MoneyTalk: Becoming Financially Empowered
January 18, 2023MoneyTalk: Being Money Smart When Going Through A Divorce
Are you going through a divorce, or are planning to get a divorce? Have you started looking at your personal finances and becoming money smart for a life post-divorce?
Divorce is a major unfortunate life event for any person. Dissolving the union with your partner is not only emotionally taxing but is also financially draining. Divorce will impact your current finances as well as your future financial growth as an individual. And if you have kids involved, you will have to become extremely careful and savvy with your money so that you can continue to provide for your kids and yet build a financially secure life for yourself.
Going through a divorce is a difficult process, both emotionally and financially, for everyone involved, and the longer a couple has been married, the more financially intertwined their lives are. Being honest about your financial situation with your partner is very important. If you’re in debt or have a lot of financial anxiety, it’s important to be honest with your partner about it. This can help them understand your perspective and make them more willing to work with you on the terms of the divorce settlement.
When going through the divorce, you may either work with a divorce mediator or go to court. Depending on the route you choose the division of your Assets and Liabilities will happen. Your attorney and the judge will decide how to divide debts and assets and whether to award child or spousal support. You need to prepare yourself to deal with the financial implications of how this pans out.
When someone is going through a divorce, it’s difficult to think about life post-divorce. Most people often consider how much money they’ll have to pay upfront for divorce-related costs like alimony and child support. However, once a person is single, their daily expenses will substantially alter, impacting their finances drastically.
If your divorce settlement includes alimony, it’s critical to give yourself time to process everything before making any major financial decisions. You should then focus on taking the time to create a post-divorce budget so that you can be prepared for your new financial reality.
One of the best ways to avoid letting money get the best of you after divorce is to have a budget. This means knowing exactly how much money you have coming in and going out each month. Once you handle your finances, it becomes much easier to save money and make smart financial decisions. Most financial advisers recommend creating a budget for your post-divorce existence so that you can have a proper plan to help mitigate the financial impact of the divorce.
Now, let’s talk about some of the key things you should do to prepare yourself for a financially successful post-divorce life.
1. Understand Your Cash Flow and Current Financial Picture
As soon as you realize that divorce is unavoidable, you should start to carefully track your monthly cash flow by keeping track of your income and spending. You and your spouse probably share some financial accounts, and you will need to know what is in each one of these accounts. To estimate spending from the previous months and year, you should look up your credit card and bank statements. Check these account statements from the past few months so that you can get an idea of which bills need to be paid and how much money you will have available after the bills are paid.
While going through your previous month’s statements and transactions, start categorizing your expenses. Categorize all your expenses as either fixed or variable expenses. Your fixed expenses are those that stay the same every month, such as your mortgage payment, car payment, and insurance premiums. Variable expenses fluctuate from month to month and include items such as groceries, entertainment, and clothing.
Once you do this exercise, then calculate the average total value of your fixed and variable expenses for the previous six months. Make sure that you include in these calculations the expenses related to your kids as well. Doing this will give you a clear idea of your overall income, your savings, investments, assets, debts, and bill dues. And, you will now know how much money you had been spending each month. By the way, you can also use MoneyPatrol for this exercise as MoneyPatrol will make it very easy to get a clear picture of your income, expenses, and bills.
2. Create a Post-Divorce Budget to Manage Your New Financial Reality
After the divorce, your monthly expenses will likely change. You will have to plan for having an effective money management strategy post-divorce. This means being mindful of your spending and making sure that your budget is balanced. You can use a budgeting or expense-tracking app such as MoneyPatrol to help you track your income and expenses. These apps can be helpful in creating and maintaining a post-divorce budget. You would need to account for housing, food, transportation, childcare, and other necessary expenses. It’s important to focus on your essential expenses and find ways to cut back on non-essential expenses.
To create a post-divorce budget, you must first understand your monthly cash flow based on the data you were able to put together in the previous step. Once you understand your monthly income and expenses for the previous few months, you will get a fair idea of your overall cash flow. Now, you should estimate the potential income and expenses you will have after the divorce. It’s essential to take inventory of all the sources of income you will have after divorce. This includes your salary, any alimony or child support you receive, any investments you have, and any other sources of income. Similarly, you should account for all the possible expenses you will likely incur after the divorce. For example, if you are the partner who needs to provide alimony and childcare, these expenses need to be calculated and accounted for. Additionally, if you are going to be renting a new place, and providing for your own insurance, then these would be additional expenses. Creating a proper budget taking into account the various factors related to your income and expenses, and then making sure that you stay disciplined by sticking to these budgets is crucial.
3. Decide What You Are Going to Do About Your Joint Accounts and Debts
Separating joint funds is a very difficult task. The majority of the procedure is dictated by state legislation, with some treating all assets, income, and debts as if they were all part of one pot. In the months and weeks leading up to your divorce, emptying the pot or even putting in more than usual can be disastrous. Experts advise keeping all financial matters open with your spouse, as being the first to the bank has no advantages.
Regardless of the outcome of your divorce, you are still responsible for paying off any joint debt. Even if your divorce decree specifies that your ex would repay the amount, it will make no difference to a third party. Married couples frequently use joint credit cards for their day-to-day expenses. However, as part of a divorce settlement, you will likely need to have the joint accounts closed or removed from your name.
Most divorcing couples want to pay off as much joint debt as possible because an outstanding shared debt might continue to affect your credit score after a legal divorce. If you and your spouse are unable to pay off all your joint debts with traditional assets, you and your spouse must agree on who is responsible for which payments.
By the way, when you were married, if you didn’t have any separate credit card or other types of credit, it’s recommended that you start building your credit history as you won’t be able to get a good credit score until you use your credit responsibly. A good credit score is essential as it will make renting an apartment easier and receive low-cost insurance.
Let’s summarize what we have talked about today.
Divorce will impact your personal finances in ways that a person may have never imagined. All the way from the division of Assets and Debts to providing for Alimony and Child Support is going to be an exercise which you and your partner will have to work on with the mediator or have the courts dictate.
Regardless, you should strive to be practical about the situation and work on planning for your new financial reality. Some of the things we recommend are:
1. Understand Your Cash Flow and Current Financial Picture
2. Create a Post-Divorce Budget to Manage Your New Financial Reality
3. Decide What You Are Going to Do About Your Joint Accounts and Debts
While going through a divorce, even though you may not be in the emotional state of thinking about finances, you should keep in mind that becoming money smart is the key to a better and secure financial future for yourself.