Going through a divorce is one of the most stressful life experiences a person can go through. For many, it may feel as if you are going through a hurricane. And if you live in places that are prone to hurricanes, you know that these can come in mild category 1’s to completely catastrophic category 5’s. The good news is, if the divorce is finalized, the hurricane is over. You have survived, and you will be able to rebuild a fulfilling life. It may not be what you had envisioned but it if you are open to it, it can be just as enriching. The best way to start moving towards that new life and feeling more empowered is to get your finances in order. It’s time for some divorce financial planning.
1. Get Over Feeling Lost by Getting Organized
In our experience, getting a hold of your finances and what your new lifestyle may look like is the best thing you can do early on after your divorce. We have seen too many clients who waited too long to get organized, only to find that they have made their financial situation more difficult. Your financial house needs a solid foundation based on a new budget and outlook. Getting organized with your finances is especially important if you were not involved in the day to day finances during your marriage. So where do you start?
Make a list of your income, expenses, assets, and liabilities.
Income: Any income amounts such as salary, child support, alimony, social security, or other.
- Bank accounts and balances
- Retirement account(s) and other investment account balances
- Real estate information including title, loan amount, interest rate
- Vehicle(s) information including make, model, year and loan amount
- Inventory of personal property such as jewelry, art work, and other valuables
Liabilities: Any amount you owe that requires repayment such as a mortgage or credit card balance.
If you have not been tracking your expenses, this is a good time to start reviewing how you are spending your money. Make a list of your fixed and variable expenses such as
- Rent or mortgage
- Parking fees
- Auto and health insurance
- Personal care
- Dining out
- Movies or theater
- Subscriptions (Netflix, Amazon prime, Hulu etc.)
- Credit card payments: list balances and annual rate
2. Reassess Your Lifestyle
Going through a divorce disrupts all aspects of your life but especially your finances. In some cases, your standard of living will stay the same but in other cases depending on your age and career, your standard of living will go down for a few years. Based on our experience, reassessing your lifestyle can be a painful process for many. What you should keep in mind as you are going through this is that you are trying to secure your future. Without this step, your financial house will end up with a lot of money leaks and eventually the financial foundation may grow weak. Remember, you can and will have a fulfilling life if you allow yourself flexibility and time. This is your chance to reinvent yourself.
To reassess your financial outlook, you must see where you stand. To do this remember two equations:
DISPOSABLE INCOME = INCOME – EXPENSES
Ideally, you want to have more income than expenses, so you can continue to save for the future. If your disposable income is negative, it is time to rethink your expenses. Find ways to cut back. Many people are tempted to disregard this equation because they have assets they can tap into to continue to spend the way they used to. However, when you do this, you are decreasing your net worth and may be jeopardizing your financial future.
It is only in some cases that it may be appropriate to draw on assets to sustain your lifestyle. To know this, you need a solid financial plan that will show you the long-term impact of such as decision on your retirement. After all, you don’t want to find yourself in a situation where you must get a job at 70 because you blew through all your money.
NET WORTH = ASSETS – LIABILITIES
It should come to no surprise that your net worth number should be positive and ideally should grow until you reach retirement. The best way to do this is to grow your assets and reduce your liabilities.
Doing this exercise is not fun. You may realize that you can no longer do some things or spend as much as you used to. But remember this, your worth as a person is not tied to the amount you have available to spend. Once you realize this, you can become free to build your new life and find peace in the present.
3. Reset Your Financial Plan
Now that you have organized your finances and understand what your net worth is, it’s time to sit down and do your new financial plan. Here’s what you need to consider:
- How much should you save annually towards retirement?
- When do you want to retire?
- Do you have enough assets to provide you with enough income through retirement?
- Do you need to reduce your debts?
- Are your assets growing at a reasonable rate to meet your goals?
- Should you downsize your home?
- What changes should you make to your portfolio to ensure your retirement?
- Do you need to update your will and beneficiaries?
4. Investing for Your Future
Your investments need to support and reflect your own personal goals and needs. After a divorce, it is likely that the investments you now have do not match your new financial plan or strategy. Reviewing your investment portfolio is critical. Whether you have your own portfolio, or you received assets by way of a marital settlement or a qualified domestic relations order (QDRO), you’ll have to revisit your investment strategy.
For example, in some cases if you receive retirement assets from a former spouse, you may be able to roll the money into your current 401(k) or a rollover IRA. Before you decide what to do consider speaking to a financial planner. If your investment options at your employer’s 401K are poor or limited, it may make sense to move the assets to your own IRA. Every situation is unique and requires thoughtful consideration.
|Let Us Help You Get Back on Track
Updating your financial plan during or after a divorce can help you secure your retirement. Set up a no obligation consultation with one of our financial planners to find out how we can help you. Simply fill out our request for information form and one of our advisors will contact you to find out how we may be able to assist you.
Contact Us at 305-648-9814
Your asset allocation will also probably need some tweaking. You may be taking on too much risk or not enough to help you meet your goals. It may also be the case that you are no longer sufficiently diversified if you and your ex used to have a holistic investment approach.
Getting your financial house in order can be a lot of work, however delaying or burying your head in the sand can be disastrous. We have found through working with clients during and after their divorce that they are able to move on faster once they feel a sense of financial stability in their lives. Start building your new life today by tackling the hard things one step at a time.
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