assets

How These 6 Assets Might Affect Student Financial Aid Eligibility

Emily Guy Birken — Thu, 14 Jun 2018 08:30:36 +0000

Once your child reaches high school, figuring out how to pay for college starts to loom large in your mind. An important step in getting ready for the costs of college is filling out the FAFSA (Free Application for Federal Student Aid). This paperwork helps determine how much need-based financial aid your student qualifies for. And before you assume that you make too much money to get any such assistance, remember that families earning as much as $180,000 per year can qualify for some form of financial aid.

Whether you have been diligently saving money in a 529 account since your (now 6-foot tall) baby was born, or you have only just now started thinking about college costs, you do need to understand exactly how your various assets might affect your student's financial aid eligibility. (See also: 5 Reasons Why Every Student Should Fill Out the FAFSA)

Here's what you need to know about the asset and income calculations for need-based financial aid.

Understanding the expected family contribution (EFC)

To determine your student's financial aid package, the college financial aid office starts by determining the cost of attendance and the expected family contribution, or EFC. The EFC amount is calculated based upon the information you provide on the FAFSA.

In general, assets and income held by the dependent college student count for more in the EFC formula, while parents' assets and income count for less — and some parental assets are not included in the calculation whatsoever.

The formula for calculating EFC specifically counts the following assets and resources:

20 percent of the student's assets, which includes savings, investments, business interests, and real estate.
2.6 to 5.64 percent of the parents' same types of assets (based on a sliding income scale).
50 percent of student income above $6,570.
22 to 47 percent of parent income above $25,040 (also based on the sliding scale).

The more money that is included in the EFC calculation, the lower the need-based financial aid offer will be. (See also: The 10 Most Common Financial Aid Mistakes — And How To Avoid Them)

How your assets are counted

Depending on what kind of assets you have, you may or may not have that money included in your student's EFC calculation. The following assets can affect financial aid offers:

1. Income

As of 2017, the FAFSA began requesting the prior-prior year's tax return from filers. This is called the "base year."

Before the change, families had to provide the prior year's tax return (that is, the immediate previous year) as their base year information. For instance, for the 2011–2012 school year, FAFSA filers had to provide their 2010 tax return, but filers filling out the FAFSA for the 2018–2019 school year will provide their 2016 tax return.

There are a couple of reasons why this is an important change. First, it means that families are less crunched to complete their previous year's taxes and a FAFSA form in the same year. Secondly, it also means that families who are actively trying to make income-related plans to lower their EFC need to do such things no later than their child's freshman spring/sophomore fall year.

What kinds of income-related plans? For instance, you might max out your retirement savings in the years leading up to the base year, because you are not asked to declare the value of tax-deferred retirement accounts (such as 401(k), 403(b), or IRA accounts) on the FAFSA. However, money that you contribute to your retirement account during the base year is still considered part of your income for the EFC calculation, even though it is pretax income that you have invested.

Another important thing to remember about income is how your child's income is counted on the FAFSA. Fifty percent of the dependent student's income over $6,570 is counted in the EFC calculation, and financial gifts are also considered income. For example, if Grandma and Grandpa give your child $10,000 toward college in 2018, 50 percent of the amount over the threshold ($3,430) would have to be counted as income on the FAFSA filed for the 2020–2021 school year, and it could increase the EFC amount (and reduce the aid) by about $1,715.

2. 529 accounts and Coverdell ESAs

The good news about these accounts is that whether they are in your name or your child's, they are considered parental assets. That means no more than 5.64 percent of the assets in a 529 account or Coverdell ESA will be included in the EFC calculation. So if you have saved $25,000 in your daughter's 529 account, her aid would only be reduced by roughly $1,400.

If other relatives — such as grandparents — have been saving money for your child in a 529 or Coverdell account under their own names, their gift can come with some expensive (and unanticipated) strings attached. That's because such assets are not counted at all on the FAFSA form, but when the money is withdrawn to pay for educational expenses, you must claim the amount withdrawn as untaxed income to the student. Since 50 percent of student income is counted in the EFC calculations, this situation can reduce aid by half the amount of the withdrawal. (See also: 5 Smart Places to Stash Your Kid's College Savings)

3. Retirement accounts

As mentioned above, the value of parental retirement accounts are not included in EFC calculations. However, the money that you contribute to your retirement account during years you fill out the FAFSA is included as parental income, even though you don't actually get to bring that money home with you. Some parents front load their retirement contributions in the years leading up to their child's base year just in case they need to reduce their retirement savings during the college years.

In addition, parents need to know that withdrawals from Roth IRA accounts are penalty-free if they are used for qualified college expenses. However, this distribution will count as parental income on the FAFSA for the year of the distribution and potentially reduce financial aid by as much as 47 percent of the amount withdrawn.

One way to circumvent this problem is to wait to take a Roth IRA distribution until your child has reached at least the spring semester of his or her sophomore year, since it will be after the final year of income you will need to report on a FAFSA. (Remember, since the FAFSA is based upon the prior-prior year's tax returns, you will not need to provide income information for the last two years of your child's four years in college.)

4. Home equity

The FAFSA does not consider the amount of equity in your home when calculating the EFC — although the CSS PROFILE, which is the form required by many private colleges and universities for determining financial aid eligibility, does request this information. This means that federal financial aid does not need to know how much equity you have in your home, but many private institutions will consider it when evaluating your financial aid needs.

Since home equity is not part of the EFC calculation, some families with large non-retirement savings may consider paying down (or paying off) their mortgage in the years before the base year. This will reduce your expected family contribution, but it could hurt you if Junior or Sis decide to go to a private college or university instead of InState U.

5. UGMA or UTMA accounts

These sorts of custodial accounts are in your child's name, which means that 20 percent of any assets in these accounts are counted toward the EFC. In addition, any interest, dividends, or capital gains earned from these types of accounts (or any accounts in your child's name) are counted as income for your child — which means that 50 percent of that money is counted toward the EFC.

Parents who opened a UGMA (Uniform Gift to Minors Act) or UTMA (Uniform Transfer to Minors Act) account for their child's education would probably be better served by rolling the assets over into a 529 account so that less of the money will be considered part of the EFC.

6. Taxable investment accounts

If you have additional investments on top of your tax-advantaged retirement accounts, these will also need to be claimed on the FAFSA form. These accounts are counted as assets, meaning up to 5.64 percent of their value will be counted in the EFC calculation. However, any dividends and capital gains earned are counted as income, and any distributions you take from these sorts of accounts are also counted as income.

If you need to take distributions from taxable investment accounts to help pay for your child's education, you will also want to wait to do this until at least the spring semester of his or her sophomore year, to keep the distribution from dinging you on the FAFSA.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

9 Surprising Ways Marriage Can Make You Richer

Tim Lemke — Mon, 19 Mar 2018 09:00:06 +0000

Marriage can be a wonderful thing, and not just because of the potential for lifelong companionship. Tying the knot can be a great financial decision, too.

When you get married, you'll be eligible for some key tax breaks, and there are a number of other advantages that will ultimately help you build wealth. Take a look at these examples of how marriage can make you richer.

1. There's a larger standard tax deduction

Under the 2018 tax law, every married couple filing jointly is eligible for a standard deduction of $24,000. That's nearly double from the previous law and exactly twice the standard deduction for single people. This standard deduction is more important than ever, as the new tax law does not allow for as much itemizing of deductions. (See also: 12 Things You Should Know About the New Tax Law)

2. You may save on taxes if filing jointly

Much has been said about the so-called "marriage penalty" in which couples could face a higher tax rate if they file jointly. But in truth, this was not an issue for most people, and the new tax law makes it even less likely that married couples will be penalized.

