No one goes into marriage thinking they’re going to get a divorce. Unfortunately, about half do.1 It’s usually a painful period, filled with uncertainty around what it’ll mean for yourself and your family. At the same time, you may be concerned about how you’ll survive financially.
Going through a divorce isn’t cheap. It can cost $15,000, on average, and in some cases can be as high as $100,000 if it is contentious or involves custody battles.2
And along with dissolving the union, you also need to untangle your personal finances from an ex-spouse. This can be daunting, especially if you didn’t take an active role in managing your finances in the past. Here are three steps you can take if you are suddenly single as a divorcee.
Step 1: Move on financially
The first step is to start decoupling your team from your spouse and get back to the financial basics. Organize your financial information and documents to get your finances on track as you embark on the next phase of your life. Follow these five guidelines to help you regain confidence in managing your wealth.
Calculate your new net worth
You will most likely have to split your assets and debt with your spouse after a divorce. Your net worth is the difference between your assets (checking and savings account, investments, real estate, personal property, etc.) and debts (loans, credit cards, mortgages, etc.). Calculate and track your net worth regularly to help you see where you stand.
Set new financial goals
While married, you may have set financial goals as a couple. Now you need to reorient to a single way of thinking and create your own financial goals that support your values and priorities. Next, map out a financial plan to meet them. For instance, do you expect to retire in 10 years? Then design your roadmap for getting there. Or would you like to take your kids on an annual trip? Add that savings goal to your annual budget.
Create a new monthly budget
Calculate your household income and expenses post-divorce. Unfortunately, most household incomes fall as a marriage dissolves. This is especially burdensome for women who tend to get paid less than men—historically earning just 83.7 cents for each dollar that men earn.3 The disparity is even greater for older or minority women.3 For example, women's household income falls by 41% after a divorce or separation after age 50, while men's household income only drops by 23%.4 If your income has decreased after the divorce, you will have to readjust your spending and reduce or eliminate certain expenses.
(Re)Build an emergency fund
If you didn’t have an emergency fund or if the divorce left you without one, one of your top priorities is to build your emergency fund. An emergency fund helps pay for unexpected expenses or events such as a job loss, medical problem, or car breakdown. It should be roughly three to six months’ worth of expenses.
Protect your family
A divorce may also change the amount of life insurance, disability insurance, and other types of insurance you need. You want to make sure you have the right amount for the right purposes. If you have children to care for, the right type and amount of life and disability insurance can help protect your family.
Step 2: Update your estate plan
Chances are your estate plan is fully integrated with your ex-spouse’s. You’ll need to disentangle and update many of your estate documents. Here are some of the key ones to focus on post-marriage:
- Will—determine who will inherit your assets and be the executor of your wishes.
- Healthcare Proxy—appoint someone to speak for you if you are medically incapacitated.
- Designated beneficiaries—update the named beneficiaries that would receive your assets upon your death. Many accounts—such as bank, investment, and retirement accounts, and life insurance policies—have designated beneficiaries. These selections take precedence over who is named in your will, so it is vital to update them immediately upon a life change, such as divorce.
Step 3: Work with your own professional advisors
Handling financial changes during and after a divorce on your own can be intimidating. Unfortunately, one of the most common mistakes many people make is relying on a divorce attorney to assist in financial decisions. Just as you wouldn’t go to a neurosurgeon for surgery on your knee, you shouldn’t go to a divorce attorney for decisions around your finances and taxes.
Another mistake is using the same professionals that an ex-spouse uses. During the divorce proceedings, you should establish your own team to look after your best interests rather than use a joint team who may have conflicts of interest.
For example, a Wealth Advisor and tax professional can help transfer assets in the most tax-efficient way, especially if those assets are tax-deferred, such as ones held in a 401(k) or traditional IRA. There are specific rules and deadlines imposed on moving these assets, and your professional advisory team can help you navigate their complexities.
A Wealth Advisor can also help you manage a liquidity event—such as proceeds from the sale of a house—the receipt of regular alimony payments, and how to maximize social security benefits, while a tax professional can minimize taxes based on your new tax status. If you are the one paying alimony, your Wealth Advisor can help you determine from which bucket of assets you should draw these funds to ensure you are not handicapping your ability to save for the future or minimizing your potential to compound growth.
Breaking up is hard to do, but laying out a financial plan after doesn’t have to be
Divorce can be an overwhelming life change, and tackling your finances without support can add to the stress. As a suddenly single individual, you will have to take responsibility for earning, saving, paying bills, and investing for retirement. The key is to educate yourself about possible solutions and surround yourself with your own team to guide your decisions and help you achieve your goals and financial independence.
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