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How to rebuild your financial health after divorce

June 16, 2015

By Dan Rafter | Money Rates Columnist

The divorce process is expensive. There are plenty of lawyers' fees to pay and new financial burdens like alimony and child support may arise following a divorce -- which can eat away at people's savings.

Michael Brady, president of Generosity Wealth Management, offers a piece of advice, "Once your divorce is finalized you have to take control of your finances. You have to be proactive. You can't just assume that things will work out."

If you're going through (or have recently closed) a divorce, you'll need to recover emotionally, but don't neglect your financial health. If you do, you might face serious consequences.

Here are four steps you need to take after a divorce to rebuild your savings.

1. Get going

You might want a break from big decisions following a divorce. But Pam Friedman, a certified financial planner and founding partner of Divorce Planning of Austin, recommends that her clients skip that mental break and make financial plans quickly once a divorce is finalized.

But she doesn't recommend that her clients make big money decisions on their own. Many of her recently divorced clients are exhausted from the mental strain of the process, and might struggle to make the right decisions to rebuild their savings.

Friedman advises them to meet with their attorney and a certified financial planner to create a plan for rebuilding their wealth and to make sure they don't miss any important deadlines when it comes to signing up for insurance or changing the beneficiaries in their wills.

"There are deadlines out there that you don't even know existed," Friedman says. "You don't want to miss them. I hate it when clients come to me and say they just finished their divorce and they actually closed it six months ago. That's too much time."

2. Rebuild your credit

Brady also says that people should immediately check their credit scores -- they can buy them for $15 from the three national credit bureaus (Experian, Equifax and TransUnion). If their scores have taken a hit, they need to start rebuilding them by paying their bills on time and eliminating big chunks of their credit card debt.

Consumers with low scores will struggle to qualify for credit cards and loans, which can have a negative impact on a persons' ability save money or build an emergency fund.

Some of Brady's clients have low credit scores because shared loans and credit cards were under their spouse's names, not theirs. Because of this, these clients never had a chance to build a real credit history. These clients might need to apply for their own credit cards, make purchases with them and pay these purchases off in full each month to steadily rebuild their credit, Brady said.

3. Build an emergency fund

An emergency fund is a financial necessity for every adult. But it's especially important for those who have recently gone through a divorce, said Allison Alexander, a financial advisor with Savant Capital Management.

People who have gone through a divorce might have extra expenses such as alimony payments, rent and child support that they didn't have before their marriages ended. Alexander recommends that her clients have at least six months of normal living expenses saved in an emergency fund. If their car needs a new transmission, instead of putting the repairs on a credit card they can pay for them from their emergency fund.

If you're newly divorced, you might consider moonlighting with a second job to earn the extra money you need to build an emergency fund, Alexander said.

"After a divorce, you might have more alone time," Alexander says. "If you choose to moonlight with a job that you truly enjoy, not only will you start making extra money, you'll have an outlet to fill that alone time. That can help with your emotional recovery from a divorce."

4. Make careful investments

Brock Mosely, founder and managing director of Miracle Mile Advisors, says that adults who've gone through a divorce need to make sure that the money they do have left is always earning more dollars.

This means that they have to make wise investments. It's the best way to grow their existing savings.

But Mosely cautions clients not to make these investments too quickly. They need to research the best investment vehicles for them, especially now that their living and financial arrangements have changed after a divorce. A parent who has the financial responsibility to provide child support payments might not want to invest in an investment vehicle that comes with too much risk. They need a steady, guaranteed flow of money to help them cover these new regular payments.

"My biggest challenge is to stop [clients] from making investments because they want something to do," Mosely says. "Following a divorce, they often need things to do. They need to keep themselves busy. My goal is to make sure they don't invest in some big project that is going to potentially hinder their financial goals."

Why the dividend yield on stocks is surprisingly attractive

June 15, 2015

| MoneyRates.com Senior Financial Analyst, CFA

Compared to growth stocks, dividend-paying stocks are often viewed as the investment equivalent of a minivan or sensible shoes - they serve a practical purpose, but they aren't flashy or exciting. However, an extended period of low interest rates has added a little sizzle to the notion of dividend investing.

