Ask Lisa: Am I doing enough to be financially independent now that I’m divorced?

I’m in my mid-50s with two teenage daughters and a start-up catering business. Last year, my husband and I decided to get a divorce. During our marriage, I was a stay-at-home mom and managed our day-to-day expenses. But when all the paperwork started to come out through the divorce proceedings, I found out that he had been taking money out against our credit card at 21% interest and that he had refinanced our mortgage to buy stocks. When I realized how much debt we had, the feeling was indescribable. I can remember all the times I signed documents and thought nothing of it; I completely trusted his judgement.

To be fair, he has been very generous with our children. So, as we figure out what’s fair money-wise between us, I do not need to worry about their future. Initially, it was a real concern for me as my eldest doesn’t have great spending habits and my youngest still lives at home. Because my children are taken care of, I’ve recently had the time and energy to focus on understanding financial statements, investments, and properties. I think I’m heading in a good direction.

My question is, how do I make sure I’m financially secure? At this point, I think I’d have to go back to an entry level position since I’ve been out of the workforce for over 21 years (even though I have an economics degree). Although I have my amateur catering business, I’m not sure I can rely on it for a steady source of income. I’m counting on the return I can make from investing my settlement fund as well as using some of it to buy a rental property down south. But will that be enough?

–       Aware and Awake

 

Dear Aware and Awake,

Wow! I can only imagine how shocking it must have been to discover the high-interest borrowing and leveraged investing that had been going on right under your nose. It makes total sense to me that financial security is a high priority for you right now. Ignorance can be bliss, but awareness is power and I think security is striking a balance between the two.

We don’t worry about the things we are ignorant of, and becoming aware empowers us to make informed decisions to protect ourselves. But too much of either – ignoring the facts to avoid worry, or striving to predict absolutely everything that could go wrong – isn’t healthy. Arming yourself with knowledge of the basic principles of financial security (which I think is more or less synonymous with financial success) allows you to balance the two extremes, making informed decisions without worrying about the things you can’t predict.

Here are what I believe to be the four key principles of financial security.

 

1. Practice the habit of saving – and spend less than you earn.

Living within your means is arguably the most important key to financial security. If you’re in the habit of saving on a regular basis and spending what’s left, you will always have enough. It’s more of a mindset and a habit than anything else. Live by this principle and you will ensure you’re able to save for important goals while also paying the bills.

 

2. Stay away from consumer debt.

When it comes to debt, there’s helpful debt – which allows you to invest in assets that are worth more over time, like a mortgage, an education, or starting a business – and unhelpful debt – which typically is spent on stuff that you end up throwing out during spring cleaning.

If you’re not following the first principle, then you’ll likely find yourself needing to use credit cards and lines of credit to bridge extra spending. Consumer debt might feel helpful in the short run as it allows you to live a lifestyle you can’t truly afford, but in the long run it’s crippling to your financial security. Paying interest to someone else is making them more financially secure, not you.

 

3. Establish an emergency fund.

For many people, their very first savings goal is establishing a healthy emergency fund. What’s a healthy amount? It’s different for everyone. For some its three to six months of living expenses, for others its a few years’ worth. Ultimately, it’s whatever amount helps you sleep well at night. Having this stash of money will allow you to handle the surprises life throws at you without breaking a sweat. It also gives you the flexibility to focus on finding a job that you enjoy rather than feeling like you need to take the first thing you find just to have money coming in.

 

4. Protect yourself from the worst-case scenario

If you’ve done all the work to understand and practice the principles of financial security, it’s important to protect yourself from the absolute worst-case scenario. What if something happened and you couldn’t work for years – or at all? Having insurance (life, disability and/or critical illness) means you won’t have to worry about a potential catastrophe blowing up the security you’ve created for yourself and your family.

Now that you know the basic principles of financial security, let’s come back to your question, “Will it be enough?”

 

How much is enough?

I said before that if you’re in the habit of spending less than you earn, you’ll always have enough. This is true, but it assumes your income meets a certain minimum threshold to sustain your needs. I’m not trying to say that you can live happily ever after on $1,000 per year. In order to know how much income is enough for you, you have to be really clear on what your ideal living situation and your future goals will cost you and plan accordingly. Once you know exactly how much you want to spend every year, it’s then just a question of math to calculate if your settlement fund will be able to generate that, and if not, then exactly how much you’ll need to earn.

At the end of the day, I believe that “having enough” boils down to two key things: being clear on your values and spending accordingly. It’s not about having enough for everything and anything. Rather, it’s having enough for what matters most to you. And often, what matters most are the things money can’t buy.