There are few life transitions more emotionally draining than divorce. At the same time, the end of a marriage can also bring the promise of a new beginning. Once the final papers are signed, sealed and delivered, here are some practical steps you can take to best secure your financial future.
1. Begin with a Budget
A top priority is to establish a new, reasonable budget to live on. After all, you’ll have a hard time taking care of your family if you’re not on solid footing yourself.
Start by getting your arms around your spending in the first six months. Especially if you’re the spouse who has stayed home with the children, and/or you’re seeking reemployment, your new budget will probably be far more constrained than you were used to. You may be unable to replace your income at a level equivalent to you and your spouse’s joint earnings, or even to your previous single, or pre-parenthood earnings. It might make most sense to take a “blank slate” approach, tailoring your new budget and cash flow to your new normal. Using a reverse budget can be a great way to get started.
Download this free worksheet to help you manage your personal cash flow.
2. Putting the Pieces in Place
Logistically, funding your new budget may involve managing lump sum divorce settlements in the form of cash or other assets. It’s worth taking the time to assign or reassign each asset into the right place – whether that is in a checking/savings account, an investment account, or a retirement account (such as an IRA, Roth IRA or 401(k) plan). In total, this becomes your personal portfolio, for optimally funding your ongoing lifestyle needs and expenses.
Next, there are several financial planning decisions best made soon after your divorce.
- Healthcare Coverage: It’s important to ensure your healthcare coverage doesn’t lapse. If your coverage has changed, you may need to elect COBRA coverage, take coverage under a new employer, or shop for a plan in the marketplace.
- Other Insurance: You’ll also likely need new or updated auto, homeowners or renters, and life insurance coverage.
- Retirement Planning: Reevaluate your retirement goals and funding under your new financial circumstances.
- Estate Planning: Revisit your wills and powers of attorney to ensure they reflect your current intent. You may also now need additional instruments, such as a trust, to pass assets directly to your kids. If your children are still young, reevaluate their secondary guardianship options. Download our free worksheet to establish an estate memo that helps your family properly handle the distribution of your assets.
3. Custody of Your Kids
Even under ideal circumstances, divorce generates a multitude of money-related issues – especially if joint custody is involved. What are some of the financial and related ramifications here?
Claiming Dependents: With joint custody, who gets the tax deductions? This should be addressed in the parenting/custody agreement, but it’s often unclear or, conversely, unnecessarily complex.
- If you and your ex will alternate or share deductions, and you are in similar tax brackets, consider “assigning” the deduction for each child to one or the other of you. No switching back and forth!
- If there are an odd number of children, agree on and document in writing who will take deductions and credits (including college credits) in which years.
- If you and your ex are in different tax brackets, it may be most beneficial for the higher-income parent to take the deductions and credits … but only if the divorce is amicable, and you can agree to share equally in the benefit. (Hint: A CPA or financial advisor may be able to help with this analysis and mediation without incurring additional attorney fees.)
- The custody agreement should list the “residential” parent, which dictates the answer. This may come down to which of you is in a more permanent residence, or in a better school district.
- If your children attend or will attend private school, who will pay for how much? One solution is to allocate pro rata splits for these expenses, such as 70%/30%.
- Will any home schooling/school supervision be split evenly? Concentrated on certain days for each of you? Delegated to an outside facilitator? Virtual schooling adds an additional layer of complexity warranting additional discussion, especially if both of you are now working full time post-divorce.
- Older kids incur college expenses, car purchases (including insurance), health insurance, and extracurriculars (such as club sports leagues).
- Younger kids, incur daycare or babysitting expenses.
If these one-off outlays are not specified in your agreement, they can fall under the overall allocation you’ve agreed upon, or you may need to split them 50/50, depending on the details of your divorce.
That’s an overview of some of the opportunities and challenges involved in navigating through a divorce. As you work through the logistics, remember: The end of your divorce can come with a new beginning for you and your family. Engaging a seasoned, independent financial advisor to help you sort through the details can help ensure you start off on the right foot.
Disclaimer: This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.