Making Lemonade With Lemons: How to Invest Your Divorce Settlement Money

It's generally advised to keep emotions out of investing, and there may be few times in life more emotional than a divorce. Before you make any big money moves post-divorce, allow some time for the dust to settle—but then it is important to come up with a plan. 

We'll walk you through the choice of whether to invest your divorce settlement and how to do it so you can start off this new chapter of your life on the right foot.

Divorce can reconfigure a lot of parts of your life, and your financial situation is no exception. If you're thinking about investing after your divorce, perhaps your divorce settlement money, make sure you take care of some of the following financial to-dos first.

Pay off high-interest debt

High-interest debt, as you might have guessed, is debt with a high interest rate—in other words, it's expensive debt. There really isn't any universally agreed upon benchmark for when a debt becomes high-interest; some say it's if the APR reaches the double digits, while others say anything above typical mortgage (around 4%) or student loan rates (closer to 6%) is high.

Regardless, it's important to pay off your debt with the highest APR first, as this will generally save you the most money over the long term and free up more funds to address your other financial priorities. If you have a balance on a credit card with a 20% APR, for instance, you're paying a significantly higher rate on that debt than what you'd likely earn if you were to invest instead. Plus, paying off debt gets you a guaranteed return in the form of interest saved, whereas with investing, returns are never guaranteed.

After your divorce, consider listing out all of the different types of debt you have and their respective APRs. Then, identify which one has the highest rate so you can get that paid off first.

Fill up an emergency fund

Another important money move post-divorce is ensuring you have an adequate emergency fund. As your divorce may have taught you, life can throw you curveballs and you want to be prepared for them, whether that means an unexpected medical bill or your car breaking down on the way to work.

In general, most experts recommend that you have at least three to six months in your emergency fund. This estimate should include costs such as housing, food, health care, utilities, personal expenses, transportation and debt. You can keep this fund in a savings account that earns interest to make sure you're getting the most out of your money.

Consider paying off other debt

Once you've paid off your high-interest debt and have a nice emergency cushion built up, you might consider putting your money toward non-high-interest debt, like your mortgage, auto loans or student loans, if you still have those.

Of course, there are pros and cons to consider before dumping all of your money into, say, paying off your mortgage instead of investing. While you might get peace of mind from being debt-free and will no longer be throwing away money on continued interest payments, investing that money could produce higher returns. Assess whether paying off lower interest debt is really worth the cost of forgoing other opportunities.

Tie up any financial loose ends

Post-divorce, you'll also want to look around and see how your financial situation may have shifted and whether you have any financial loose ends to take care of. For instance, do you no longer have health insurance coverage now that you're not on your spouse's plan and need to get it? Did you have a joint insurance policy or any joint credit cards that you'll now need to cancel? You'll also want to keep track of any assets or debts and how they're being transferred, and remember to check in on your estate plan.

Make sure you have enough to live off of

This might seem like a simple step, but it could easily get lost in the financial shuffle after your divorce. With a divorce, your financial reality has likely changed, whether that's no longer having your partner's income to help cover household costs or needing to worry about child support or alimony payments. 

If you're working on a smaller budget, remember to adjust accordingly. Especially during the transition period as you're getting a feel for everything, consider keeping your money in savings where it's more easily accessible rather than tying it up in investments to ensure you have enough money to fund your lifestyle.

Whether you should invest your divorce settlement really depends on your financial position post-divorce. If you've paid off any high-interest debt, have a healthy emergency fund, know you have enough to live off of and have tied up any financial loose ends, you may be in a good position to consider investing.

Saving for retirement and investing can become particularly important in the face of a life transition like divorce. You might be going from a dual to a single income, or you may be facing some new financial hurdles like managing investments on your own. You're now the only person in charge of your financial future and your retirement. This is why it's important to take initiative.

Being the only one calling the shots when it comes to investing may seem daunting, but it also means you can work based only on your own goals and risk tolerance rather than negotiating with your partner. This makes it even more important to define those things for yourself.

If your spouse always handled the investing, you'll want to do some research before you dive right in. Read up on different asset classes—from the basics like stocks and bonds to alternative assets such as real estate and farmland—to see what makes sense for your portfolio. If you're feeling overwhelmed by all of the information, you can always turn to a financial professional with questions or to get assistance.

If you feel like your financial needs are adequately covered and you're thinking investing is the right move for you, here are some ways you could consider investing a divorce settlement. But remember — it's crucial to make sure you have your financial basics covered before you shift your attention to trying out new investments.

Make sure to transfer retirement account funds properly

First things first: If your retirement accounts, like your 401(k) or IRA, are split, make sure to transfer those funds into another retirement account unless you absolutely need that money for an emergency. You'll want to keep that money in retirement accounts if possible because if you take it out, you'll not only lose out on the associated tax advantages and potential returns, but you'll also incur some hefty early withdrawal penalties.

Max out your tax-advantaged retirement accounts

Now that you're no longer pooling your retirement funds, it's all on you to make sure you have enough to retire when you want to, which is why now might be a better time than ever to max out your retirement plans. This will ensure you're reaping all of the tax advantages as well as any employer matching contributions. 

There are limits to how much you can contribute. In 2021, the limit for 401(k) plans is $19,500, while for IRAs it is $6,000. You could be eligible for catchup contributions as well, which would increase those limits.

Try investing in the stock market

Another option is to try your hand at investing in the stock market. Before making any moves here, it is imperative that you do your research.

You might test the waters by investing in popular stocks that historically perform well, like Coca Cola, Amazon or Apple. If you'd rather not do the picking yourself, there are robo-advisors out there like Betterment and Wealthfront that automate investing based on your risk tolerance and goals, or that even allow you to buy fractional shares of big companies if you don't want to go all in on a full stock and just want to experiment with owning a portion of a share.

Consider real estate

Real estate is another option for investing your divorce settlement. You could use the money to make a down payment on a house. Or, you could use the funds to purchase a rental property, giving you a passive income stream moving forward. 

Another way to invest in real estate is through buying REITs, or trying out one of the numerous real estate investment platforms that are out there. For instance, a platform like HappyNest lets you invest in commercial real estate with as little as $10.

Give alternative assets a try

You could also investigate the possibility of investing in alternative assets. Before proceeding here, it's important to keep in mind that doing so does require research and that alternative assets can be high-risk, which means it might not be right for an investor who isn't able to withstand a loss. While you don't want to put all your money into a new asset right off the bat, these assets can help you diversify your portfolio, so you could set aside a small portion of your divorce settlement to play around with.

There are a number of platforms out there if you are interested in exploring the world of alternative assets, which can range from startups and crypto to art, wine, farmland and even sports memorabilia. With a platform like Masterworks, you could buy shares in art masterpieces, or you could explore your love of wine in a new way by buying and selling investment-grade wine through Vinovest.