To understand what role dividend-paying stocks might play in your portfolio, it is helpful to look at what you might expect from those stocks, and what some of the pros and cons are of having a stock pay a dividend. The following are some answers to fundamental questions about dividends:

  1. What is a dividend? A dividend is a cash payment made by a company to its shareholders, usually on a quarterly basis. This payment comes out of the company's earnings and is one way that the owners of a company get to share in those earnings. A company with an established dividend might continue to pay that dividend even during a temporary period of low or negative earnings, though a sustained drop in earnings is likely to result in the dividend being cut or even eliminated. Think about this as if you were running a business. You might want to reinvest most of the proceeds from the company into expanding its business, but you would also take a portion of the earnings out to live on. That portion taken out of the company is akin to a dividend.
  2. How much is a typical dividend? Currently, the average dividends paid by stocks in the S&P 500 total about 2 percent of the stock's value on an annual basis. That means if a stock cost $100, it would probably pay about $2 a year in dividends. The dollar amount of dividends changes over time, and the percentage yield varies as the market of companies changes.
  3. Do most stocks pay a dividend? Over 80 percent of companies in the S&P 500 pay dividends, but that index is made up of large, well-established companies. Among newer and smaller stocks you would see a lower percentage of dividend-paying stocks.
  4. Why don't some stocks have dividends? As an alternative to paying dividends, a company could reinvest all its earnings into the business in an effort to grow. This could include adding staff, physically expanding offices, or research and development. This is why fast-growing companies or those that are heavily focused on new product development may not pay a dividend. Also, not having the commitment of regular dividends gives a company some financial flexibility to help it weather erratic earnings patterns.
  5. What types of stocks are most likely to pay dividends? Among the industry sectors in the S&P 500, telecommunications stocks and utilities have the highest dividend yields. Telecom stocks pay an average of 5.35 percent in dividends, and utilities pay an average of 4.27 percent. These tend to be businesses with a steady, predictable stream of earnings, which enables those companies to make the commitment of paying a dividend. On the other end of the spectrum are information technology stocks, which pay an average dividend of just 1.42 percent. Tech companies are highly dependent on continually developing and upgrading products, which is why they prefer to reinvest their earnings in the business rather than pay them out in dividends.
  6. What roles should dividend-paying stocks play in a portfolio? Dividends can provide a fairly steady source of income in a portfolio, and this role has become more important with the steep drop in interest rates in recent years. Ten years ago, the S&P 500 had a dividend yield of 1.86 percent, which was less than half the 5 percent yield available on long-term Treasury bonds. Nowadays, the dividend yield on stocks is up to 2 percent while the long-term Treasury yield has dropped to 3 percent, making stocks far more competitive with bonds as a source of income. Compared with other stocks, dividend payers tend to be larger and more stable, so they could represent a relatively conservative segment of a portfolio, as opposed to the high risk and reward of growth stocks.

Even though they are not guaranteed, dividends do add an element of predictability to a portfolio. One way to think of dividend-paying stocks is that they give up some growth potential in exchange for that predictability. Given how low interest rates are today and how volatile the stock market can be, exchanging growth for predictability might seem a very worthwhile trade to many investors.

How to find the best checking account

June 11, 2015

| MoneyRates.com Senior Financial Analyst, CFA

There are thousands of banks in the United States, many of which offer multiple checking accounts. With all those choices, how do you narrow it down to one?

Picking a checking account can be a very important decision. Not only can the right choice save you hundreds of dollars a year, it can also make banking more convenient, and possibly keep your money more secure.

Here are some things you should look for in a checking account:

