by Jessica Weaver, CFP, CDFA, CFS
The average person keeps their finances on the back burner, and when it comes to divorce, the trend continues. There are a few things you can do to better prepare yourself financially for a divorce that will propel you toward your goals after its final.
The first thing I tell my clients is put their cash flow statements together. Look at what money is coming in to the household versus going out with expenses. Don’t forget to include your salary, any rental income, investment interest, and any other income when completing this. Think about all your fixed expenses such as mortgage payments, rent, utility payments, and food bills. Then put an estimate together for your variable expenses, and always include savings as part of your expenses. Make sure you aren’t spending more than you take in. Now after your divorce, how will your expenses change, and how will you make up for the shortfall of living on one income. What areas can you cut back on with your expenses without jeopardizing your retirement savings?
Another crucial area of finance is your credit score. It is essential to get a credit card in your own name and to start building a credit history. Try to pay off your credit card bills on time as credit card interest can be your worst enemy if it builds up. After the divorce, make sure to take your ex-spouse off your credit cards even if they are just an authorized user. Doing this can easily be overlooked, but it is very important to do.
Before you start your settlement negotiations, put together a list of all your investment and retirement accounts. Everything should be accounted for, and think about the tax implications of selling a certain asset versus another. How much of a taxable event will the sale make, and will there be a penalty for liquidating it now? You don’t want to receive all pre-tax money in your divorce settlement because you will be left with a lot less after paying the tax bill. Having some money set aside in your savings account will be a big help. You don’t want to incur credit card debt or have to sell something with a big taxable gain to cover your expenses.
Lastly, you should start thinking about your estate plan, and what you will need to change once the divorce is over. You will most likely have to update your will, power of attorney, and living will after the divorce is final. Another disregarded area, is your beneficiary designations for your life insurance and retirement plans. Make sure to consult with an estate attorney on how best to leave your estate to your loved ones after you’ve moved on from the divorce.
Getting a grasp of your finances, will make you feel more comfortable with your divorce and the settlement. It will give you confidence to move on with your life, and toward your new goals.