If you’re going through a divorce, you are likely aware that divorce can instigate a series of changes in your life that can seriously impact your financial outlook. The stress of navigating through unexpected lifestyle changes and budgeting for expenses can be overwhelming. Financial instability is a common side effect of divorce, so it is important for those affected to take proactive steps towards securing their financial future.
It is understandable that those facing divorce may feel overwhelmed or uncertain about the significant changes they will inevitably experience in their life, especially financially. Fortunately, there are several practical measures that a person going through divorce can take to help ensure their long-term financial wellbeing. Here are 5 essential financial decisions that can help you gain control and recover from divorce:
#1. Create an Emergency Fund
Building, maintaining, and even shoring up an emergency fund is one of the most important financial decisions that anyone going through a divorce can make. During a divorce, this fund can be used for any unexpected expenses associated with the divorce process, such as filing fees or legal costs. After a divorce, it can serve as a fallback if you lose your job, have unexpected car repairs, or find yourself facing medical bills. It can also provide peace of mind knowing that you will have funds to rely on if anything unforeseen happens.
When creating an emergency fund, it is important to start with a realistic budget and determine how much money you can set aside every month. It is wise to put this money into a separate account that is accessible when necessary, but where you won’t be tempted to withdraw from it on a regular basis. Having access to liquid assets during a difficult time can help alleviate some of the stress associated with unexpected expenses and provide resources in case of an emergency.
Here are some tips on how to create your own emergency fund:
- Start small and build up your savings gradually: Building up a sizeable nest egg may seem overwhelming at first, but don't let that stop you from starting small and contributing regularly until you reach your desired amount.
- Make a goal: Calculate what your necessary monthly expenses are and then work toward creating an emergency fund that would cover 3-6 months of expenses.
- Automate your savings: Automating your savings process will ensure that money is transferred directly into your emergency fund account every month as soon as it arrives in your bank account. This will help prevent unnecessary spending and make sure that you are always saving towards your goal.
It is important to have a buffer of funds in case of unforeseen events or emergencies that arise following the divorce process. Having a few months' worth of living expenses saved in liquid accounts can provide peace of mind, allowing you to focus on other aspects of your life without worrying about where extra money will come from if needed.
#2. Review Your Creditworthiness
Reviewing your creditworthiness is an essential step to take in the midst of a divorce. It is important to assess both your individual and joint accounts, as well as any liabilities such as joint mortgages or loan payments. You need to be aware of any lingering debts that may continue after the divorce is finalized.
Here are some tips on how to review your creditworthiness:
- Request copies of all your credit reports: Requesting copies of all individual and joint reports from each major credit bureau is a great starting point. This will allow you to identify any discrepancies, old accounts, or lingering debt that needs to be addressed.
- Review your past statements: Looking over previous statements allows you to identify any forgotten debts or liabilities that could have been overlooked during the divorce process. It can also help you develop a better understanding of where your funds are going and what needs to be done in order for them to be taken care of properly.
- Acknowledge any shared debts and liabilities: Knowing which debts are still in both names should be a priority, as this ensures that all parties involved understand who should pay what portion of the debt. Any remaining balance has potential implications on both parties' future finances, so it is important for both individuals to be aware of their responsibilities here.
You should also be sure to double check your credit reports and confirm that you have been removed from any joint accounts and vise-versa, as well as updating any addresses, names, or other information that has changed due to the divorce. It’s essential that this information be accurate as you don’t want to be responsible for any ongoing debt your ex-spouse accrues after your divorce is finalized.
#3. Budget for Post-Divorce Expenses
It’s not uncommon in marriages for one person to be more involved with managing expenses and finances than the other person. While this division of labor might work within the confines of marriage, it can make it hard for some people to adapt to managing their own finances post-divorce. If you are unfamiliar with managing your own finances, one of the most important steps you can take is to make a budget.
The first step in creating a budget is to determine what your income and expenses will look like after the divorce is finalized. This includes tracking all of your income sources, including any alimony or child support payments. After you understand what your total income is, you should track your expenses. Some people find that categorizing these expenses can be helpful, and there are apps such as Mint and You Need a Budget (YNAB) that can help with both tracking and categorizing expenses. Most importantly, however, you should have a sense of what your essential monthly expenses (e.g. rent, utilities, and groceries) are as opposed to discretionary expenses (e.g. entertainment and dining out). Once you have an understanding of your financial situation, you will be able to create a realistic budget that takes into consideration both necessary and discretionary spending. The goal is to have your expenses be less than your income so that you are able to save a portion of your income.
Here are some tips on how to budget for post-divorce expenses:
- Track all incoming and outgoing payments: Keeping track of all incoming funds can help you better understand where your money is going each month, allowing you to make adjustments if needed. Tracking expenses should also include both fixed costs such as rent or utilities as well as variable costs such as groceries or entertainment.
- Allocate funds for essential items: Establishing a portion of funds specifically for essential items can help ensure that these necessities are taken care of first each month. This could mean setting aside an amount for monthly bills, groceries, or other necessities before allocating money towards other nonessential items.
- Prioritize long-term savings: While creating a budget following a divorce, it is important not to forget about long-term savings goals such as retirement accounts or college tuition funds for children. Allocating a portion of your income towards these goals each month will eventually lead to larger returns in the future and provide more financial stability down the line.
