Divorce Financial Planning: Preparing for a New Beginning
By Team Seneschal
Divorce is a challenging and emotional experience that can have a significant impact on your financial well-being. Whether you are in the midst of a divorce or contemplating one, you will need a clear financial plan to navigate this transition successfully. It is important to recognize getting a divorce is just as much a financial process as a legal process.
Here are some ways to help you prepare for a new beginning.
Assess Your Current Financial Situation
Assess your current financial situation. Examine your income, expenses, assets, and liabilities. Gather bank statements, tax returns, investment accounts, and mortgage statements. This information will serve as the foundation for your divorce financial plan.
Document sources of income, including salary, bonuses, investments, and other financial resources. List your expenses, like mortgage or rent, utilities, groceries, insurance, and childcare expenses, if applicable.
If there was an imbalance of financial controls or decision making in your marriage, you may encounter challenges when gathering this information during your divorce process. The more you are able to gather before your process begins, the better, especially if your spouse is expected to be adversarial. It will help you, your attorney, and financial advisor get a head start on understanding your situation while data may be pending through discovery or subpoenas.
If you are post-divorce, the sooner you begin thinking about your financial plan, the better. You likely put in a lot of work to get through your divorce process, and it is common for people to exit their divorce process more educated and aware of their financial picture. You may be able to use this to your advantage before the data gets too stale.
Create a Spending Plan
Once you understand your financial situation, it's time evaluate your cash flow. This step will help you determine how much money you need to cover your living expenses and maintain your lifestyle post-divorce. Be realistic about your expenses and consider any additional costs associated with the divorce process, like legal fees. If your spouse took care of important items like filing tax returns, managing a portfolio, or chores around the house - you may find that you will need to hire professionals to serve these needs post-divorce.
Your spending plan should also include essential and discretionary expenses, like entertainment, dining out, and vacations.
Remember that a spending plan is dynamic. It can evolve as your circumstances change. Regularly review your actual spending to ensure you stay on track and make adjustments when necessary.
Understand Your Financial Rights and Obligations
Divorce laws vary from state to state. Consult a divorce attorney specializing in family law to guide you through the legal process. They can help you navigate property division, alimony, child support, and more.
Your choice of attorney is critical. Seek recommendations and conduct interviews to find a knowledgeable attorney and someone you feel comfortable working closely with during this challenging time. They will be instrumental in ensuring that your rights are protected.
You will want an attorney that can help you achieve your goals and is the right fit for the process you choose to divorce. Fortunately, only a small percentage of divorces go to trial. That means a majority of divorces are able to settle outside of the courtroom. Understanding the options and choosing an approach that is productive and supports your goals will help you build the right divorce team.
This article provides a helpful list of questions you should ask attorneys you are considering. The questions include billing, potential conflicts of interest, communications, staffing, mediation and experience.
Build an Emergency Fund
Divorce can bring unexpected financial challenges, so having an emergency fund is crucial. Aim to save at least three to six months of living expenses in a readily accessible account. During a divorce process, having these funds in your own name can provide a financial safety net, especially if your spouse is non-responsive, abusive or controlling.
Update Your Financial Accounts
Post-divorce, update your financial accounts to reflect your new circumstances. Change beneficiaries on life insurance policies, update your will and estate planning documents, and close joint bank accounts and credit cards.
Establish Your Credit
If you relied on your spouse's credit history during your marriage, it's time to establish your credit independently. Open a credit card in your name, make regular payments, and maintain a positive credit history. If you can qualify to refinance debts from the marriage into your own name, this can help build your credit too.
Prioritize Your Financial Goals
Take the time to define your short-term and long-term financial objectives. Whether saving for retirement, buying a home, or funding your children's education, having clear financial goals will be a critical part of your financial planning.
Seek Professional Financial Advice
Navigating the financial complexities of divorce can be overwhelming. Consider consulting with a CERTIFIED FINANCIAL PLANNERTM professional (CFP®) specializing in divorce financial planning. They can help you make informed decisions about asset allocation, retirement planning, and tax implications. Their experience in working with divorcees can also better equip them to understand the emotional impacts of divorce and be more empathetic to this transition.
During a divorce process, you may also want to consider engaging a Certified Divorce Financial Analyst® (CDFA) who has consistent experience doing pre-divorce work. Some financial professionals seek the CDFA designation but may rarely actually get divorce cases. It is possible they could be more interested in a financial planning relationship or managing post-divorce assets. It is important the CDFA professional you engage understands how divorce works in your state, can participate effectively in the divorce team during your process, and is willing to serve your case with a fiduciary mindset. They should have a case history to support their experience. CDFAs listed with the Institute of Divorce Financial Analysts are in good standing and may be a good place to start your search.
Protect Your Retirement Savings
Retirement accounts are often among the most substantial assets in a marriage.
Ensure you understand the rules governing the division of retirement accounts, like 401(k)s and IRAs, during a divorce.
A qualified domestic relations order (QDRO) may be necessary to protect your share of these assets. According to the U.S. Department of Labor, a QDRO recognizes your right to receive all or a portion of a designated retirement plan.
Consider Tax Implications
Consult a qualified financial advisor or tax professional to understand how divorce may impact your tax return, deductions, and potential liabilities.
Filing taxes after a divorce or separation can be confusing. Be sure your tax professional is familiar with issues relating to your filing status, name change, tax withholding, the taxation of alimony and separate maintenance payments, claiming dependents, the taxation of property transfers and Rules for IRAs.
Maintain a Support System
Divorce is emotionally taxing. Having a support system in place is essential. Lean on friends and family for emotional support. Consider counseling or therapy to help you navigate emotional challenges.
Explore joining support groups and online communities. Learning about the experiences of others who have gone through a divorce can provide comfort and help you implement effective coping strategies.
Embrace Your New Financial Independence
Divorce can be an opportunity for personal growth and financial independence. Embrace the chance to take control of your finances, set new goals, and build a brighter financial future.
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