In fact, in most cases under the 2018 tax law, there won't be much difference between your taxes if you file separately or jointly. But it could be very advantageous for couples to file jointly if one spouse makes considerably more than the other.

To illustrate this, let's say you earn $37,000 in taxable income. Under the 2018 tax law, you'd be in the 12 percent tax bracket and pay $4,440 in tax if filing separately. Now let's say your spouse earns $190,000 per year and pays $60,080, based on the 32 percent tax bracket, also filing separately. If you file jointly instead, you'd report a combined income of $227,000 and would be in the 24 percent tax bracket. You would pay $54,480 in tax, a savings of nearly $10,000.

3. You have more buying power

When you get married, you are pooling financial resources. If both of you have assets and income, then you have greater ability to make purchases. It means you may be more likely to afford a down payment on a home, and have more ability to handle the monthly mortgage. It means you may become more attractive to lenders, though it is worth noting that you will still each have separate credit scores.

4. You can contribute to an IRA even if you don't work

If you want to contribute to an individual retirement account (IRA), you must have earned income. But there are exceptions, most notably in the form of a spousal IRA. With a spousal IRA, each spouse can have their own IRA, as long as one of the spouses has earned income. For most people, the limit of contributions on each account is $5,500 annually, so the total contributions allowed for married couples doubles to $11,000. The only catch to a spousal IRA is that couples must file their taxes jointly. (See also: 4 Ways Couples Are Shortchanging Their Retirement Savings)

5. You can receive Social Security spousal benefits

When you file for Social Security benefits, you can file for your own benefits or under your spouse's. Even if you did not earn any income during your life, you can receive benefits through your spouse. Usually, spousal benefits are up to half your spouse's normal Social Security benefit. You'll also be able to receive spousal benefits even after your spouse passes on.

6. You may spend less on health care

There is considerable evidence that being married can make you healthier. Married couples look out for one another. They keep each other on track regarding diet and exercise, and a spouse is often the first person to notice when you appear unwell.

The Harvard Health blog reported in 2016 that married people tend to live longer, are less likely to be depressed, and have fewer strokes and heart attacks. The report also cites studies showing that married people have better immune systems. This potentially means that your health care expenses could be less than if you remained single.

7. You can get health insurance through your spouse

If one spouse has access to health insurance through his or her employer, they can add a spouse to their plan. This is very helpful when one spouse is not employed or is not offered health insurance through their job. In most cases, family plans offer savings over plans for individuals.

8. Auto insurance is cheaper

Generally speaking, auto insurance companies will charge less to married couples than single people. That's because they tend to see marriage as something a more mature person does. Of course, it helps if both drivers have good driving records; if your spouse has a worse driving record than you, you may not see any savings.

An analysis from Carinsurance.com revealed that married couples can typically see savings of 10 to 15 percent in most states. It's worth noting that insurance companies will offer discounts for multiple cars, as well.

9. You can inherit assets from your spouse without a will

To be clear, no one is suggesting you should celebrate when your spouse passes away. But it's worth noting that when you are married, you are usually entitled to inherit their assets, even if you don't have a formal will drawn up. Note: Crafting a will is still a very good idea. (See also: Here's What Happens If You Don't Leave a Will)

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Liabilities That Will Ruin Your Net Worth

Tim Lemke — Thu, 15 Mar 2018 09:30:17 +0000

If you're passionate about personal finance, you know about the importance of building net worth. This means accumulating things that will grow in value, while reducing your liabilities. A person with no debt, a home that they own free and clear, and a sizable retirement account likely has a high net worth. A person with thousands of dollars in credit card debt, a burdensome mortgage, and no cash savings has a low or even negative net worth.

Building net worth is about accumulating money and assets, but it's also about reducing liabilities. In short, it's about making sure debt isn't hurting your ability to achieve your financial goals. Here are some big liabilities that can hurt your chances to build a high net worth. (See also: 6 Money Moves to Make If Your Net Worth Is Negative)

1. Credit card debt

Credit cards can be poison to those looking to generate wealth. Interest rates on credit cards are so high that it rarely makes sense to carry a heavy balance on them. The average household with credit card debt owes more than $15,000 on their cards. It's no wonder Americans are, in general, fairly lousy at building net worth.

Having a lot of credit card debt can hurt your credit score, thus making it more expensive to borrow for mortgages and auto loans. This leads to a nasty spiral that virtually guarantees your liabilities will be larger than your assets. If you have credit card debt, start paying it off as soon as possible. Aggressively reduce your expenses, learn to invest rather than spend, and get out from under the pressure of those crippling cards. (See also: The Fastest Way to Pay Off $10,000 in Credit Card Debt)

2. Car loans

Many people live with car payments as a permanent part of their lives. Financing the purchase of a vehicle is a common practice, but is also an easy way to add to your liabilities while adding very little to your net worth (cars almost always decline in value).

Vehicles aren't cheap, but if you can avoid making car payments over the course of several years, you'll be better off financially. Work to save toward the purchase of a vehicle so payments are minimal or nonexistent. Resist the urge to purchase a new car until the one you have is no longer viable. Avoiding several hundred dollars a month in car payments will free up cash to invest and accumulate assets rather than see your net worth stagnate. (See also: Cutting Your Car Payment Is Easier Than You Think)

3. Unpaid taxes

Yeah, taxes are a pain. No one really feels like paying them. But if you don't pay them, they turn into liabilities that can grow as a result of penalties and fines. Failure-to-file penalties only add to your tax bill, and keep increasing the longer you avoid paying.

If you are employed, most of your taxes are taken from your paycheck, but you still may find that you owe some money on your tax return. Self-employed people must be extra diligent to ensure they are paying taxes on any income they receive. It's also important to make sure you are paying proper real estate taxes on your home, as well as taxes for income gained from your investments. (See also: 8 Tax Return Mistakes Even Smart People Make)

4. Medical bills

There will come a time when you or a family member gets hurt or injured. The expense of hospital stays, surgeries, or ongoing care can be devastating. It's driven many families into bankruptcy and can crush any attempts to boost your net worth.

It may not be possible to avoid medical emergencies, but you can protect yourself by being properly insured. If your employer subsidizes the cost of health insurance, take advantage. If you are self-employed, seek to find a reasonably priced plan through a state or federal health exchange. Insurance isn't always cheap, but it will prevent you from taking on costly medical bills that destroy your financial well-being. (See also: How to Handle a Massive Medical Bill)

5. Student loan debt

We often view student loans as investments in our financial future because an education can help us earn more in our career. But until they are paid off, student loans are only liabilities. If you are still in school, you have some time before you have to start making payments; but once you graduate, those loans can become awfully burdensome. Heavy student loans can force you to take on additional debt just to make ends meet, in turn sinking your net worth even further.

To avoid this, it's important for you and your family to save as much money for college as possible in advance. Take cost and value into consideration when making your college choice, and think about getting a job while in school to help pay for tuition. This may require some tough choices, but avoiding student loan debt will help you get on track for building your net worth much sooner. (See also: 6 Questions to Ask Before Taking Out Student Loans)

6. Your mortgage

Owning a home can be a great way to build your net worth, but that may not be the case if you have a bad mortgage. If your payments are so high that you are unable to save money and invest, it's preventing you from boosting your net worth in other ways.

Borrowing money to buy a home is perfectly normal and has helped countless people get on the path to financial freedom. But it's important to have a mortgage that helps you more than hurts you. Put as much money down as you can so the loan itself is not too large. Get a loan with a low, fixed interest rate with a relatively short term (30-year mortgages are OK, 15-year mortgages are even better).

