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A Fresh Financial Start After Divorce

The divorce decree is in hand, and your financial assets have been divided.  Everyone’s journey through the divorce process is different, but we all end up at this same place.  Life as a single person might seem scary, but it also represents a fresh start with YOU at the helm.  This is the new reality and the sooner you understand the parameters, the better.

In an earlier blog, The Devil is in the Details, I highlight the importance of ensuring that all the assets that the divorce decree dictates as yours have been transferred into accounts in your name. No matter what level of involvement you previously had in the family finances, it is now time to develop a plan for yourself.

What Do You Own?

A good start is to understand your assets-what YOU own.   This may include retirement accounts, brokerage accounts, bank and savings accounts, and perhaps your home.  Making a list of all your assets will help you to understand your financial starting point. You may also have liabilities, such as a mortgage, student loans or credit card debt.  The liabilities are not as satisfying to see listed but are just as important to get a handle on. Your net worth is calculated by subtracting your liabilities from your assets.

Understand Income and Expenses

During the divorce process, you and your spouse were required to produce a financial affidavit for the court that listed your joint assets and your individual monthly expenses.  Now that you are independent, the process of understanding your income and expenses is more personally pressing.

At that time of transition, it can be a challenge to figure out what your expenses will be once divorced. If you haven’t started, we suggest that you track your spending to better understand what you are spending your money on and, more importantly, if it is sustainable.  There are software programs such as Mint or Quicken, to which you can link checking and credit cards and then fine-tune categorizing the expenses. Another option, while tedious, is to review your bank and credit card statements and make your own expense spreadsheet. Many year-end credit card statements do a good job of categorizing expenses.

Whichever way you choose to track finances, you will not only see the things you are spending money on but also your various sources of income. If you are receiving alimony or child support or if your paycheck is automatically deposited, these will be included.

Create a Spending Plan

The bottom line is: are you spending more than you make?  If so, that means that each month you will need to take money from your brokerage account, or even worse, from your retirement accounts to cover the shortfall.  What is worrisome in this scenario is that depending on the level of your overall portfolio, withdrawing monthly will act as a drag on the ability of these long-term assets to grow to provide for your future retirement.

A sounder approach is to use this new income and expense information to create a realistic spending plan for your fresh start. In this new spending plan, your monthly income should be greater than the monthly expenses.  Don’t forget to factor in allowances for expenses that are infrequent or unexpected.  It is critical to establish an emergency account for those unplanned expenses.

Protecting Your Wealth

There are some housekeeping items that you will want to put behind you as soon as possible.  First and foremost is to check your retirement accounts and life insurance policies to make sure your “ex” is no longer listed as a beneficiary. There are many horror stories where beneficiary designations were not changed, and an ex-spouse ends up with retirement assets intended for someone else.  While you are verifying account titles, make sure that your “ex” is no longer listed on your checking account and credit card statements.

This is a good time to start building credit in your own name if you have not done so before. Start by opening one credit card with a small available balance that you make sure to pay off every month.  Even if you already have an established credit history on your own, we recommend reviewing your credit reports to make sure that they are accurate. You are entitled to a free copy of your credit report every year from each of the credit reporting companies (TransUnion, Experian, and Equifax). You can request them at AnnualCreditReport.com or by calling 1-877-322-8228. For maximum security, it is recommended that you stagger the inquiries every few months between the three companies in order to monitor your credit record all year long.

Estate Planning

Make plans to work with a lawyer to design your new will, power of attorney, and health care proxy.  Your retirement accounts will pass to your heirs by beneficiary designation. However, if you do not have a legal will, a probate-court-appointed administrator will determine how your other assets (brokerage accounts, bank accounts, homes and cars) are distributed. This delays estate distribution and causes undue stress for your heirs.

Knowledge is power when it comes to one’s finances.

As a newly divorced person, it is incumbent upon you to understand what is coming into your accounts (income) and how that income can be spread to cover all expected expenses, along with a few surprises.  Your fresh start can be a satisfying reset with you at the helm, but it is important that you take charge at the outset.

Jennifer Nicasio, CFP®
Jennifer joined HTG in 2005. As an advisor, she helps clients make thoughtful and informed decisions on all aspects of their finances. Jennifer is a CERTIFIED FINANCIAL PLANNER™ practitioner and Certified Divorce Financial Analyst®. As a CDFA™ professional, she helps clients understand the short and long-term implications of decisions they are making during the divorce process. Jennifer has a BA from Middlebury College.
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