Are you going through a divorce, or are you planning to get a divorce? Have you started budgeting 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 and 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 to continue to provide for your kids and yet build a financially secure life for yourself.
You may either work with a divorce mediator or go to court when going through the divorce. Depending on the route you choose, dividing 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. It would help if you prepared yourself to deal with how this pans out the financial implications.
When someone is going through a divorce, it’s challenging 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.
How to be Money Smart during a Divorce?
If your divorce settlement includes alimony, it’s critical to give yourself time to process everything before making any significant 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 economic reality.
One of the best ways to avoid letting money get you after divorce is to have a budget. This means knowing exactly how much money you have coming in and going out each month.
Going through a divorce is a complex process for everyone involved, both emotionally and financially. Being honest about your financial situation with your partner is very important. The longer a couple has been married, the more financially intertwined their lives are.
Suppose you’re in debt or have a lot of economic anxiety. In that case, it’s essential to be honest with your partner about it. It can help them understand your perspective and make them more willing to work with you on the divorce settlement terms.
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. Once you handle your finances, it becomes much easier to save money and make intelligent financial decisions.
In this MoneyTalk, we will discuss ways you can plan and prepare to have 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 of these accounts.
To estimate expenditures 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 to get an idea of which bills need to be paid and how much money you will have available after the bills are paid.
Start categorizing your expenses while going through your previous month’s statements and transactions. Categorize all your expenses as either fixed or variable expenses.
Your fixed expenses stay the same every month, such as your mortgage payment, car payment, and insurance premiums.
Variable expenses fluctuate from month to month and include groceries, entertainment, and clothing.
Once you do this exercise, calculate the average total value of your fixed and variable expenses for the previous six months. Doing this will give you a clear idea of your overall income, your savings, investments, assets, debts, and bill dues. Make sure that you include in these calculations the costs related to your kids. And, you will now know how much money you have been spending each month. You can also use MoneyPatrol for this exercise. MoneyPatrol will make it 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 pos-divorce. It means being mindful of your spending and ensuring 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 help create and maintain 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 costs 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 know your monthly income and expenses for the last few months, you will get a fair idea of your overall cash flow.
Now, you should estimate the potential revenue and costs you will have after the divorce.
It’s essential to take inventory of all the sources of income you will have after divorce.
It includes your salary, any alimony or child support you receive, any investments you have, and any other sources of income.
Similarly, it would help if you accounted for all the possible expenses you will likely incur after the divorce. For example, suppose you are the partner who needs to provide alimony and childcare. In that case, these expenses need to be calculated and accounted for.
Additionally, if you will be renting a new place and providing for your insurance, these would be additional expenses. Create a proper budget considering the various factors related to your income and expenses. Then, make sure that you stay disciplined by sticking to these budgets.
3. Decide What You Are Going to Do About Your Joint Accounts and Debts
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 cannot pay off all your joint debts with traditional assets, you must agree on who is responsible for which payments.
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.
- Use MoneyPatrol to figure out how much debt you have, and identify your monthly payments. And create budgets to ensure that you’re putting enough money towards your debt payments each month.
Divorce will impact your personal finances that a person may have never imagined. All the way from the division of Assets and Debts to providing for Alimony and Child Support will be an exercise that 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.
- Understand Your Cash Flow and Current Financial Picture
- Create a Post-Divorce Budget to Manage Your New Financial Reality
- Decide What You Are Going to Do About Your Joint Accounts and Debts
While going thru 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.