Starting Your Financial Life Over After Divorce
By Andrea Murad
The divorce process isn’t just long and stressful, it’s also expensive.
Once a divorce is finalized, the participants are often left picking up the financial pieces and establishing a new budget as a single person.
“There will always be things you could have done better in the divorce, but don’t dwell on them—focus on the positive,” says Randy Kessler, founding partner of Kessler & Solomiany.
The first step you should take is to evaluate your income sources and create a new budget.
“You’re transitioning to a different lifestyle,” says Joseph Montanaro, certified financial planner at USAA. “You may have to adjust retirement and other long-term goals based on your new situation.”
Everyone has a hard time adjusting to a budget, says Suzanna de Baca, vice president of wealth strategies at Ameriprise Financial. She suggests evaluating your spending habits and identifying any areas that can be trimmed back if necessary. “If you’re going from two to one income, you’re going through emotional turmoil and it’s very easy to fall into ‘budget denial’.” In the wake of divorce, recalculate those fixed expenses and allocate what you can as discretionary spending.
As you create your new plan, experts suggest opening your own savings, checking and retirement accounts and changing ownership of houses and cars. Also, close all joint accounts and refinance any mortgages and loans you received in the settlement.
Update Estate Plans
Most couples name their spouse as the beneficiary for insurance and retirement plans, so be sure to change the name as soon as you can. Also be sure to review any wills, end of life decisions and any other legal documents naming your ex as a beneficiary or legal partner.
Reassess Your Insurance Needs
If the divorce leaves you without health insurance check with your employer to see if you can immediately enroll in a plan. A divorce is considered a major life event so you generally have up to 60 days to sign up for coverage depending on your plan.
If you don’t work or are ineligible for insurance, purchase COBRA through your ex-partner’s company, recommends de Baca. COBRA provides a temporary continuation of group health benefits.
Be sure to have enough insurance to meet your children’s needs if something were to happen to you. Most companies offer group disability that typically covers 60% of your salary but it doesn’t cover bonuses and is after taxes, evaluate whether you can live on this number.
Now is also a good time to revisit your long-term care insurance policy. “Since you’re solo, look at coverage options in case something happens to you and you need long-term care,” says de Baca.
Get Out of Debt and Rebuild Credit
“A lot of people do come out of divorce with debt,” says Certified Public Accountant Tracy Stewart. Review all your debt and create a plan to pay it down starting with the balance with the highest interest rate. “Once you’ve paid off debt, put it towards another debt or savings—don’t spend it,” she adds.
Experts suggest checking your credit report for inaccuracies and creating a plan to repair a low score. But Kessler warns to take a balanced approach to improving the number. “Don’t liquidate all your assets just to restore your credit. It’s better to have poor credit with cash in the bank than good credit with no cash in the bank.”
Your next step should be to establish credit lines, says Montanaro. If you didn’t manage credit well as a couple, secured credit lines can help you rebuild your credit since the limit is based on a deposit you made in a CD.
Make Saving a Habit
Saving can be hard with just one income, but it’s important to make yourself a priority, says Stewart.
“Pick two or three spending categories that are discretionary, like entertainment and clothing, and try to trim those by a percent or dollar amount and direct that money to your savings,” she says.
If possible, increase your 401(k) contribution and if you’re not eligible for an employer-based retirement plan, open a Roth or traditional IRA.
As you put money aside, review your asset allocation, says de Baca. “If it’s just you and you’re less risk averse, look at the mix of fixed income, equities, cash or other investments.” Revisit your portfolio on a regular basis and make adjustments for your own risk tolerance and not your risk tolerance as a couple.
Fall Into a Financial Routine
Monitor your cash flow-what you’re earning and what you’re spending—by downloading credit card and bank account statements into budget software or a website. Create your personal balance sheet and list what you have and what you owe and review the information annually to see whether you’re headed toward your goals.
Limit Court Time With Your Ex
Don’t rush back to court because your ex is five days late on a payment or continues to drop off your child a few minutes late, says Kessler. “You’ll spend more money on a lawyer than you’ll get back.”
If money’s very tight, don’t spend money on lawyers unless it’s really important to you. It’s easier on your wallet if you resign yourself to the fact that there will be small inconveniences and accept these.