounts. (Note: although a pension is a retirement asset, it requires a special valuation so we’ll leave it out for the moment.)
· House paperwork (if you’ve purchased a house)
· Credit card statements
· Mortgage statements
· Vehicle loan statements
· Student loans
· Promissory notes, etc.
“Only after I faced the unhappiness of my first marriage did I start on the path of personal growth.” — Judith Wright
It’s hard to look at divorce as a positive sometimes, but it might be the push you need to really discover who you are.
We’ll look at your investment assets first. First, sort them into whether they’re taxable or retirement accounts.
Normally include: savings, checking, investment (brokerage) accounts that are not retirement accounts.
How much do you have in taxable accounts? _______________
You’ll usually get 1099 forms for your taxable accounts, because interest and realized capital gains are taxable in the year you receive them. Savings accounts usually earn interest, and the interest itself is taxable to you at ordinary income rates. (This is what you pay on your earned income.)
Capital gains are the difference between what you bought something for and what price you sold it.
Only the gain from a sale is what’s taxable, not the amount you put in. If you hold the investment for 12 months before you sell it, you pay taxes at the long-term capital gains rate. If held for less than 12 months, you pay ordinary interest, or your marginal tax rate. (If you have a capital loss, you can deduct it on your tax return.)
Include IRAs, Roth IRAs, 401(k)s and 403(b)s. But they are taxed differently according to whether they’re traditional or Roth accounts.
Your statements will usually tell you if it’s Traditional or a Roth. If you would like more information on the differences, click here.
Separate the two types from each other.
Traditional accounts are pre-tax. If you have a 401(k) at work and the contribution is deducted from your pay before taxes are taken out, it’s Traditional. If it’s an IRA and you deduct the amount on your income taxes every year, it’s Traditional. Because you contribute pre-tax, the entire withdrawal is subject to ordinary income tax when you take money from the account.
How much do you have in Traditional retirement accounts? ______________
Roth accounts are after-tax. If the money comes out of your paycheck after taxes are deducted, or you don’t deduct the contributions on your tax return, the money is Roth. Once you’ve had the Roth open for at least 5 years and you reach the age of 59 ½, all distributions are tax and penalty-free.
How much do you have in Roth retirement accounts? _________________
Add up your taxable + Traditional + Roth accounts. Also, add in the value of any annuity that you’re not taking income from right now (taxes depend on the type of account it’s in). How much do you have in investable assets? ____________
“You may have a fresh start any moment you choose, for this thing that we call ‘failure’ is not the falling down, but the staying down.” Mary Pickford
Mistakes are made, especially in finance! Don’t beat yourself up, just pick yourself back up and try to learn from the error.
Add up all your debts using a copy of the Google sheet.
Any other debt, such as 401(k) loans? ___________
Total debt: _______________
Is this greater or smaller than your assets?
Who owns what? You’ll need a real estate appraisal, if you have one, or look online for the approximate value of your house. For your cars, you can estimate its value. Make a copy of this spreadsheet to enter your assets and debts appropriately.
This helps you to see what you’re responsible for in terms of paying off debt. Does one of you have more assets and/or more debt?
Now it’s time for comparison! Bear in mind that these will be estimates, since we didn’t go into great detail on expenses. But you should be able to have a reasonable idea based on the work you’ve done.
What was your total monthly income you found in Week 1? ____________
What are your monthly expenses? __________
Which one is greater?
If your expenses are greater, you’ll need to make some changes. If you add in the expense reductions from Week 1, are you now under your expenses?
If not, revisit your expenses more, or include the methods for making more money you wrote in Week 1.
Set aside your retirement accounts for the moment, and find which is higher:
Credit card debt vs. savings
House value v. mortgage
Car values v. loans (for most people the loans will be higher, especially if you bought a new car)
Can you pay off your credit cards with the amount you have in savings? Remember that credit cards accrue interest much faster than your savings account does.
As long as you’re able to make the regular monthly payments on mortgage and student debt, don’t worry too much about paying those down at the moment. Focus on zeroing out your credit cards first.
You made it through Week 2!
Congratulations! You did a lot of work this week, but hopefully now you have a better understanding of your finances. You know where the assets are and if they have debt against them.
If you want more information about divorce finances, check out the blog on the Divorce Nest site. Or shoot me an email at email@example.com.