When you begin paying off your mortgage, you may not be paying off much of the principal of the loan at first. But soon, you'll be making a good dent and building real equity. And that's the path to building net worth. (See also: 8 Signs You're Paying Too Much for Your Mortgage)

7. Home equity loans

It's not uncommon for people to borrow money from the equity of their home to pay for major expenses. There are a variety of reasons why this may make sense. But it's important to be careful when doing this. When you are borrowing from your home equity, you are essentially turning an asset — the equity of your home — into a liability. In essence, you are taking away something that adds to your net worth.

In the long run, borrowing from home equity can help build wealth if you make the right financial choices. For example, you could use money from the equity of your home to make repairs or expand the home, thus boosting its value. And when interest rates are low and market returns are high, it may make sense to borrow for major purchases and use your available cash to invest instead. Just be sure to weigh the risks and rewards before borrowing heavily against the equity in your home. (See also: 4 Smartest Ways to Use a Home-Equity Loan)

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Retire With Less Than $1 Million in Savings

Aja McClanahan — Fri, 09 Mar 2018 09:00:07 +0000

The sad truth is that many Americans are vastly underprepared when it comes to retirement savings. A 2016 GoBankingRates survey revealed that 33 percent of Americans have nothing saved for retirement at all. In total, 56 percent have less than $10,000 saved.

How much money does it actually take to retire comfortably? It seems like one million dollars is the magic number many people think of — and today, with people continuing to live longer, some think that magic number should be closer to $2 million. But is it really necessary? Could some people could get by in retirement on less?

For some, a smaller retirement income could actually support a reasonable lifestyle provided inflation and health care costs don’t get out of hand. For others, it might be a financial struggle.

That being said, let's explore all the different ways you could live a happy retirement even if you don’t amass a million-dollar nest egg.

Work part-time

If your nest egg won’t stretch far enough for all of your financial needs, a part-time job could help immensely. Not only can the extra income come in handy, but a few hours of work per week can have a positive effect on retirees' mental health, as well as their sense of purpose and social life.

You can choose to work in the same field as you always have or launch a second career, maybe in a field you've always been curious about. Turning a hobby into a business could also be profitable, provided it doesn't require a large financial investment to get off the ground. If you already have the skills and materials needed to get started, it can be a cost-effective and rewarding option to bring in extra income. (See also: 5 Questions Retirees Should Ask Before Starting a Small Business)

Wait to take Social Security

If you can live comfortably on your savings early in your retirement, most people should hold off on taking Social Security benefits for as long as they can. The Social Security Administration reports that if you delay receiving retirement benefits until after your full retirement age, your monthly benefit continues to increase. If you can wait until you’re 70 (the maximum age for waiting) you can get 132 percent of your expected payout. Unless your physical health or family history makes you think you will die before your late 70s, it usually makes sense to wait.

This strategy requires patience and frugality, and it may not work for retirees who need their benefits earlier to get by. Before taking this option, make sure you’ve got the financial means to wait, and that you have no other options for bringing in an alternative source of income. (See also: 6 Smart Ways to Boost Your Social Security Payout Before Retirement)

Reduce your housing costs

Housing is one of the largest expenses you’ll incur in life. If you can decrease this expense, you could live on a lot less in retirement. One way of doing this is to move into a smaller home or apartment. This could help you eliminate or drastically lower your mortgage payment, as well as minimize other housing costs like utilities, maintenance, and property taxes.

Another option is moving in with friends or family, if they are willing and able to take you in. Sharing a home is becoming increasingly common due to the rising costs of living for not only retirees, but for everyone else. If you don't have friends or family you could bunk with, you could try to find a roommate that could help foot your housing bill. (See also: 6 Ways You Can Cut Costs Right Before You Retire)

Invest in a health savings account (HSA)

A health savings account is available to those who have a high deductible health care plan. You contribute pretax dollars into your HSA, and can use those same pretax dollars to cover qualified health care expenses — everything from hearing aids, to X-rays, to bandages.

The best part about this plan is that it can become a helpful part of your retirement savings when you turn 65. At this point, your HSA basically becomes a traditional IRA. You can withdraw the funds for anything — health care related or not — to help supplement your retirement income. Funds withdrawn for qualified medical expenses will continue to be tax-free, while nonmedical withdrawals will be taxed as ordinary income. (See also: How an HSA Could Help Your Retirement)

Consider relocating to a low-cost country

The number of American expats abroad is very surprising. The U.S. Department of State estimates that as many as 9 million citizens live overseas. There's a reason so many Americans are choosing to live out their golden years abroad; moving to a country with a lower cost of living means that their retirement dollars are stretching a lot further.

In lower cost of living countries, you will see steep savings on housing, food, and even health care. Many people can also afford inexpensive help from locals to assist in tasks like cooking, cleaning, and running errands.

What’s more is that many of these countries have beachfront properties and communities that are affordable even for the non-millionaire retiree. Though you may be leaving friends and family behind, the good news is that they may be more likely to visit you if there’s a beach involved. (See also: 4 Affordable Retirement Spots With World-Class Health Care)

Invest in cash producing assets

If you don’t have one million dollars in cash, you might be able to make up the balance with other assets like real estate, stocks, or a small business. All of these assets have the potential to add another stream of income for you in retirement.

Real estate can be an excellent source of cash flow if you are able to charge rents that exceed expenses for your property. If you own dividend-yielding stocks, the income from dividend payouts can also boost your bottom line. Finally, if you have an interest in a business that is profitable, you could retire on less than $1 million with a moderate amount of monthly net income. (See also: 7 Reasons to Invest in Stocks Past Age 50)

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This article is from Aja McClanahan of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Build Financial Stability After Divorce

Toni Husbands — Tue, 20 Feb 2018 09:30:09 +0000

Financial instability is a reality for nearly three-quarters of this country's 25 million divorcees. A study by TD Ameritrade surveyed 2,000 participants to examine how they're coping financially after a divorce or death of a spouse. As it turns out, people facing the end of a marriage are struggling — 75 percent of divorced Americans feel less than secure financially, and half are worried about running out of money in retirement.

The average cost of a contested divorce — which can range from $15,000 to $30,000 — also throws many divorcees' finances out of whack. And it doesn't end there. Additional costs such as separate household expenses, counseling for children, and taxes or fees to sell marital assets can quickly add to the financial burden. (See also: How to Protect Yourself Financially During a Divorce or Separation)

Healing after a divorce is no small feat, but digging yourself out financially is possible. You just need a strategic plan.

Assess your assets

There is no doubt that your standard of living will change after a divorce. It's important to realistically acknowledge what you can handle financially. It may be necessary to sell a family home and downsize to maintain a workable budget. While challenging, especially if there is an emotional attachment to the home, life after divorce presents a new reality that must be addressed head-on. (See also: 5 Money Moves to Make the Moment You Decide to Get Divorced)

Seek professional advice

This is an essential step for anyone facing an unexpected change in their financial situation. Objective, third-party advice can help you avoid making knee-jerk or emotional decisions that have long-term negative consequences. A financial professional who specializes in assisting divorcees can help you deal with typical questions and decisions that people in your situation face.

Adjust your budget

A divorce will likely decrease the overall income you've been accustomed to enjoying. Once you've established a plan for the essential items like housing, it will be time to take a closer look at the luxuries you enjoyed as a married person.

This also relates to expenses for your children. Often, parents try to maintain the same standard of living for their kids to minimize the impact of a divorce. Moving to a less expensive house, downgrading a luxury car, or making cutbacks to family travel plans can help you recover financially.

Evaluate career options

Depending on your age and/or situation at the time of the divorce, you may have been out of work or planning on retiring soon. In this case, you may need to adjust your career aspirations. Re-entering the job market, investing in additional education or training, or postponing retirement are all reasonable considerations to ensure long-term financial stability after a divorce.