  1. FDIC Insurance This may sound pretty basic, but with all the digital payment systems and  banking alternatives entering the market these days, you would be wise to check the FDIC web site to make sure you are putting your money in an institution backed by FDIC deposit insurance. This covers up to $250,000 per depositor, per bank, against loss.
  2. Branch locations Do you still like to do your banking in person? If so, you will want to make sure that any bank you are considering has a branch that is easy for you to get to. Check the hours the branch is open to make sure they coincide with your schedule.
  3. Digital presence and features For many people these days, the digital presence of the bank matters more than the physical presence. Start by noting how user-friendly the web site is, and then move on to check whether the bank has the mobile apps you need. Banks are adopting digital tools at vastly different rates, so you want to find a bank that embraces new technology as enthusiastically as you do.
  4. Monthly maintenance fees Most banks charge a monthly fee just for maintaining a checking account with them, on average this costs about $150 a year. Though they are in the minority, there are banks that offer checking accounts without a monthly fee, so make it a priority to look for one of these money-saving options. In general, online banks are more likely to offer free checking than traditional, branch-based banks.
  5. Balance requirements Banks not only have minimum requirements to open accounts, but also minimum ongoing balances. Sometimes staying above a certain balance can get the monthly maintenance fee waived. In other cases, falling below may result in additional fees. Check to see if the bank you are considering has balance requirements that are in line with how much you are likely to keep in your account.
  6. ATM locations Banks typically don't charge you for using their own ATMs, or those in a network to which they belong. However, if you use an out-of-network ATM, it will probably cost you twice - one fee to the bank that owns the network, and another to your bank. Avoid this by making sure your bank has ATM locations that are convenient to where you live, work, and regularly travel.
  7. Overdraft fees You can opt out of overdraft protection, but if don't, you better compare the size of overdraft fees and policies for imposing them before you choose a bank.
  8. Interest rate The interest rate on most checking accounts is negligible, but there are exceptions. Still, in a low-interest rate environment, keep in mind that the checking account interest you earn is likely to be far less than the typical fees checking accounts charge. So, even for relatively high-interest checking accounts, make sure you consider the interest in context of how much it will be offset by fees.
  9. Special offers that apply to you Some banks have special accounts for students, and some have special accounts for people over age 50. If you belong to one of those groups, looking for special offers that apply to you can be a great way of avoiding checking account fees.
  10. Additional services What else does the bank have to offer? You don't have to do all your banking in one place, but doing so can often be convenient and qualify you for special rates or lower fees. If you think you might be in the market for a car loan, mortgage, or investment advice, take a look at what else the bank you are considering can offer.

Some account features will be more important to you than others, but you should be aware of them all before you buy so that there are no unpleasant surprises.

5 money eccentricities that cost you money

June 10, 2015

| MoneyRates.com Senior Financial Analyst, CFA

Money brings out the crazy in people. Some obsess over it too much while others are carelessly extravagant. Most people are at least a little eccentric with their money habits.

This helps explain why many people have money problems, and why money can make people unhappy. Just look around at your own family, do you recognize one or more of the following types:

  1. The short-sighted uncle. This guy always seems taken by surprise by financial events. He drives an eleven-year-old clunker, but is shocked when it has to go into the shop for repairs. He often needs extra time to pay his bills - even the routine ones that have been on the same schedule for years. People who don't focus beyond this week's paycheck and the bills in the mailbox often cost themselves money because of late fees, interest charges, and damaged credit. Also, you can imagine how unprepared this character will be for retirement - something that should be easy to see coming, but which will probably still take him by surprise.
  2. The penny-pinching aunt. She has a decent enough income, but you would never know it by the way she lives. In fact, you hate to eat over at her house because the heat is always turned down a few notches above freezing, and she reuses everything from tinfoil to milk containers. Being frugal can be a sign of responsibility, but when it crosses the line to paranoia it makes a person - and everyone with that person - miserable.
  3. The enabling grandmother. Grandmas are expected to be generous, but this one goes too far. She is constantly giving people money to make up for their financial mistakes, which leaves them no incentive to learn. Sometimes a little tough love can do more long-term good than being a softie.
  4. The perfect older brother. This guy is a walking financial advice column. He always has a story to tell about where he found the best bank rates, how shrewdly he timed the rollover of his certificate of deposit, and how he got a cheaper insurance premium. It's good to look after financial details like that, but understand that other people are not that interested in them. It is better to wait for people to come to you for financial advice, because then they will be ready to listen. If you constantly give unsolicited advice, people will tune you out.
  5. The profligate younger brother. "Well, he's young. He'll learn." That's what everyone always says about this guy - when he racks up a couple hundred dollars in overdraft charges, or when his credit card gets cancelled. Youth should not be used as an excuse. The problem with developing bad financial habits early is they tend to stick, and then the stakes get higher as you get older.

Whether you are just a little eccentric with your money or flat-out crazy, your less-than-rational habits can cost you financial security and happiness. Recognizing the types of eccentricities described above might just help you cut out some of those bad habits, and learn to feel better about your financial situation.

7 small money moves that could change your life

June 9, 2015

| Money Rates Columnist

You don't need to invest thousands of dollars monthly to retire comfortably, and you don't need to make six figures to have a cushy savings account balance. Small money moves can make a big difference in your finances. So big, in fact, they may change your life by allowing you to retire early or allowing you to switch to a career you really love.