Creating and adhering to a post-divorce budget will help you manage your finances effectively during this time of transition while also preparing you for future success financially. Taking control of your financial situation can play a major role in feeling secure when everything else seems uncertain, so it is advisable to review your finances regularly and make sure they remain on track with your goals.
#4. Reassess Your Insurance Coverage
After going through a divorce, it is important to reassess your insurance coverage to protect yourself and your assets. While the process may seem daunting, it can be made easier by focusing on three main categories: life, health, and property insurance.
Life insurance provides financial protection for both you and your loved ones in case of an untimely death. When reassessing life insurance policies after a divorce, it is essential to ensure that your beneficiaries are properly updated and that any joint policies are converted into individual policies.
Here are some tips on how to reassess life insurance coverage following a divorce:
- Update beneficiary information: Make sure that the beneficiaries listed on all policies accurately reflect those who should receive the funds upon death. In some cases, you may still want to keep your ex-spouse as your beneficiary, such as if you share children.
- Reevaluate existing coverage: Determine whether existing coverage is sufficient or if additional coverage is required following the changes brought about by the divorce. If additional coverage is needed, consider shopping around for quotes to find a policy with an affordable premium rate that meets your needs.
- Examine any prenuptial agreements: In some cases, prenuptial agreements may have stipulations regarding life insurance policies that need to be taken into consideration when reviewing current coverage.
Health insurance coverage can often be overlooked during the divorce process, yet it is just as important as other forms of insurance for protecting one's financial well-being. Ensuring that health care costs are adequately covered throughout and after the divorce process is essential to avoiding setbacks further down the line.
Here are some tips on how to reassess health care coverage following a divorce:
- Review existing plans: Take time to review all existing health care plans and determine which ones will remain valid following the divorce. Make sure all beneficiaries are up-to-date and that any changes required are communicated properly with employers or providers.
- Shop around for new plans: If necessary, look into new health care plans that best meet your needs and budget post-divorce. Consider both individual plans offered through employers or private providers as well as public options such as Medicaid or Medicare if eligible.
- Utilize COBRA options when available: COBRA allows individuals who have lost their insurance due to circumstances such as a divorce or job loss to continue their current plan for up to 36 months at group rates depending on eligibility requirements set forth by employers.
Property insurance covers losses caused by damage done to one's personal property due to theft or natural disasters such as floods or fires. It is important to reassess property insurance once you go through a divorce because ownership of certain items such as homes or cars may change hands between spouses during this period.
Here are some tips on how to reassess property insurance following a divorce:
- Transfer ownership of shared assets if applicable: If ownership of certain properties needs to be transferred between spouses during the divorce proceedings, make sure these changes are reflected in any associated property insurance policies accordingly.
- Look into new policies if needed for newly acquired assets: New purchases such as cars or homes require their own specific property insurance policy separate from any shared ones with an ex-spouse.
- Consider higher deductible rates for lower premiums: Increasing deductible rates can lower monthly premiums while still providing adequate protection against unexpected damages due to theft or natural disasters without breaking the bank.
Reassessing your insurance coverage is a critical step to take following the divorce process in order to ensure adequate financial protection for yourself and your assets. Taking the time to review all current policies, updating beneficiaries, as well as examining new plans and policies will help provide stability during this transitional period.
#5. Save for Retirement
Retirement savings may not be top of mind when going through a divorce, but it is important to remember that you are ultimately investing in your own future. Especially if you were expecting to rely on your spouse’s retirement plan for future income, it’s important you begin to start contributing towards retirement as soon as possible to secure your financial stability for the years ahead.
Here are some tips on how to save for retirement after a divorce:
- Review existing plans: Take the time to review any existing retirement plans and familiarize yourself with the provisions of the plan. This includes understanding whether you are due any portion of your ex-spouse's pension, 401(k), or other retirement accounts and vise-versa.
- Reallocate funds as needed: Depending on changes in living expenses and income following the divorce, it may be necessary to reallocate funds into different accounts to ensure that adequate savings are available when needed. If you have been aggressively saving for retirement, for instance, you may want to temporarily reallocate some of those funds into your emergency savings.
- Explore other options: In addition to traditional retirement plans such as 401(k)s, there are also other options such as Roth IRAs or SEP IRAs which may be better suited for your individual needs depending on your current financial situation. Exploring these options can help you find the best solution for your post-divorce retirement planning.
Planning for retirement should also include updating your estate plan. Even if you do not have children, it is important to create a will or designate beneficiaries to ensure that your assets are distributed according to your wishes upon death. It is also important to review all existing powers of attorney and other estate documents to make sure they accurately reflect your wishes.
How the Law Office of Alexandra White, PC Can Help
Taking proactive measures towards financial stability following a divorce is essential for long-term wellbeing. Although it may seem daunting at first, these five decisions are simple steps that anyone facing divorce can take towards securing their financial future. With the right planning and preparation, those affected by divorce can confidently move forward toward a better, more financially secure future.
At the Law Office of Alexandra White, PC, we understand that this time can be challenging and strive to help our clients make informed decisions about their financial future. We are committed to providing personalized advice tailored to each client’s needs to help ensure their wellbeing both now and in the years to come.
Our attorneys can provide comprehensive guidance on understanding all aspects of financial planning following a divorce, from budgeting and insurance coverage to estate planning and retirement saving. We are here to help you navigate any changes in your life with confidence and security.
If you are going through a divorce and want an experienced and compassionate legal advocate in your corner, contact us online or call us at (303) 647-4245 for more information about how we can help you move forward.