Automate your savings

There are many things to handle during a divorce, and saving money may feel like a bottom-tier priority. But that couldn't be further from the truth. You need savings now more than ever. The TD Ameritrade study found that almost half of divorced couples are not saving or investing anything. That compares to 32 percent of their married peers. If you have a lot on your plate, it's understandable; but give yourself one less thing to worry about by automating your savings. Having money automatically withdrawn from your paycheck and put into a savings account or emergency fund can give you peace of mind without having to think about it. (See also: 5 Ways to Automate Your Finances)

Divorce is tough. It's important to give yourself time to grieve your previous lifestyle and adjust to your new normal. Making these moves can be a smart step to help you springboard into the rest of your life without worrying about money.

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This article is from Toni Husbands of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Why You May Need a Revocable Living Trust

Carrie Kirby — Mon, 15 Jan 2018 09:30:09 +0000

If you are named the executor of someone's will, be prepared for a hassle. In most states, you will have to go through the probate process, which includes filing court documents and possibly attending hearings. Or, you could get lucky: If the deceased set up a revocable living trust, the process of executing their estate will be much easier.

When I handled a relative's estate this year, the revocable living trust she had set up years earlier made the process so smooth that all I had to do was meet with an attorney and sign checks to the beneficiaries. It was less hassle than getting a mortgage or buying a car. (See also: 6 Things You'll Encounter When Taking Over a Loved One's Finances)

But what is this mysterious document that makes the estate process so much easier for those left behind? Let's look at the details.

What is a revocable living trust?

A revocable living trust is an estate planning tool that people can set up to make the transfer of responsibility seamless both in incapacity and after death. They are "revocable" because you can revise them as your wishes or circumstances change.

When you set up a trust, you designate someone close to you as your successor trustee, giving this person the authority to manage your finances if you become incapacitated or die. You transfer all or some of your property into the trust. You also list your wishes for how to distribute this property after your death, much like you would with a will.

If you become incapacitated or die, the trustee simply needs to provide each of your banks or investment brokerages with a copy of the trust and their identification, and they will have the ability to write checks, sell investments, and make any other financial decisions as if they were you.

Why would I set up a revocable living trust?

When you die, the trustee will have the freedom to carry out the wishes you wrote in your trust without court supervision. This makes the process a lot less onerous. It also preserves the privacy of your heirs, since unlike with court proceedings, the amounts you bequeath and who you leave them to are generally private. In a way, setting up a living trust is a favor you do for your executor and for those you wish to leave bequests to.

But a living trust can also help you while you are among the living. For instance, if you have a stroke and are unable to manage your finances for six months, the trustee could step in and make sure your mortgage payments and other bills get paid out of your checking account. Once you recover, you could take control once again.

If you don't recover and end up passing away, your trustee will already have their name on your accounts, making the process of writing checks to beneficiaries easy.

How would I set up a revocable living trust?

The first thing you would do is visit an attorney, preferably one who specializes in estate planning. The attorney can write the trust document, and walk you through the process of transferring your assets into the trust. You'll also have to choose who you want as your successor trustee, plus a backup in case they can't do it when the time comes, and notify those people. If you don't want to name someone you know as trustee, you could turn to a company to carry this out for you.

Your attorney can advise you on which assets should go in the trust and which should not. For instance, placing an IRA or 401(k) account in a trust can cause problems and/or confusion with what taxes are owed.

Will having my assets in a trust be a hassle?

You won't notice any difference in your day-to-day financial life once your financial assets are transferred to your trust. It's all still your property. Since you are the trustee, you can write checks, sell stock, or make any other financial moves you would have previously done.

Some other assets, however, might be more trouble to add to a trust. Some attorneys advise against adding your home and car to the trust, especially if you think you will sell these and buy new ones during the course of your life. If you do end up adding such assets, you might have to occasionally provide a copy of the trust or fill out extra paperwork.

When do I need to worry about this?

Of course, you never know when life will end, but most people are advised to start thinking about a living trust after the age of 55. If you start one before then, and hypothetically live another 50 years before your successor trustee takes over, you may end up wanting to change your trustee. Estate laws and the size of your estate may change so much that your trust doesn't make sense anymore.

Even if you wait until you are older, the process, which does take some money and effort, may not be for everyone. If your estate is small or you plan to leave all of your assets to your spouse, it may not be necessary.

What if I change my mind?

As stated earlier, "revocable" means you can always change your mind. If you decide you don't want your assets in a trust anymore, or want to create a different kind of trust, you can transfer ownership of all the assets in the trust back to your own name. Once the trust is empty, you create a dissolution document stating that the trust no longer exists.

Will a living trust shelter my assets from nursing home bills?

If you need long-term nursing care, you might be surprised to learn that Medicare will generally not cover it. You will be expected to liquidate your assets and pay for your own care. And only when your own assets have been exhausted will you qualify to have Medicaid pick up future bills.

If your assets are in a revocable trust, you are still expected to use them to pay nursing home bills. There is another kind of trust that can shelter assets from these expenses, called an irrevocable trust; however, this is a complicated strategy and requires careful consideration and consulting with an attorney who specializes in such planning.

Once I have set up a trust, is my estate planning done?

You may be surprised to learn that even after detailing how you want your assets to be distributed in the trust, you will still need to create a will. This is generally called a "pour-over will," and the point of it is to cover any assets that you may have neglected to transfer to the trust.

It's also important that parents with minor children have a will, since this is where you appoint guardians to raise your kids in your place if you die. (See also: 6 Times You Need to Update Your Will)

Estate planning can also involve decisions such as purchasing insurance policies and naming beneficiaries for those policies and for your retirement accounts. Some people also include prepaying funeral expenses in their estate plan; planning the funeral in advance is certainly a big favor you can do your heirs. (See also: 9 End-of-Life Cost Savings Your Survivors Will Thank You For)

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This article is from Carrie Kirby of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

6 Times You Need to Update Your Will

Aaron Crowe — Thu, 07 Dec 2017 09:30:06 +0000

If you have a will, you're already one step ahead of most people. According to a recent survey by Caring.com, 60 percent of U.S. adults don't have a will or a living trust.

But simply creating a will isn't enough; you must also update it every time you reach a major life milestone. After all, your assets and beneficiaries can change several times long before you reach old age. If you were to pass away before those changes are reflected in a will, your assets may not be distributed to your heirs in the way you had intended. (See also: What You Need to Know About Writing a Will)

If you've recently gone through one of these big life changes, it's time to sit down and update your estate plan.

1. Marriage

A will that designates what goes to your spouse will make things easier on them when you die. Joint property ownership is automatically turned into complete ownership by the surviving spouse after one spouse dies, and that can't be changed by a will. However, the surviving spouse will need a will to direct what to do with the house after they die.

Also, some things may not automatically go to your spouse as a beneficiary if you haven't updated your will. For instance, say you receive an unexpected inheritance just before you die, such as the house of a long-lost relative. Is that joint property with your spouse? Not if it isn't listed in your will. Such assets could go to probate, which is why it's better to have an updated will.

What if you and your spouse both die at the same time and neither of you have a will? Other trusts such as life insurance policies and retirement plans will have named beneficiaries. The home will automatically go to those people without requiring a will. But everything else will end up in probate court if there are no wills. (See also: Don't Make These 5 Common Mistakes When Writing a Will)

2. Divorce

A marriage adds a person to your life who should be added to a will; in a divorce, you may want to remove that person from your will. Do you want to leave your grandmother's jewelry to your ex-wife? Many people would say no.

You may also want to update your will after a change in relationship with any other member of your family. Maybe the executor of your will who you named years ago is no longer of sound mind and capable of doing such duties. Or maybe someone you've left a large asset to has died. These are all reasons to update a will.

3. Children

When a child is born, it creates a potential new heir. A will can declare who you would want to be the guardian of your minor children upon your death. Otherwise, if you don't have a will and have young children, your surviving spouse may have to go to court to be appointed guardian of the children's property, according to Sherman Silverstein, a law firm in New Jersey.

