One of the more overwhelming aspects of divorce is figuring out how to effectively manage your finances now that you are suddenly single.
When you were married, you likely relied on two sources of income. Now that is cut in half and you might have additional expenditures such as child support and alimony to take care of.
If you don’t take the time to come up with a comprehensive post-divorce financial strategy, you can quickly fall behind on bills. That debt can snowball and take years to fully recover from.
Your first step is to conduct a personal cash-flow analysis to get a clear and detailed understanding of all your financial obligations and sources of income. Track everything and divide everything into fixed costs (such as monthly mortgage payments and child support) and expenses that you might be able to adjust (maybe you can cut your grocery bill down by doing more meal prep).
A budget you can stick to before, during, and after divorce is absolutely essential.
Once you figure out all the money you have coming in and where that money is going, your next priority should be to establish an emergency fund. Take care of your immediate expenses and then, if possible, set aside some money each month for unplanned medical bills, unexpected auto expenses, and other unexpected costs.
Everyone is different, but most experts believe you should have enough money in your emergency fund to cover 3-6 months of living expenses.
Update your beneficiaries
Estate planning might not be top of mind during and immediately following divorce, but it is critical for you to quickly take steps to update any wills, trusts, or other important documents to reflect your current life and wishes. Failing to do so risks having your assets distributed in a way you don’t want.
If you have a will, you likely listed your wife as a benefactor. You need to revoke the will and begin writing a new one. You might also need to name a new executor of your will if you had your wife listed as your previous one.
Other documents you might need to update include life insurance policies, retirement accounts such as IRAs and 401(k)s, and transfer-on-death brokerage accounts.
Another important consideration is figuring out the best way to file your taxes now that you are divorced. Recently-divorced couples could have the option to file separately, jointly or married filing separately depending on their situation.
The filing status for most couples is usually determined by their marriage status on the last day of the year. If you were still married on December 31, it might make sense to file jointly to take advantage of certain tax advantages. (But remember that you will both be liable in the event of an audit if you file jointly.)
In addition to your own filing status, you’ll need to determine who claims the kids as dependents. Usually, this will be the custodial parent. If parents share custody, then the parent paying child support claim them. If there is no support order, it goes to the parent with the higher adjusted gross income.
It is also common for parents to alternate who claims the children each year.
Hire a financial advisor
Although you are trying to limit your expenses at this point in your life, it might be a wise investment to hire a Certified Divorce Financial Analyst to help set you on the path to a financially independent future.
“Although divorce attorneys will have a basic understanding of the tax and benefits issues they come across on a daily basis, a good financial advisor will have a much firmer understanding of the intricacies involved with these particular subjects,” Mr. Cordell said.