The Time Value of Money in a Rhode Island Divorce
- posted: Sep. 02, 2021
- Asset Division
One of the most complex aspects of a divorce is the distribution of assets and property. The more assets a couple has in their marital estate, the more complex it can become. Complicating divorce finances, even more, is the fact that money can decreases in value over time. The interest rate that funds in a retirement or other financial account earn often fluctuates; the equity in the marital home or other property can also fluctuate, depending on the market.
This is why it is important for anyone going through a divorce to understand the concept known as the “time value of money.”
The Time Value of Money
The time value of money is a concept used by economists to calculate how much a certain amount of money at one time would be worth at another time. Just going through a divorce does not require nuts and bolts knowledge of how to figure out the time value of money but understanding the basic principles can help people make smart decisions when it comes to dividing up the marital assets and property.
The basic idea behind the time value of money is that there are a variety of things that make money worth more now than that same amount of money in the future, including lost profits, risk, and inflation.
When it comes to lost profits, money that people have can be invested for a profit. Even money that just sits in a savings account earns interest. The problem of risk relates to the risk that the payment will not actually come through. As promises of payment get made further and further into the future, more and more potential obstacles for payment appear. One example of a potential obstacle is a spouse who is obliged to pay suddenly losing their job or falling ill.
The final problem is one of inflation, which creates issues because money loses purchasing power over time during the ordinary growth of the economy.
How Does This Apply to a Divorce?
This general decrease in the value of money over time is important in divorce because much of the property division process involves negotiation and tradeoffs between current obligations and those in the future.
Let’s take for example a couple who have a marital home valued at $300,000 and a $400,000 retirement account. Those two large assets are now part of the marital estate that needs to be fairly distributed in their divorce settlement.
Comparing these two major assets can be difficult for a number of reasons. The marital home provides unique benefits, but there are also the upkeep expenses associated with homeownership. Another difficulty in comparing these two is that the current value of the home is immediately available, but the retirement account may not be accessible for decades.
When negotiating asset and property division in your divorce, there are key factors you should consider. The financial circumstances you are under right now will not necessarily be the same financial circumstances you will have in the future. Some of these factors include your current health and if it affects your ability to work, how close you are to retirement, and what your future financial goals are.
For example, many people are adamant that they want the family home in a divorce settlement so they are willing to trade off their share of other assets with their spouse in order to obtain sole ownership. However, before making that kind of agreement, it is important to understand that your household income is likely going from two paychecks to one paycheck. Before making this decision, consider whether you will be able to afford the mortgage, property taxes, insurance, upkeep costs, and potential repairs on just your income. If your current mortgage is joint with your spouse, you will also be required to apply for a new mortgage in your name only.
Let Our Family Law Firm Help
All of these financial decisions that need to be made in a divorce can be stressful. This is why it is important to work with a skilled and dedicated Rhode Island divorce attorney, who will ensure that your best interests are protected in any divorce negotiations.
Call Kirshenbaum Law Associates at 401-467-5300 for a confidential consultation.