If a husband and wife die simultaneously without wills, the state may take over the care and support of minor children, and name relatives or someone else to take over their care, according to Silverstein. That's why it's important for both parents to have wills.

If there are certain assets you want give to your children, you also need to spell this out in a will and make sure it's regularly updated. Without one, state law may divide your property between your surviving spouse and children against your wishes. If property is left to minor children, a guardian must be named to administer the property for them. It could be someone who is raising the children or someone else. (See also: The Fair Way to Split Up Your Family's Estate)

4. Death of an heir

If an heir dies before you do, anything left to them upon your passing could be in flux if your will isn't updated. Without any named heirs, property may pass to the state instead of to friends and relatives.

If your spouse dies before you while any of your children are still minors, you'll want to update your will so that you can direct relatives and friends to select a guardian that they agree upon in case of your death. You also may want to direct the probate court to make the selection in the case that the relatives and friends you named can't agree on a guardian.

5. Real estate purchase or sale

Buying or selling a house is a major life event and can be a reason to celebrate. It can also be a reminder that it's time to update your will.

As stated above, joint ownership of a home will pass on to your spouse if you die without a will. But other circumstances, such as your spouse also dying, can create the need for a will when you own property.

If you're moving out of the state where you executed your will, check with an attorney in your new state to see if the will is still valid. State laws for wills can vary, and you shouldn't assume yours meets the requirements in your new state.

6. Major adjustment to investment portfolio

If your estate has had a substantial increase or decrease in value, then it's time to update your will. This can include your stocks increasing substantially in value, the sale of a major asset, the founding of a business, or anything else that has a big impact on your finances. You may want to change how much you give to one beneficiary over another, for example, or leave a new business to your daughter who is interested in it.

Whatever life events come at you — and whenever — it's a good idea to review your will every year. A will is meant to disburse your assets according to your wishes. And those wishes may not be so easy to follow if your will has old information.

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This article is from Aaron Crowe of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Money Mistakes Couples Who Live Together Might Make After a Breakup

Emily Guy Birken — Fri, 06 Oct 2017 08:00:07 +0000

Neil Sedaka made a massive understatement when he sang, "Breaking up is hard to do." Of course, Sedaka was referring to the heartbreak that comes from calling it quits with your significant other, but that is not the only tough aspect of ending a relationship. Breakups can also be financially costly for the partners as they figure out how to move on, especially if they've been living together.

While married couples can rely on the rules spelled out by divorce laws to protect themselves financially, unmarried couples don't have the same luxury. It is up to you to protect yourself when your live-in relationship goes south.

Here are the common financial mistakes you might make post-breakup — and how to avoid them.

1. Forgetting your financial responsibilities while you recover

The easiest mistake to make after a heartbreak is to ignore the important tasks while you recover. While you are busy watching Dirty Dancing on an endless loop and eating your feelings, you might not notice that your bills are piling up. Creditors don't care that your heart is shattered. They expect to be paid on time, no matter how you are feeling.

Setting up billing alerts can help you to keep your finances in order even while you are in the middle of your heartbreak. Sign up for text message or email alerts so you don't have to rely on your memory to stay on top of your finances. This will ensure that your broken heart doesn't also lead to a destroyed credit rating.

2. Not agreeing on how to sell the house you bought together

You bought the house together when you assumed the relationship was forever — and now you are broken up. If you did not draw up a joint house ownership agreement at the time of the home purchase, it could be difficult for you and your ex to determine a fair division of the home. This can be particularly difficult if one partner believes he or she owns a larger share of the home after contributing money to the down payment or labor toward home renovation or maintenance.

This kind of disagreement can result in long, drawn-out legal fights, so it's in your best interests to compromise with your ex. Assign a dollar figure to each partner's contributions, including things like the down payment, mortgage payments, labor, and other improvements. This will help you better understand each partner's stake in the house.

Once you have come to an agreement on that, one partner can buy out the other's interest in the home, or you can sell the house to a third party and split the proceeds.

It is generally cheaper for one partner to buy out the other, since you will avoid closing costs and other costs associated with a market sale. However, there are further complications to expect if you buy out your partner, such as deciding on a fair price, figuring out if the selling partner's name will need to remain on the mortgage until the buying partner qualifies for a new mortgage, and transferring the title.

3. Forgetting to pay the bills your ex took care of

Every couple has a different system for handling shared expenses. Whether you split every bill down the middle or you each took care of different bills, it's important to make sure you are aware of which accounts your ex took care of. If you find yourself unable to access a shared utility bill because your former sweetheart still has the passwords, you could risk anything from having the utility turned off to potentially losing your good credit rating if the account is in your name.

This is why you need to keep an eye on all shared expenses with your live-in lover, including passwords, contact information, and a tally of who pays for which services. If you find yourself broken up and without that information, it's better to have a chilly conversation with your ex to get the important details than to let your finances take the hit.

4. Not removing your ex's name from shared accounts

Sharing accounts is a natural extension of living together. You might have shared credit cards, utilities, or even a bank account from when you were living under the same roof.

But neglecting to remove your ex from these shared accounts can potentially put you at risk. Even if you're certain your old partner isn't the sort of person to exact financial revenge on you, it's better to take your ex's name off any shared accounts and change the passwords. It wouldn't be the first time that someone shows his or her true colors after a breakup.

5. Fighting over shared items

You bought the dining room table, the computer, and the Xbox together, and you can't decide who gets what. And then there's Roscoe the dog, who neither of you can imagine living without. How do you determine who gets custody of what in your split?

Under ideal circumstances, you and your ex will be able to decide who gets which shared items based on who bought or most uses the item. If your ex is the one who hosts all the dinner parties and you are the one who is up walking Roscoe every morning at 6 a.m., it should be obvious which item should go with which partner. Of course, it's not always so easy, and sometimes you end up fighting over your things.

If you can't stop arguing about who gets what, consider taking the issue to mediation. In this process, you and your ex go to a neutral third party who will help you hammer out the details of who gets what.

In really tough cases, court proceedings can be a last resort to help you solve the question of which items belong to which partner.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Ways to Make Passive Income Online

Anum Yoon — Wed, 27 Sep 2017 08:30:11 +0000

The internet is responsible for many wonderful things, from letting you shop whenever and wherever you want, to the ability to view unlimited cat videos. And if you're savvy, the internet can also be a great place to develop income-producing assets for yourself.

Income-producing assets are products you create or invest in that earn passive income. In essence, passive income allows you to earn money without having to do additional work after creating the asset. There are several ways you can do this online. (See also: 7 Surprising Ways to Earn Money Online)

1. Sell a course or ebook

Everyone's an expert on something, right? And the world is full of people looking to learn. One income-producing idea is to develop an online course. People will pay to learn what you know about the best travel spots in Europe, how to be a better public speaker, and everything in between. There are multiple online platforms where you can host an e-course (though you will have to pay for most of them), or you can host the course through your own blog or social media channels. (See also: Can You Really Make a Living as an Ebook Writer?)

There are plenty of tutorial, video course, and ebook content creators out there generating a steady monthly income. How you design, develop, and create your course or ebook will be very dependent on what you teach, how you teach, and the best way for your readers to learn. This all requires some legwork upfront, but if you can get the ball rolling, your online book or course can continue generating passive income well into the future. (See also: How I Made $400 in 10 Days by Selling an Online Course I Created)

2. Earn interest on a loan

If you have some cash to spare, you could earn a nice return by investing in peer to peer lending. Peer to peer lending removes financial institutions from the equation. With sites like Prosper or Lending Club, you can put up a sum of money — whether it's a few hundred dollars or a few thousand — to fund a personal or business loan yourself. Just like if they had worked with a bank, borrowers then pay the loan back with interest, which acts as a passive income stream for you. Most sites report lenders see a return of between six and seven percent. Note that each peer to peer lending site will have its own qualifications and terms and conditions, so do some research to find the best option for you. (See also: Everything You Need to Know About Peer-to-Peer Investing With Lending Club)

3. Become an affiliate

Affiliate programs pay you in exchange for sending them customers via your website, blog, or social media channels. The best-known example of a popular affiliate program is Amazon, which pays "Associates" commissions of up to 10 percent.

