The process of divorce is rarely something people make financial plans for until the event itself becomes a reality.
While the emotional and mental pain of divorce is unquestionably brutal, the financial aspect of legally separating can cause even more suffering if not handled in a responsible and fair way. Having frank and compassionate conversations with your former spouse about money and making levelheaded plans with your financial advisor about moving forward as a single person or single parent can diminish the financial impact of divorce on all parties.
There are even specialized wealth management professionals called divorce financial advisorswho have singular expertise in the field of post-separation financial rehabilitation. If you do not already have a money management provider at the time of your divorce, this may be the sort of immediate help you require to make the best of a hard situation and protect your financial future. Focusing on certain key categories of post-divorce financial well-being can bring you the confidence to move forward in your new life while exerting your financial freedom to maximum personal benefit.
The hardest financial aspect of divorce is that you are making the shift from viewing finances as a team to creating a budgetary life that includes only yourself and possibly your children. There is a tremendous amount of pressure associated with this transition that your professional financial planning advisor can help alleviate by keeping you on a progressive budgetary track with your money.
The first step to financial freedom after divorce is to cancel joint accounts and open individual accounts. It is helpful to make an itemized list of all joint accounts you held with your former spouse and to determine which of those accounts you want to replicate now that you are on your own and which you want to cancel entirely. Make certain that you either have enough cash reserves on hand or access to immediate new credit cards while your divorce is finalizing to avoid financial discomfort in keeping up with basic needs.
Work with your financial planning representative to come up with a new budget for your solo income and your part of the support of any children involved. Make places in your budget for alimony where necessary and remember that alimony is tax deductible for the recipient while child support is not. Speak with your financial advisor about new overall tax projections as well so that you can work all of the above into your new routine budget and not be hit with challenging large expenses all at once.
Among the more difficult shifts that must take place after any divorce is the potential change to your lifestyle. Divorce often means that your budget becomes stricter and limitations are imposed on your available funds for everything from transportation to coffee. You may have to downsize your home or vehicle, cut out certain hobbies or pastimes and even be more careful about grocery spending.
Have a frank discussion with yourself and your children about these changes. Be ready to tighten your belt and do without luxuries that you have become accustomed to in a dual-income household. Talk with your financial planning advisor about how to prioritize your financial well-being as a single person, with all of your future goals laid open on the table. If you want or need to go back to school to further your education and advance your career, be ready to cut other corners to work that into your budget.
Sacrifices lead to success in post-divorce financial planning. Bring copies of your past year’s bank and credit card statements to your financial planning advisor so that the two of you can take a close look at your spending and saving habits while you were married to try and replicate as optimal and least disruptive a single alternative for you as fiscally possible.
Most financial planning advisors will tell you that the first thing you need to do for your financial health after a divorce is to change your beneficiaries on all retirement, investment and insurance accounts. Failure to do this, even after a significant amount of time has passed since the divorce, can mean that your former spouse is entitled to the assets in those accounts.
Speak with your estate lawyer about naming legal and medical proxies for yourself and guardians for your children in the event of serious illness, medical crisis or death. Go over your insurance coverage (life, medical, disability, long-term care, automobile, homeowners, etc.) with your financial advisor and make sure that you have enough to securely provide for your needs and the needs of your children in all relevant categories.
A good financial planning advisor will always tell you to pay yourself first when it comes to savings. Now that you will be the sole arbiter of your financial health, you cannot afford to skimp on savings, even in early months when you feel as though you do not have a penny to spare.
Speak with your wealth management representative about an automated savings plan that either sets funds aside in a basic emergency account or even invests them in a very short-term, interest-accruing bond. This takes the choice of saving out of your hands and guarantees that you are building the kind of cash assets that provide true financial security.
Cash reserves are an absolute imperative coming out of a divorce. The minimum you should have in available cash reserves is six months’ worth of full living expenses, including every type of insurance and utility in your budget. Disability insurance also becomes very important after divorce. For many newly single clients, this is the only safeguard they have against feeling totally financially vulnerable in the event that they become unable to work or suffer a financial setback.
Talk to your financial planning advisor about your willingness to negotiate risk in the diversification of your savings. It is typically thought to be less lucrative in the long run to put all of your budgetary eggs in one basket, and it may be that allocation of some of your savings into various other types of Roth, IRA or 403(b) accounts will do you more overall financial good. Remember to be open with your financial planning advisor about your long-term financial goals so that the financial headache of divorce can be kept to a minimum and your best interests secured as you move forward with the next chapter.