Opinion
I just got divorced. What should I do with the settlement?
Paridhi Jain
Money contributorI’m in my 30s and recently got divorced. This is the first time I’m managing my own finances. While I’ve always earned an income, previously my ex-partner managed the finances. I received a sum of money in the settlement of the divorce and I’m not sure what’s best to do with it. I’m currently renting, so I was thinking maybe I should buy a property. I don’t really know anything about investing or real estate, but I need a place to live, and hopefully it would also be a good investment. Where should I start?
Firstly, when you come into a lump sum of money, don’t be in a rush to do something with it. It can sometimes be a good idea to avoid doing anything at all for a few months so you don’t make any rash decisions.
Port-divorce, it’s best to not rush into any rash financial decisions you could regret.Credit: Simon Letch
Secondly, let’s talk about property. It can be tempting to think that since you have a lump sum of money, buying a property is a good idea.
However, just because you can now afford to do that doesn’t necessarily mean you should. There are a few things you mentioned that make me think you might want to slow down a little.
Home or investment?
Many people think that buying a property automatically makes it a good investment, so why spend money on rent if you can just buy a home which doubles as an investment?
It sounds like you’re wanting to buy a Ferrari before you’ve even learnt the basics of how to drive.
This mentality makes sense when you look at how property prices have performed over the last few decades. Anyone would be forgiven for thinking that buying any property is a good investment that would eventually lead to significant gains in the form of capital appreciation.
This isn’t how property works. Not every and any property makes for a good investment. So just because something ticks your boxes for being a good home doesn’t mean it will automatically tick the boxes for being a good investment.
One way to think about this is: just because you like buying clothes from a particular clothing brand doesn’t mean you should go ahead and buy shares in that company. The criteria you use for your personal preferences and the criteria used to determine whether something is a good asset financially are often different.
This is a mindset shift people are often reluctant to make when it comes to property because they like the idea of hitting two birds with one stone. It’s also easier to justify spending a little extra on buying a nice home if you can also tell yourself it’s a good investment.
Getting clear on whether you’re looking for a home or a property that will form part of your investment portfolio in the future will help you clarify your decision-making.
Focus on your financial house first
The pressure to buy a property as soon as possible can make you forget that you’re taking out a huge loan and making a decision that is likely to impact you financially for decades to come.
For this reason, it’s a good idea to have a baseline level of financial stability and confidence before you add a whole lot of complexity and pressure to the mix.
This looks like: understanding how to manage your income and expenses, and how to save money consistently. Do you know how big a mortgage you can afford to maintain?
Understanding whether you’re adequately insured, understanding your superannuation and the tax savings opportunities you could be leveraging through super, or having some idea of what your investment goals are can help you decide where property fits into that mix.
I’m not saying you have to have everything perfectly in order before you buy a property, but I am saying it sounds like you’re wanting to buy a Ferrari before you’ve even learnt the basics of how to drive. This can put you in a worse situation down the road if you feel overwhelmed, because you’ve taken on a level of responsibility you don’t know how to manage.
In summary, here are a few steps you can take that will help give you clarity:
- Start learning basic money management and organisation of your financial affairs (paying your bills, saving money consistently, tracking your expenses).
- Review and optimise the financial products you probably already have (superannuation, and you might have insurance in your super fund too).
- Be clear about what your investment goals are and where buying a property fits into that. Do you want to buy a home or build a real estate investment portfolio?
Don’t try to do all of this at once. Give yourself the time and grace to learn the ropes and build confidence one step at a time.
Paridhi Jain is the founder of SkilledSmart, which helps adults learn to manage, save and invest their money through financial education courses and classes.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
Expert tips on how to save, invest and make the most of your money delivered to your inbox every Sunday. Sign up for our Real Money newsletter.