Here's how it works: Say you run a food blog where you showcase your favorite recipes. People who read your blog are likely interested in all things cooking: cookware, cookbooks, kitchen remodeling — you get the picture. If you include an Amazon affiliate link to a mixer you're using, for example, you'll earn money any time a visitor clicks through from your blog and makes that purchase. (See also: 5 Easy Ways to Make Extra Money Blogging)

If you want to expand your affiliate partnerships beyond Amazon, you can join networks that connect you to companies looking for affiliates — ShareASale can help you do this. Also, if there is a particular company you would like to work with, check out their website. Usually at the very bottom of the page, in the footer bar, you'll find a link to learn about any affiliate program they might offer.

4. Use AdSense

AdSense, an advertising service run by Google, operates in a similar fashion to an affiliate program. To use AdSense, you'll also need to have a content site, YouTube channel, or blog with views. But rather than letting you promote or link to a specific item or brand, AdSense automatically places relevant ads on your site for readers to click through. These ads won't be random; they'll relate in some way to the type of content you normally post. You'll automatically earn money for views and clicks on your ad. The more views you get, the more money you can make. (See also: Can You Really Make Money by Starting a Blog?)

5. Sell your photos

Do you have a good eye for photography? Are friends and family always commenting how much they'd love one of your photos hanging on their wall? Take the hint! Build a portfolio storefront with sites like SmugMug or Zenfolio where fans of your photography can purchase prints. Many gallery sites do require paying for a monthly "plan" and may take a small commission, but their bottom tier packages are often fairly affordable at a few bucks per month. Many also have plugins that allow you to process print orders with high-quality photo labs and drop-ship directly to your customers. (See also: Earn Extra Income With Your Smartphone Camera)

You could also sell your own photography to be used as stock photos. While there are many big-name stock photo agencies out there, such as Getty Images and Shutterstock, becoming a contributor often involves a lot of competition and a lengthy application process. Selling your stock photography on your own website allows you to set your own prices, licenses, and keep 100 percent of the earnings for yourself.

The internet has opened up a world of opportunity for anyone to earn a little extra money. Think of what you're passionate about, what skills you have that someone might be willing to pay for, and create a revenue generating asset that will keep extra cash flowing into your budget. (See also: 13 Ways to Make Money Online That Aren't Scams)

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Don't Make These 5 Common Mistakes When Writing a Will

Christa Avampato — Tue, 19 Sep 2017 08:30:10 +0000

It's a task no one likes to think about: With everything going on in our lives, do we really want to add our own mortality to the list of our concerns? As unpleasant as it may be to consider, having a will is a critical way to take care of your family should you pass away. It will also ensure that your wishes are carried out in a way that aligns with your values. (See also: What You Need to Know About Writing a Will)

For most of us, it's a fairly straightforward process. We have the options of free online kits, using a service like LegalZoom, or consulting with an attorney. No matter which option you choose, here are some common mistakes to avoid when creating a will.

1. Not giving anyone responsibility

When a will is executed, there must be a person assigned to settle the will when the time comes. This person is known as an executor, and that person makes sure that your wishes are carried out exactly as you intended. It's very important for you to select a responsible person you trust, and get that person's permission to name them as the executor. This is not something you want to be a surprise.

Also, you may want to strongly consider naming a second executor in the event that something happens to the first person you name, or if he or she is unable to serve as executor for any reason. (See also: The Fair Way to Split Up Your Family's Estate)

2. Not taking care of the kids

If you have children, it's critical that you select who will become their guardian(s) and communicate that to the named guardians as well as to other family members. I have seen this become a bone of contention before and after someone's passing, and it's a heartbreaking ordeal for everyone involved. Unfortunately, the people who suffer most in the battle are the children. It can be a difficult thing to communicate these wishes to your family, but it is far easier to deal with that difficulty now than to have a potential custody battle unfold after you're gone.

You must also consider how to give your assets to your children if they are still minors. This is a very complicated financial and legal issue, though there are a number of different options that you can put in place to properly take care of it. Creating trusts or accounts under what's known as the Uniform Transfers to Minors Act (UTMA) are avenues worth exploring.

3. Not knowing your state laws

Wills are state-specific and different states have different laws for them. The state that executes your will should be the state where you claim legal residence even if you have homes or spend significant amounts of time in different states. FindLaw provides a clear overview of laws that govern wills in the different states.

4. Not signing the will or having a witness

You've done all of the work to create a will. Make sure to sign it and have a witness sign it in accordance with your state's specific laws. If a will is left unsigned by you or a witness, there is a high risk that it won't be honored. Also bear in mind that you must be of sound mind and body, and you must create this will without being threatened or pressured by someone else to do so. If either of these points could be disputed, a legal battle could ensue before the will is executed.

5. Not making it accessible

Make sure your completed and signed will is easily accessible when the time comes, particularly by your executor. There are a few options for this. You can keep it in a secure location such as a safe in your home or a safe-deposit box. You may also choose to provide a copy of your will to your attorney, accountant, or financial adviser if you feel comfortable doing so. Though you are not required to file your will with the court or place it into public record, some courts may provide the option to store it for you. This last possibility is a good option if the court in your local jurisdiction allows it.

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This article is from Christa Avampato of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Why You Need to Know the Difference Between Secured and Unsecured Debts

Dan Rafter — Wed, 26 Jul 2017 08:30:14 +0000

You might think that all your debts are equal. In your mind, there might not be any difference between your auto loan, student loan, and credit card bills.

But there is one major difference: Some of your debts are unsecured, and some are secured. It's important to know the difference if you run into a financial crisis and you don't have enough money to pay all your bills on time. (See also: Pay These Bills First When Money Is Tight)

If you stop paying secured debt, you might lose your home, car, or other assets. If you stop paying unsecured debt, your credit score will take a major hit, but you won't lose your shelter or your car.

Secured vs. unsecured debt

Secured debt is tied to an asset. Think of mortgages and auto loans.

In a mortgage, the money you borrow is connected to your home, which your lenders consider collateral. If you stop making your payments, your lender can start foreclosure proceedings to take possession of your home.

In an auto loan, your car serves as collateral. If you stop making payments on this debt, your lender can take possession of your car.

The collateral on secured debts is a way for lenders to protect themselves when passing out large loans. Borrowers aren't as likely to stop making payments if they know doing so could cost them an asset. And if borrowers do stop making payments, lenders can recover some of their losses by taking possession of the collateral and selling it.

Unsecured debt does not have any collateral behind it and is not tied to any asset. The most common kind of unsecured debt is credit card debt. Student loan debt and medical bills are also examples of unsecured debt.

If you fall behind on unsecured debt, your lenders generally have no collateral to take over.

The consequences

This doesn't mean that falling behind on your unsecured debt payments comes without consequence. First, your credit score will take a hit. If you make a credit card payment or payment on another unsecured debt more than 30 days past due, your payment will be considered officially late. You can expect your credit score to fall by 100 points or more. (See also: 5 Simple Ways to Never Make a Late Credit Card Payment)

This is a big deal: Lenders rely on your credit score to determine if you qualify for loans and at what interest rate. If your score is too low, you'll struggle to earn approval for loans. And if you do get that approval, the higher interest rates will make borrowing money more expensive.

