Adjusting to Life Financially after a Divorce

By Clarke Hedrick, CFP

There's no doubt about it--going through a divorce
can be an emotionally trying time. Ironing out a
divorce settlement, attending various court hearings,
and dealing with competing attorneys can all weigh
heavily on the parties involved.
In addition to the emotional impact a divorce can
have, it's important to be aware of how your financial
position will be impacted. Now, more than ever, you
need to make sure that your finances are on the right
track. You will then be able to put the past behind you
and set in place the building blocks that can be the
foundation for your new financial future.

Assess your current financial situation

Following a divorce, you'll need to get a handle on
your finances and assess your current financial
situation, taking into account the likely loss of your
former spouse's income. In addition, you may now be
responsible for paying for expenses that you were
once able to share with your former spouse, such as
housing, utilities, and car loans. Ultimately, you may
come to the realization that you're no longer able to
live the lifestyle you were accustomed to before your
divorce.

Establish a budget

A good place to start is to establish a budget that
reflects your current monthly income and expenses.
In addition to your regular salary and wages, be sure
to include other types of income, such as dividends
and interest. If you will be receiving alimony and/or
child support, you'll want to include those payments
as well.
As for expenses, you'll want to focus on dividing them
into two categories: fixed and discretionary. Fixed
expenses include things like housing, food, and
transportation. Discretionary expenses include things
like entertainment, vacations, etc. Keep in mind that
you may need to cut back on some of your
discretionary expenses until you adjust to living on
less income. However, it's important not to deprive
yourself entirely of any enjoyment. You'll want to build
the occasional reward (for example, yoga class,
dinner with friends) into your budget.

Reevaluate/reprioritize your financial goals

Your next step should be to reevaluate your financial
goals. While you were married, you may have set
certain financial goals with your spouse. Now that you
are on your own, these goals may have changed.
Start out by making a list of the things that you now
would like to achieve. Do you need to put more
money towards retirement? Are you interested in
going back to school? Would you like to save for a
new home?
You'll want to be sure to reprioritize your financial
goals as well. You and your spouse may have
planned on buying a vacation home at the beach.
After your divorce, however, you may find that other
goals may become more important (for example,
making sure your cash reserve is adequately funded).

Take control of your debt
While you're adjusting to your new budget, be sure
that you take control of your debt and credit. You
should try to avoid the temptation to rely on credit
cards to provide extras. And if you do have debt, try
to put a plan in place to pay it off as quickly as
possible. The following are some tips to help you pay
off your debt:
• Keep track of balances and interest rates
• Develop a plan to manage payments and avoid
late fees
• Pay off high-interest debt first
• Take advantage of debt consolidation/refinancing
options

Protect/establish credit

Since divorce can have a negative impact on your
credit rating, consider taking steps to try to protect
your credit record and/or establish credit in your own name. A positive credit history is important since it will
allow you to obtain credit when you need it, and at a
lower interest rate. Good credit is even sometimes
viewed by employers as a prerequisite for
employment.
Review your credit report and check it for any
inaccuracies. Are there joint accounts that have been
closed or refinanced? Are there any names on the
report that need to be changed? You're entitled to a
free copy of your credit report once a year from each
of the three major credit reporting agencies. You can
go to www.annualcreditreport.com for more
information.
To establish a good track record with creditors, be
sure to make your monthly bill payments on time and
try to avoid having too many credit inquiries on your
report. Such inquiries are made every time you apply
for new credit cards.

Review your insurance needs

Typically, insurance coverage for one or both
spouses is negotiated as part of a divorce settlement.
However, you may have additional insurance needs
that go beyond that which you were able to obtain
through your divorce settlement.
When it comes to health insurance, make having
adequate coverage a priority. Unless your divorce
settlement requires your spouse to provide you with
health coverage, one option is to obtain temporary
health insurance coverage (up to 36 months) through
the Consolidated Omnibus Budget Reconciliation Act
(COBRA). You can also look into purchasing
individual coverage or, if you're employed, coverage
through your employer.
Now that you're on your own, you'll also want to make
sure that your disability and life insurance coverage
matches your current needs. This is especially true if
you are reentering the workforce or if you're the
custodial parent of your children.
Finally, make sure that your property insurance
coverage is updated. Any applicable property
insurance policies may need to be modified or
rewritten in order to reflect property ownership
changes that may have resulted from your divorce.
Change your beneficiary
designations
After a divorce, you'll want to change the beneficiary
designations on any life insurance policies, retirement
accounts, and bank or credit union accounts you may
have in place. Keep in mind that a divorce settlement
may require you to keep a former spouse as a
beneficiary on a policy, in which case you cannot
change the beneficiary designation.
This is also a good time to make a will or update your
existing one to reflect your new status. Make sure that
your former spouse isn't still named as a personal
representative, successor trustee, beneficiary, or
holder of a power of attorney in any of your estate
planning documents.

Consider tax implications

You'll also need to consider the tax implications of
your divorce. Your sources of income, filing status,
and the credits and/or deductions for which you
qualify may all be affected.
In addition to your regular salary and wages, you may
have new sources of income after your divorce, such
as alimony and/or child support. If you are receiving
alimony, it will be considered taxable income to you.
Child support, on the other hand, will not be
considered taxable income.
Your tax filing status will also change. Filing status is
determined as of the last day of the tax year
(December 31). This means that even if you were
divorced on December 31, you would, for tax
purposes, be considered divorced for that entire year.
Finally, if you have children, and depending on
whether you are the custodial parent, you may be
eligible to claim certain credits and deductions. These
could include dependency exemptions, the child tax
credit, and the credit for child and dependent care
expenses, along with student loan interest and tuition
deductions.

Consult a financial professional

Although it can certainly be done on your own, you
may want to consider consulting a financial
professional to assist you in adjusting to your new
financial life. In addition to helping you assess your
needs, a financial professional can work with you to
develop a plan designed to help you address your
financial goals, make recommendations about
specific products and services, and monitor and
adjust your plan as needed.

Clarke Hedrick, CFP

Pivotal Financial Services, Inc. is an independent, full service financial planning firm.Founding principal and current CEO, Clarke D. Hedrick, CFP® holds the CFP®/Certified Financial Planner™

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