After a Divorce: A New Financial Plan
[Read also Preparing for Divorce and Negotiating a Divorce.]
As you start a new life after a divorce, you will also be in a new financial situation. Budgets and planning you had done as a married couple are out the window. So you’re putting yourself at a disadvantage, and perhaps financial jeopardy, if you leave your finances on autopilot. That is certainly the easy out, especially if it seems you have more than enough to live on for a long time.
I would advise you, though, not to give in to murky, wishful thinking. Post-divorce is a critical time for getting good financial analysis, guidance and advice. By making smart decisions early on, you can maximize your options as you start a new life. Feeling trapped due to poor planning is not where you want to end up! Good financial advice can allow you to feel secure and present options you may have overlooked or not even considered.
For clients emerging from divorce, or the loss of a life partner for any other reason, we work to establish a high level of comfort with their new financial situation. And to explore fully all their options, while also taking care of important details such as beneficiary designations and the titling of accounts. Specifically, we do the following:
- Review your budget and spending for at least the next decade to make sure it’s realistic.
- Advise on how your tax situation has changed and how to make the most of it.
- Build an investment portfolio that reflects how much risk your finances can tolerate.
- Re-evaluate your options when it comes to housing. If you have a high-maintenance family home in a hot real estate market, would you be better off selling or renting it and starting anew in a smaller place?
- Discuss your retirement goals and put a plan in place on how to achieve those goals.
- Review insurance policies and retirement accounts to make sure they reflect your current situation; update beneficiary designations.
- Review your estate plan and refer you to an attorney who can (re)draft your will.
- If you have children, advise on ways to save and pay for college.
Get the Kids Involved
The instinct after a divorce is to protect and shield the kids as much as possible. But by not talking to the kids about their new reality, you may end up making them feel more isolated and vulnerable. If you have children, we suggest you involve them in the conversation early on and help them understand how this new life is going to work. There are many aspects involved, from the legal to the emotional to the financial. Your children are likely to learn valuable lessons as they work with you to build a new financial plan that makes sense, is achievable, and works to support everyone’s goals. Think of this process as giving them an opportunity instead of a burden.
One of the most important things you can do as a single parent after a divorce, even if you have a high level of income and/or assets, is to build a budget, especially if you’ve never done it before. A budget will help you understand how much you’re spending, how much you’re bringing in and how to build a plan for how you want to live. Setting short-term and long-term financial goals are both important, such as saving for retirement, paying down debt and building an emergency fund.
Consider how a change in your lifestyle is going to change your kids’ lifestyles. If you’ve been a stay-at-home parent who is now going back to work, you might not be at home when your kids come home from school. Or, if you’ve been working but now need to be at home more often, you might take on more responsibilities they’re not used to. While this isn’t directly a financial consideration, it’s a change that’s driven in part by finances, and it’s important to involve your kids in these changes so they understand what’s going on and why things are suddenly different.
College education costs may be looming, so start looking into the different ways to pay for schooling. This is also a great way to get your kids involved and invested in their futures. Talking to kids about how the family finances have changed and helping them take some responsibility about how to pay for college can be empowering. It can give them a tangible way to help navigate through the changes in their lives in a positive and productive way.
Even If You’re Happily Married, Life Happens
Pre-nuptial or post-nuptial agreements, separate bank accounts and establishing your own credit can all help protect each spouse’s financial interests. Even more important: for both spouses to be involved in the family finances. It’s understandable for one spouse to have more control, but this can make it more difficult for the other spouse to deal with a crisis — divorce, disability or death. Life and relationships are often not under our control, but finances are one area where you can have a clear, solid plan that makes things easier regardless of what the future holds. Even if you don’t think divorce is in your future, you should gain an understanding of your family’s finances if you haven’t already. In fact, one of the important things we do here at LNWM is to educate family members on financial topics and their finances in particular.
For more, please read my posts on Preparing for Divorce and Negotiating a Divorce.