Lenders can also take steps to force you to start paying what you owe on unsecured debts. They can hire a debt collector. They can also sue you to garnish your wages or put a lien on your assets to get you to pay.

Which should you pay first?

If you are hit with a financial crisis, and you can't pay all your bills on time for the month, it usually makes sense to pay your secured debts first. You don't want to take the chance of losing your home, car, or other assets.

Secured debts tend to be larger, too. For most people, the mortgage payment is the biggest bill they pay each month. It can be more difficult to catch up on missed payments if you fall behind on these larger bills.

The most common type of unsecured debt, credit cards, also come with more flexibility. You only have to pay the minimum required monthly payment on your credit card debt to avoid being hit with a late fee. You might pay off your secured debts first and then have enough money to pay at least the minimum on your credit cards.

Interest rates might play a role, too. Unsecured debt generally comes with higher interest rates. If you fall behind on these payments, the amount you owe can build quickly because of these higher rates. Skipping two or three credit card payments can quickly boost your overall debt on your cards.

Ideally, you'd never have to prioritize unsecured or secured debts, but would rather pay all your bills on time each month. But if you must make the difficult decision of which bills to pay and which to wait on, knowing the difference between secured and unsecured debt can help you make that call.

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4 Myths About Divorce and Money, Debunked

Dan Rafter — Tue, 11 Jul 2017 09:00:10 +0000

Divorce happens. And when it does, it's expensive. Divorce proceedings cost an average $10,000 to $15,000, according to GOBankingRates. (See also: How to Protect Yourself Financially During a Divorce or Separation)

Unfortunately, many who are divorcing hold certain financial misconceptions about the process. Some might believe that spouses who commit adultery will pay more in a divorce. Others might believe that they won't be responsible for the debt on their spouse's credit card accounts.

There are plenty of financial myths surrounding divorce. Here are four of the most important ones.

1. My spouse's adultery will help my case

You might think that you're entitled to more money in the divorce because your spouse was unfaithful. The truth is, adultery does not play a role in who gets more money or assets following a divorce.

That's because states today offer what is known as a no-fault divorce. As the name suggests, in this type of divorce proceeding, separating spouses do not have to prove that the other party did anything wrong to cause the breakup of the marriage.

Divorce isn't about punishing people for bad behavior; it's about finding a way to divide up money and assets between two people. Your spouse's infidelity does not mean you will automatically get the house or you will receive a greater amount of alimony.

There is an exception, though: If your spouse blew a significant amount of money to pursue the affair — renting a secret apartment, spending on lavish trips — your divorce judge might require them to pay more.

2. I didn't work during my marriage, so I'll get alimony payments for life

If you didn't work during your marriage, you will probably receive alimony payments. But these payments might not be as permanent as you might think.

Today, nonworking spouses usually receive their alimony payments, also known as spousal support, for a limited time. The goal is to provide the spouse with some financial support until that person can find a job or pay for an education. Don't expect an unending stream of financial support from your ex-spouse.

3. Money in my own bank account will be mine after the divorce

Don't think that just because you stashed money in a bank account in your name only that you won't lose some of these funds in your divorce.

Your former spouse might be entitled to some of the money in this account. Whether that's the case depends on a host of factors, including how that money was earned, whether you inherited it, or whether you live in a community property state.

That community property state part is important. There are nine of these states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska is an opt-in community property state. In these states, all assets acquired during a marriage are considered community property and owned by both spouses equally. In a divorce, all assets are split 50/50.

In the rest of the states, assets in a divorce are to be divided equitably, but not always equally. So even if you've stowed money in a private bank account, your divorce judge might decide that you either owe your spouse half of that money or a portion of it, depending on the circumstances of your case.

4. I won't have to worry about the debt my spouse ran up on a credit card

This is a tricky one. Depending on where you live, you usually won't be responsible for the debts that your spouse ran up on a credit card that is in that spouse's name only.

But if you live one of the community property states, you will be responsible for half of that debt, even if the credit card account was never in your name. There is an exception, though: You are only responsible for 50 percent of the debt your spouse ran up during your marriage. Any debt your spouse ran up on the credit card before your marriage is not your responsibility.

If you don't live in a community property state, you are usually not responsible for the debt your spouse runs up on a credit card. However, there are some exceptions. If the debt your spouse ran up was to pay for your child's dental work, to repair your home's busted water heater, or to replace your residence's furnace — basically, to cover any essential family expense — you will then be responsible for half of that debt. (See also: Spouses and Debt: Who's Really on the Hook for Those Bills?)

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How to Protect Yourself Financially During a Divorce or Separation

Samantha Stauf — Mon, 10 Jul 2017 08:30:11 +0000

Marriage is not always "till death do us part." Time, unforeseen events, individual decisions, and emotional disconnect can lead couples to make the hard decision to separate or divorce.

Divorce proceedings cost an average $10,000 to $15,000, according to GOBankingRates. That's due largely to lawyers' fees. It's vital that individuals minimize additional financial fallout. The last thing you need is another financial blow due to negligence, malice, or misunderstanding.

1. Research your state's divorce and separation laws

Divorce and legal separation laws in the United States are decided on a state level. That means the first step to financial security is finding out when you stop being liable for debts incurred by your spouse.

In Pennsylvania, for example, a debt and assets cut off date is known as the "Date of Separation." That date is either considered the day the divorce complaint is filed or the day that the decision is made to separate (either moving out of the house or into a separate bedroom). In other states like New Jersey, liability for your spouse's debt doesn't stop until the divorce is actually finalized.

Couples can also, depending on the state, opt for a legal separation. Legal separation is a lot like a divorce, but the couple remains married, which allows them to file taxes together and remain on their spouse's health insurance. It could be a solid stopgap if you're unsure if a divorce is the right answer.

2. Plan ahead

Individuals who are separated or divorced might want to begin to track and document all potential assets. That means taking pictures of evidence, hunting down legal documents, and familiarizing yourself with your joint and individual financial portfolios.

Spouses often utilize temporary separations as a means to collect evidence before officially filing for divorce. It might be best to assume your spouse is already considering what needs to be done to come out ahead if a divorce is imminent. If you don't divorce, you'll at least have a better sense of your financial footing.

If you suspect the divorce might get ugly, you should also consider keeping important documents in a safety deposit box and having important mail sent to a PO Box. This will cut the risk of anyone stealing or destroying important documents during divorce proceedings.

3. Immediately protect your credit and finances

Separation and divorce leave an individual's finances and credit score in jeopardy. An estranged party, who might or might not be feeling charitable, still has control over your financial health. Now might be the time to start separating yourself.

Here are a few tips to protect yourself:

Create new car insurance policies that aren't tied to the other party (this protects you from the financial fallout of potential accidents or tickets).
Ensure rental or homeowners insurance is in your name.
Shut down joint bank accounts.
Tell all lenders and companies that expect payments that you are going through separation or divorce proceedings. Give them updated contact information in case payments are late.
Check to see if any loans or credit card payments can be frozen until the divorce proceedings are finalized.
Ensure all loan, credit card, insurance, and utility payments under your name are paid, even if you agreed your spouse would pay that particular bill.
Once the division of assets has been agreed upon legally or verbally, you can begin closing the accounts by selling off assets, refinancing loans, removing one party from the loan, or switching credit card debt to a new card.
Request a credit report and look for accounts that need to be canceled or updated. You want to identify joint accounts or accounts where the other party is an authorized user. Credit reports are the easiest way to ensure you don't miss one.
Change all passwords to your accounts.

4. Negotiate support

Separation can be a long, arduous, and expensive task. Individuals in the middle of divorce or legal separation proceedings can appeal in the courts to be granted temporary relief also known as "pendente lite." The temporary support, if granted, could lead to the primary bread winner providing temporary alimony, child support, and household payments.

