Preparing for Divorce Part 6: Prepare a Post-Divorce Financial Plan
We’ve talked at length about finances in our previous two posts on preparing for divorce, and in this installment, we are going to wrap up our discussion about economics by focusing on your financial plan going forward after the divorce is over. We touched on this in Part 4 of our series when we talked about creating your post-divorce budget, but your financial life is much more than just tracking your income and managing your expenses.
Your budget is one of the fundamental pieces of your post-divorce financial plan, but it is far from the only piece. Having a budget will help ensure that you meet all your monthly obligations and hopefully have something left over for discretionary spending. This is an important first step for many divorcees, especially for those who relied on their spouse to handle the finances during the marriage and had very little experience in this area of themselves.
Having a budget is a confidence builder; it proves that you can and will adjust to life after the divorce and you will be able to keep things together. As most people are worse off financially after a divorce is finalized, you will likely be facing some financial challenges at this point. Your budget gives you an organized structure that keeps you disciplined and allows you to focus on the four essentials:
Financial guru Dave Ramsey refers to these essentials as the Four Walls. Once you have ensured (through your budget) that these walls are covered, you know that you and your family will be fed, clothed, and have a roof over their heads, and that you will have a way to get to and from work. And with the four walls covered, you can start to take on larger financial objectives.
Aside from your budget, here are some other areas to address when preparing your post-divorce financial plan:
Closing Joint Accounts
There may be some unfinished business from your marriage that needs to be cleaned up. Among these items may include bank and/or credit accounts that are in both of your names. Read the divorce decree carefully to determine how the assets and debts are to be divided. Next, complete account transfers to your spouse in accordance with the decree, if applicable, and open individual accounts (if you haven’t already) for the assets and debts that you are supposed to keep. This may include the home mortgage and/or any home equity lines of credit if one spouse is keeping the marital home.
Along these same lines,if you are changing your name after the divorce, it is best to wait until all transfers of ownership are completed before updating the name on the account. Account transfers can already be complicated and take a bit of time under normal circumstances, and adding a name change along with the transfer could cause unnecessary delays.
Addressing Tax Implications of the Divorce
Your divorce is likely to have various tax consequences. For one thing, your tax filing status will eventually change to “single” or “head of household” for as long as you remain unmarried. You may also find yourself in a different tax bracket, which could affect how much you pay and which deductions and credits you qualify for. Finally, the sale of some assets may have tax implications. Speak with your CPA about divorce tax consequences to help ensure that there are no unpleasant surprises come the following April. If you do not have a CPA, ask your divorce attorney to recommend a reputable tax professional who can help you with this.
Life happens, and unexpected events will inevitably occur that will set you back financially. An expensive car repair, medical bills, traveling to be with a sick loved one, and many similar challenges will arise as time goes on. It is best to try to prepare for these in advance by putting aside a portion of your disposable income into an emergency fund. Build up this fund at whatever pace you can afford; the important thing is to have something put aside in case of an emergency. That way, you will not have to rely on your credit cards and go deeper into debt when something like this comes up. Ideally, you want to be able to save up six months to a year’s worth of emergency savings. But again, do not be discouraged if you can only afford to set aside a little bit at a time. Just commit that you will keep doing it until you reach your goal, however long it takes.
Paying Off Debt
While you are building an emergency fund, it is also important to try to get rid of your debts. In particular, you want to tackle high-interest unsecured debts first, such as credit cards and personal loans. Start with the loan with the lowest balance and put whatever extra you can afford each month toward paying it off. Then take that same amount and apply it to the loan with the next highest balance, and so on. This may be a multi-year process in some cases, but if you keep at it, you will eventually be able to get rid of your unsecured debts.
Investing for Retirement
After you have paid off all your debt and have your emergency fund in place, it’s time to get serious about funding your retirement. Even before then, if you have a 401K plan through work, you should at least put enough of each paycheck into the plan to receive the full amount of your employer match, whatever that is. This is free money that your employer is giving you for your retirement, so it is best to take advantage of it. Once you are debt-free and your emergency savings is funded, you should be able to up your 401K or other retirement plan contributions significantly.
Seek Help from a Qualified Financial Advisor
We have discussed some of the basic steps you can take to set up your post-divorce financial plan. However, there are several other areas that we do not have time to cover in detail here that may apply to your situation; such as stocks and bonds, real estate investments, family businesses, life insurance policies, college savings plans for your kids, and many others. These are all areas that a reputable financial advisor will be able to assist you with.
In our last post, we talked about getting help from a financial advisor who is a member of either the Institute for Divorce Financial Analysts or the Association of Divorce Financial Planners. This type of professional will not only be able to help you with your finances during the divorce process, they can also help you create a comprehensive plan for the rest of your life. If you are not sure which financial advisor to choose, ask your divorce attorney to recommend one for you.