How to Rebuild Your Finances After Divorce

No one gets married with the plan to divorce eventually, but it is widely understood that roughly half of all marriages end in divorce. That statistic gets grimmer for second and third marriages. A divorce is one of those events in life that can be overwhelming, both mentally and financially. Divorce can be difficult financially, but it is possible to rebuild your finances. This blog post will provide tips on how to create a budget, review your subscriptions and memberships, create an emergency reserve, and take inventory of your assets and debts.

Divorce Financially Impacts Spouses Differently

In a marriage, managing the family finances often falls on one partner. For some spouses, this means they do not handle their own finances (income, expenses, assets, etc.) for quite some time. So, not only are you going through a highly emotional time, but you also need to reestablish your overall financial stability. Rebuilding your finances after divorce can be a challenging and emotionally draining process, but with careful planning and strategic steps, you can regain control of your financial future. Where do you begin?

Determine Your Current Financial Situation

Before your divorce proceedings can determine how your finances are split, you need to have a clear understanding of your current financial situation. Collect all pertinent information and documents regarding your income, expenses, assets, liabilities, and insurance. Your income is a combination of your current work income, bonuses, pension, social security, child support, and spousal support. Your household income stream will probably be less than before, so knowing how much is coming in and from where will be important. Also, remember, if you are receiving child or spousal support, it won’t last forever. You will need to plan for your income and budget to change when, or if, that happens.

Create a New Budget for the New You

Your expenses will also be different than what you are used to. You may be living in a new place, and you’ll be on your own to cover utilities, groceries, and health insurance. So, you’ll need to create a budget to cover your expenses.

To do this:

• Establish realistic expectations. If you eliminate certain things that you enjoy, completely, such as going out to eat, the gym, or even buying a coffee every morning, you are setting yourself up to fail.
• Make small changes, which will lead to bigger changes over time.
• Review all your subscriptions and memberships and eliminate any you don’t use regularly.
• Create an emergency reserve. It is essential that you have money set aside for an emergency, so you aren’t using high-interest credit cards when unlucky curveballs happen.

Assess Your Assets and Debts

Another critical step is to know what you have and what you owe. Take inventory of your assets and debts. A list of your assets would include checking accounts, savings accounts, brokerage accounts, retirement accounts, pensions, cash value of life insurance, real estate, cars, and personal belongings. You’ll need to ask yourself, even though it was emotionally satisfying to keep the house, does it make sense financially? You may need to convert some of these assets from joint to individual. And, if you change your name back to your maiden name, ensure you do so on all your accounts.

When you are making a list of your debts, you should include items such as credit cards, mortgages, student loans, car loans, personal loans, and tuition. Your divorce decree may outline the amount of money that should change hands, but it may not always indicate which assets should be included. If you have taxable investment accounts, it's important to pay attention to the asset's cost basis. Additionally, you should consider the after-tax value of your assets. It's crucial that you know the after-tax equivalent value of an account with pre-tax contributions and tax-deferred growth.

You Can’t Divorce Tax Day

“Nothing is certain except death and taxes” is a famous quote by Benjamin Franklin. Even though you may be going through the most challenging time in your life, the IRS still wants you to file your taxes on time. First and foremost, determine how will you file your taxes; single, joint, married filing separately, or head of household. If you are still legally married on the last day of the year (December 31st), you must file either joint or married filing separately.

If you have children under 18, it is important to determine who will claim them as dependents. According to IRS regulations, the parent who has custody for most of the year is generally entitled to claim a qualifying child. Alternatively, you can have the dependent information in your divorce decree, which will determine who claims each child and when. This information will also determine whether you file as single or head of household.

Child support payments are tax neutral. They are not deductible by the spouse making the payments and are not taxable to the spouse receiving the payments. However, alimony, or spousal support, is deductible by the spouse paying it and is taxable to the spouse receiving it, if the divorce was finalized by 2019. There are other instances where you may be paying taxes on a divorce settlement. Filing taxes during divorce can be complicated. You should consult a tax advisor or accountant soon after your divorce to plan for taxes in the year you are filing for. It is important to note that tax planning should be done during that year and not after it, since there is little you can do to influence the outcomes.

Estate Plan Adjustment: Change Your Beneficiary

Having a sound estate plan is a crucial aspect of financial planning. When you are married, your spouse is typically your estate's primary beneficiary. The spouse could also be the executor of your will, power of attorney for financial, legal, or medical decisions, or become the trustee of any trust established.

Under Pennsylvania law, a divorce proceeding will automatically change most aspects of both spouses' estate plans - even before the divorce becomes final. This means that assets will pass to the contingent beneficiaries. In addition, successor fiduciaries of certain documents will control the assets pertaining to that document, which could be children who are minors, an ex-spouse's relatives, or friends from the past. Be sure to review your retirement accounts to ensure the primary beneficiary is who you would like it to be.

Divorce Means it's Time for a New Will

It is important to review all your legal documents, insurance policies and accounts. It is likely that you had previously assigned all your assets to your spouse. Therefore, it is advisable to start fresh by designating new beneficiaries and final wishes. If you have a will, it would be easier to create a new one than to modify the old one. In case you did not have a will during your marriage, now is an opportune time to have one written.

Track Your Credit Score

Be sure to check your credit score. Some couples choose to keep their finances separate, especially if it is a second or third marriage. If that is the case, your credit should remain separate. However, most couples jointly hold one or more financial accounts, such as a mortgage or credit card. Check to see what accounts or bills are in your name. You would be surprised how often people find out they are still on a mortgage, credit card, or loan years after a divorce. It would be best if you did this once a month initially, but at a minimum, once a year. Your credit score may decrease initially after a divorce. That is due to your overall income possibly reducing and changing your credit history. So, there is a period of adjustment.

Make Divorce Easier with Professional Guidance

When going through a divorce, it can feel impossible to rebuild your finances. Your income might be less, your debt might increase, and, for some, the numbers may appear overwhelming. Take a deep breath. Handle things one step at a time, and you will find yourself in a better place. It may take a little time, but don’t be afraid to ask for help.

You should talk to a financial planner about your finances during divorce. Some other professionals you should have on your team are divorce lawyers, accountants, and therapists. Always do your homework before hiring anyone. It is hard not to let the stress of a divorce get the better of us. But, by reestablishing and growing your financial stability, you are one step closer to a happy and healthy future.

Note: This article is meant to give a brief overview of financial planning after divorce and does not constitute legal or tax advice. Consult with a tax or legal professional for more information.

Author: Chris P. Wieder, CFP® | Financial Advisor | Allegheny Financial Group

Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered broker/dealer. Member FINRA/SIPC.