Going through a divorce often triggers financial upheaval. Dan Burges, a financial adviser and Certified Divorce Financial Analyst (CDFA), explains, “Everything is different. Even if you are in the same house and same job, it is different. Your bills aren’t cut in half, but your income might be. You may even be spending more for child support and alimony.”
Post-divorce is an important time to re-evaluate your financial life, take essential steps to re-assess your finances, and position yourself for future financial security.
1. Set up new bank accounts
If you haven’t yet done so, now is the time to establish your own separate bank account. It is important to change any passwords and PIN numbers on any accounts to which your ex-partner may have previously had access. If you have moved to a new home, post-divorce, make sure you update the address on all of your financial accounts, including credit cards, store cards, mortgage payments, investment accounts, etc.
2. Inventory your financial life
It’s time to account for everything: income, expenses, assets, and liabilities. Accurately recording your financial details is the first step to improving the management of your financial life. Begin by creating a spreadsheet of all your income sources and personal expenses, including those related to your divorce, such as alimony and child support. It may be useful to note which expenses are discretionary versus non-discretionary, as this will help you see where you have opportunities to reduce your spending or invest for the future. You should also list your assets, such as investment and retirement accounts as well as any liabilities, including the mortgage on your home. Make notes for each type of account, who owns the account, interest rates, contact information, current value, etc.
While this does requires valuable time, having all this information in one place will help you understand your current financial position and set realistic goals for the future. This will give you a greater sense of control and empowerment, and help you stay calm during this stressful time!
Beware of little expenses. A small leak will sink a great ship.
- Benjamin Franklin
3. Budget, budget, budget
After a divorce, adjusting to your new finances might take time. This is where the financial inventory helps you see whether you are spending your hard-earned income in the most efficient and effective way on the things you value. Only you can determine whether you are spending wisely, but a budget is a useful tool to keep you on track.
After a divorce, you may find it is best to be conservative and err on the side of caution. Reduce expenses where you can and set aside resources in case unexpected expenses emerge. A “rainy day” fund can help ease stress when an emergency financial situation arises. Many experts recommend having three to six months set aside as a safety net for unexpected events, such as a job loss or health emergency.
You may also consider working with a financial planner to set a realistic budget and track where your money is going. This is one of the most important pieces of financial information you will have in order to manage current and future financial security. Don’t leave your financial future to chance.
4. Protect your credit
Keep track of your credit score and report any mistakes you notice. For any credit cards issued in both names, contact the issuing financial institution to have one of the names removed to limit any liability or impact on your credit. If necessary, you can also cancel the credit card, but consider this carefully as it may impact your credit score.
Think about other factors such as joint expenses for a mortgage, auto loan, or lease. Remember: even if your divorce agreement specifies that your ex-spouse is responsible for a debt, if your name also appears on that debt then it may affect your financial obligations and credit score.
5. Update your beneficiaries and important documents
Unless your divorce agreement requires naming your ex-spouse as a beneficiary, update beneficiary designations on your life insurance policy, 401k, IRA’s, and other financial and investment accounts.
Make updating your Will, Living Will, Healthcare Proxy, and Power of Attorney a priority. If you didn’t have these legal documents in the past, now is a great time to set them up and get both your legal and financial affairs in order.
Keep in mind, you will need to give thought to whom you wish to name as an executor to manage your estate, a guardian for any minor children, and whom you will choose to make health care and financial decisions, if you are unable to do so. If your former spouse has power of attorney, you may need to revoke it in writing. Each state has their own requirements with respect to these documents, so be sure to consult an attorney experienced in these matters.
6. New financial professional
Married couples often share financial and tax advisers. Keeping the same professionals after a divorce is a very personal decision. You need to feel confident that your adviser has your best interests in mind and their recommendations won’t be based on the past. You will want to work with an experienced professional to help you navigate and plan based on your current reality and future goals.
Even if you are used to managing your finances, you may want to consider working with a professional the first time you file your taxes or while you are adjusting to your new budget.
The bottom line
Handling your financial life after divorce begins with a realistic evaluation of your current situation. It can be difficult to face, but must be tackled head-on. If you feel overwhelmed, ask a trusted friend or relative to help get you started.
Determining where you are, where you want to go, and how to get there, will take time. By taking the steps mentioned here, you can begin to get back on track and regain control of your financial life.
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