"There are legitimately some people who literally have no money to start saving," says Chris Costello, co-founder and CEO of 401(k) management firm Blooom.com. "For other people, if they're being honest with themselves, it comes down to desire. If you want to save for retirement, you'll find a way to save for it."

Shanna Tingom, owner of Heritage Financial Strategies agrees. "It's almost always possible," she says.

Here are seven suggestions for easy ways to improve your financial future, regardless of how much money you make.

1. Automate your savings

The easiest way to save is to pay yourself first. Paying yourself first is easiest if you automate your savings.

For the millions of people who work for an employer that offers a 401(k) or 403(b) plan, nothing could be more simple than signing up to have a portion of your paycheck sent directly to your retirement account. You'll never miss it.

If you don't have an employer-sponsored retirement fund, Costello says it may still be possible to use a workplace's direct deposit option to send money to a retirement fund. "Set up some type of auto-draft where money is automatically coming out of [your] paycheck and going into a Roth IRA."

Check with your employer's human resources office to find out your direct deposit options, and then look for an investment firm that can take direct deposit payments.

2. Claim your employer's 401(k) match

While not required, many employers match a certain percentage of their workers' contributions to 401(k) accounts. This could be an exact dollar match or a percentage match, such as 50 cents for every dollar.

Either way, it's guaranteed money that has potential to double your retirement savings.

"Please, please, please do not leave money on the table in respect to the match," Costello says.

Even for those who are in debt, Costello recommends maxing out your employer's matching amount. However, he cautions against contributing above that amount until you're debt-free.

3. Actively manage your investments

Once you have money going into your retirement account, you can make the most of it by actively managing your investments. In other words, don't leave money in the default fund which is typically designed to neither make money nor lose it.

Managing your money may not seem like an easy or a small money move, but it doesn't have to be hard. Many financial firms offer target date funds that include a mix of investments that are based upon your desired retirement year. Increasing the returns from your retirement account may be as simple as calling the company managing your 401(k) and moving money from a stable value fund to a targeted fund.

Of course, you may be able to get even better returns on your money if you forgo the targeted funds and pick and choose from other available options. However, that's a money move that may not be particularly easy if you don't know much about financial markets. In that case, you could hire a wealth manager to help make the decisions for you. If you can't afford a wealth manager, you could use a service like Blooom to manage your money for as a little as $1 a month.

4. Shop for better savings account rates

While 401(k)s and IRAs are great for retirement savings, they aren't the place for an emergency fund. Unfortunately, too many people leave their emergency cash in a traditional savings account where it may only be earning 0.01 percent interest.

It's a small money move, but switching to a bank with a better interest rate is another way to help your bottom line. The best savings account rates are typically offered by online banks. Currently, Money-Rates.com reports rates as high as 2.02 percent for some savings accounts and money market accounts.

5. Up your savings by one percent each year

Make it a habit to increase your savings each year, even by as little as one percent. If you bring home a $2,000 bi-weekly paycheck that means putting an extra $10 per week into your 401(k) or savings account.

"Often times, there are things that can be cut or eliminated, such as Starbucks or cable," Tingom says. "Cut a little and you won't even really notice."

By using direct deposit or a payroll deduction, the money will never hit your checking account, and you'll never be tempted to spend it.

"Part of savings isn't the dollar amount," Costello says. "It's the habit."

6. Set up automatic bill payments

Tingom notes it's not enough to simply save money; you also need to be smart about how you spend money.

She recommends automating all your monthly payments and recurring expenses. Not only does automating payments help with budgeting, it can also help avoid costly late fees and other penalties. For example, Tingom says credit card companies may cancel introductory or promotional interest rates if even one payment is late.

"In addition to the $30 or $40 late charge, you no longer have a zero percent interest rate," she says. "You may have a 19 percent interest rate."

7. Opt for a 15 year mortgage

Of all the small money moves you could make, Costello says reconsidering a 30-year mortgage may be the most impactful.

"It can literally change your financial fortunes more than any other decision," he says of selecting a 15-year mortgage.

He likens it to a form of forced savings since most people make a point to pay their mortgage first. "As a result, they are quickly building up equity in their home, not to mention that they will be able to ditch their monthly payment twice as fast as those with a 30-year mortgage."

The trade-off for a shorter mortgage period is that you may have to settle for less house, but it could be worth it.

Imagine what it would be like to have the freedom to do what you want because you have plenty of money in the bank and no mortgage payment tying you down to a job you hate. That's the power of small money moves.

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