If the support isn't granted, you might be able to petition the courts to have the other party financially responsible for part or all of the debt incurred while separated.

Divorcing or separating parties can also negotiate whether alimony payments are tax deductible.

Tax deductible alimony payments grant the individual who pays the ability to deduct the payment from their taxes and ensures the individual who receives the payments must file the support as income. (Taxable alimony should not be tied to any children or the IRS might not consider it an alimony payment.)

In some cases, it might be better to make the payments nontax deductible. This is more common if one spouse is in a higher tax bracket.

Separation and divorce can be a financially perilous time. Don't forget, as you implement protective safeguards, to look into protecting your business from financial ruin as well.

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This article is from Samantha Stauf of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Does Your Net Worth Even Matter?

Matt Bell — Wed, 17 May 2017 08:00:11 +0000

Do you know your net worth? That's how much is left after subtracting your liabilities from the total value of your cash and assets.

At first glance, figuring out how much you're worth may seem pointless. You're probably not going to bump Warren Buffett or Bill Gates from their spots on any "World's Wealthiest People" list anytime soon. But no matter how much you earn, knowing your net worth is important.

Here are three reasons why monitoring your net worth can help you manage money better. (See also: 10 Ways to Increase Your Net Worth This Year)

1. Your net worth doesn't lie

In our culture, it's easy to convince ourselves that we're doing better with money than we actually are. We can finance nice cars, pay for the latest fashions with plastic, and even "buy" a more expensive home than we can realistically afford. But our net worth tells it like it is, and that can be a very helpful financial wake-up call.

In the personal finance classic, The Millionaire Next Door, authors Thomas Stanley and William Danko draw an important distinction between people who look wealthy but aren't (they call them "Big Hat, No Cattle"), and those who don't look wealthy but are (where the title of their book came from). If you're going to build wealth, it's far better to be in the latter group.

The concept of being unassumingly wealthy is also known as "stealth wealth," and it's a lifestyle worth striving for. People with "stealth wealth" maintain a high net worth by avoiding dumping their cash into shallow, depreciative purchases. Their modest approach to money management allows them to achieve such dreams as early retirement, entrepreneurship, traveling the world, and more.

After calculating your net worth, ask yourself: Do I look wealthier than I am, or am I wealthier than I look?

2. Your net worth shows whether you're making progress

To be sure, there are other ways to define your life and determine whether you're moving forward or backward. Tallying your net worth each year, however, and monitoring the trend that develops can be very helpful. If you're going to build a nest egg large enough to support your family in your later years, you need that trend to be moving in an upward direction.

Earning more each year and increasing your standard of living may make you feel like you're getting ahead, but an increase in your net worth will show if you actually are.

Of course, there will be occasional down years. The recession of 2007 to 2009 erased a lot of wealth, but those who didn't panic eventually recovered — and then some.

3. Your net worth helps you pinpoint financial issues

Each time you calculate your net worth (a natural time to do so is at the end of each year), don't just retain the bottom line number. Keep the components.

On the asset side, track the value of your home (Zillow will give you an estimate), your retirement savings, other savings, the value of your car(s), and other assets. Then look at changes within each asset.

With our household's retirement accounts, I don't just record the balance. I also record how much we contributed each year and how much our investments earned. How much we contribute is much more under our control than the returns we earn. I want to at least make sure we're doing our part. The earnings side is important as well. If you see year after year of meager returns, it's probably time to re-evaluate your investing process.

On the liabilities side, track how much you owe on your house and other debts, such as vehicle and student loans. This annual exercise will provide a helpful reminder to perhaps put more focus on getting out of debt or make sure you're on track to be mortgage-free at least by the time you retire.

The big picture

To a great degree, net worth is an "internal" metric. It's mostly about how you're doing now compared to how you were doing last year and the year before.

If you'd like more context, The Millionaire Next Door has an interesting way of defining "wealthy." Whereas many people think of someone who has a net worth of $1 million or more as wealthy, Stanley and Danko's definition created more of a level playing field for people across the spectra of age and income: multiply your age times your annual pretax household income, divide by 10, and then subtract any inherited wealth. That, they said, is what your net worth should be.

If you have significantly more than that, you have a low-consumption, high-wealth-building lifestyle and you're considered wealthy for someone of your age and income. If your net worth is significantly less than that, you're probably consuming too much of your income and investing too little. (See also: 6 Money Moves to Make If Your Net Worth Is Negative)

This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Start Planning Now for When Your Target-Date Fund Ends

Dan Rafter — Fri, 12 May 2017 08:30:12 +0000

There's a reason why so many people invest their retirement savings in target-date mutual funds offered within their 401(k). These funds are designed to be simple: Your money is automatically invested in a mix of stocks, bonds, and other asset types based on your age and the year you plan to retire.

As you get closer to your target date (the year you expect to hit retirement), the managers of your target-date fund gradually ramp down your risk — moving more of your dollars away from high-risk, growth-oriented investments like stocks, and focusing instead on safer, more conservative investments like bonds or cash. This "set it and forget it" approach allows you to easily stash money away for retirement without constantly rebalancing the fund yourself.

The goal is to have the right asset mix when your target-date fund hits its target. But this leads to the big question: What do you do when your target-date fund finally does reach this endpoint?

Reaching the target date

According to the Investment Company Institute, the target date isn't a date when investors should automatically cash out their entire target-date fund. It's simply an estimate of when investors will retire, and therefore stop making new investments in the fund. Most target-date funds can be kept open beyond the target date.

What happens when the fund reaches that target date depends on whether the fund is guided by one of two basic investing approaches.

If a target-date fund has what is known as a "to" glide path, the fund manager will stop adjusting the fund's asset mix once it hits the target date. In this scenario, your investment mix will remain in place until you cash out the fund.

There's also the "through" glide path. In this approach, the fund manager will continue to adjust the fund's mix of investments even as the target date comes and goes.

It's important to remember that target-date funds offer no guarantees. Your fund manager will rework your asset mix as your target date approaches to minimize your investment risk. But no manager can guarantee any set amount of dollars by this date.

What can you do when your target date arrives?

When your target-date fund hits its target date, you have three basic choices of what to do with your money.

1. Do nothing

First, you can essentially choose to do nothing. You can instead leave your money in your target-date fund after you retire. You won't be able to make new contributions to the fund, of course, but as with all 401(k) investments, your target-date fund will continue to grow on a tax-deferred basis. This will remain the case until you begin making withdrawals from the fund. You are required to begin taking your minimum withdrawals from your 401(k) by age 70 ½ at the latest.

2. Roll over funds into an IRA

If you want to be more hands-on with your investments, you can instead roll over the target-date fund, and any other investments in your 401(k), into an IRA. If you roll the money into a traditional IRA, you can continue to make contributions until you hit the year in which you turn 70 ½. If you roll your 401(k) funds into a Roth IRA, you can continue making contributions as long as you are earning income. If you are not working, though, and not earning income, you can't contribute to a Roth no matter your age.

3. Cash out your fund

Finally, you can cash out your 401(k) (and the target-date fund within it) once you stop working for the employer who offered it to you. If you rollover your 401(k) into an IRA, you won't have to pay taxes. But if you cash out, you will owe income tax on the amount you withdraw from the plan. If you cash out before you turn 59 ½, you'll have to pay income taxes and a 10 percent penalty.

The best option of the three depends on how much time you want to spend focusing on your investments. If you prefer to let others manage your investment, the "do-nothing" approach might be your best move. If you'd rather have more control, on the other hand, rolling over your target-date fund into an IRA is probably the better choice.

If you need liquid cash immediately, cashing out your fund might be necessary — but the tax hit you'll take often makes this the least attractive option.

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: