Succeeding with Money in Divorce: Low-Cost Investing

There comes a point in many divorces during which people think they will never get out from under the stress of things. They think it’s too much to bear and they’ll never be successful with anything again.

This is a story we tell ourselves, and it’s not true.

You’ll succeed after divorce. You’ll succeed with your relationships. You’ll succeed with your faith. You’ll succeed with your children. You’ll succeed with your money.

It’s about the last of those statements I want to talk about for a moment.

Saving

Money is very important during and after divorce, primarily because there never seems to be enough of it.

After divorce, creating wealth is no longer a shared enterprise, so it falls on you.

People think wealth is created by saving money, and that’s partially true. You should be saving everything you can. (If you have debt, make sure to pay that off first, then start saving. For a blueprint for paying off debt, read here.) But saving will only get you so far.

Investing

For real wealth creation, you have to invest your money.

Now, most people invest their money in mutual funds and 401(k)s. These are good options if you do things correctly. Unfortunately, most people don’t.

Most mutual funds charge high fees (about 2.3% per year of the amount invested), which really siphons off your money (possibly tens-of-thousands over the years). Most 401(k)s are even worse, charging 401(k) plan administration fees on top of the already high mutual fund fees they make you invest in.

There’s a better way.

There is an increasing number of mutual fund companies (Vanguard is the standard-bearer) that charge low fees and offer very well put together index funds. Index funds are mutual funds built to approximate the stock market as a whole, or a portion of the market.

And since about 96% of mutual funds don’t perform as well as the market does over time, index funds usually provide better returns at a much lower cost.

Personally, I only invest in index funds. Over the years, this approach will save you lots of money in fees, which will mean more money in your pocket.

Robo-advisors

But how do you decide where to invest and how to allocate your investments (in other words: how to divide up your money in to different investment types)?

Traditionally, you had to find an investment advisor. This advisor would charge you 1% or more per year to help you invest your money. 1% doesn’t sound like much, but when the average mutual fund charges around 2.3%, you’re already at 3.3% of your money gone every year, right off the top.

If your investments gained at 7% per year (not a bad clip), then you’d really only be up 3.7%. That’s not good.

Enter the robo-advisor. Robo-advisors are companies that utilize software to cut costs and maximize returns.

They steer clients to low-cost index funds and determine how risky you like your investments (your risk tolerance) before giving you a portfolio of investments.

While most investment advisors charge 1% or more, a good robo-advisor averages around .25% or .35%: significant savings.

Robo-advisors offer nice features, like automatic asset reallocation and tax loss harvesting. It’s a “set it and forget it” model, which is really appealing to people like me who don’t like to fret over their investments all the time.

The other nice thing about robo-advisors is they don’t charge much to start investing. Many have no bottom limit, which means you can start with $1.

Which Robo-advisor to Choose

There are an increasing number of robo-advisors cropping up. The biggest two right now are Betterment and Wealthfront.

I’ve studied both, and both are solid choices. We recently invested our son’s mission fund in Wealthfront. I think it provides some better services at a better price for those who start by investing modest sums.

Another great option for ultra-low-cost is WiseBanyan. This company requires $10 to start investing and charges no management fee. Yep, no management fee. Now, if you want cool stuff like the automatic asset rebalancing and tax loss harvesting, you will need to pay a fee (there is never a completely free lunch), but if you don’t feel you need services like that, WiseBanyan is a fantastic option.

For a 2016 comparison of the best robo-advisors, click here.

Where to Start

Start where you are. If your divorce left you with debt, pay that off first.

If you don’t have debt, but don’t have much money sitting around to invest, start investing $5 per week. Promise yourself you’ll increase the amount you save whenever you can. It’s amazing what investing just $35 per week can do.

It’s easier now than ever to invest well and at low cost. Take full advantage of that. Your kids will thank you.

(Note: I’m an attorney, which means I’m not a financial analyst. Take what I say with a grain of salt. Do your own research before investing. There are lots of great books on the subject. One of my personal favorites is Master the Game: 7 Simple Steps to Financial Freedom by Tony Robbins.)