Ways to Improve Financial Stability Post-Divorce
After a divorce, parties may not have the same income as before due to obligations for spousal support and or child support. Also, if one person was a stay-at-home spouse, there may not be an income attributable to that spouse beyond the support resulting in a decrease in customary income throughout the marriage.
Divorce can be financially damaging since one-half of all the assets, including savings, retirement and investment account is awarded to each spouse. But hope is not lost. With good decisions and practices, each party can rebuild their finances and enjoy their newfound lifestyle.
Steps to improve financial stability post-divorce include:
1. Creating a monthly budget that works for a post-divorce financial situation generating a surplus or breakeven cash flow is an important step. Hopefully, during the divorce, a cash flow analysis has been provided and the decisions made during the divorce regarding the marital home affordability have been addressed. The marital home and housing costs in general comprise the largest component of one’s expenses and should be critically analyzed to ensure affordability.
It is often a prudent decision to move into a smaller place where costs such as property taxes, repairs, and maintenance are lower. Although it may not be an easy decision because of the emotional value of a house, it might be the right decision in some cases.
It will be important to review wants and needs post-divorce, eliminate non-essential or duplicative expenses such as multiple streaming services, and revisit the cadence of certain expenditures such as spas, massages, and eating out.
Luxuries that were commonplace during the marriage may no longer be supported by the new income. Revisiting a new lifestyle and spending habits will help avoid a financial crisis or getting over your skis and accruing revolving credit card debt that is unsustainable and fiscally irresponsible. It is imperative to ensure that expenditures do not outweigh the net income received as this is the first step toward financial stability.
Often, there is a temptation of falling into debt or dipping too much into savings without having the means to replenish the savings. Staying within a budget that ensures a breakeven or positive cash flow is crucial to financial wellbeing.
2. Adding a side hustle for extra income is another top-line intervention that can help maintain a certain standard of living or lifestyle that one has become accustomed to. Of course, this will work against the earner for any support received but typically, two-thirds more is kept than is counted against the support amount.
Reducing or eliminating expenses may be difficult and can be overcome with an additional income stream. This may be in the form of a side hustle or greater efforts to earn a promotion or skills to qualify for a higher paying job. The top-line cash inflow is a critical component of financial security.
3. Maintaining a good credit score post-divorce by paying bills in a timely fashion and not accruing mounds of debt provides for optionality in future financial decisions. Avoid using all available credit to keep the credit utilization ratio low. Create a plan for resolving any existing debt. Use whatever disposable income realized towards any outstanding debt.
Some high-interest debts such as high-interest credit cards, can build up a lot over time if not paid off and it becomes a never-ending cycle of debt. With a strategy to keep debt down and pay off any accumulated debt first with any disposable income, it will enable a good credit score. This will in turn lower the down payment for a new leased or purchased car and help with qualifying for a lower mortgage rate if the refinancing is a consideration or a new mortgage loan may be desired.
If you are still carrying joint debt post-divorce, it is crucial to get that debt paid off as quickly as possible. Creditors do not honor Marital Settlement Agreements that assign joint debt accrued during the marriage to one spouse alone. If the ex-spouse fails to make a payment in time, both credit scores can be dinged.
4. Paying the right amount of taxes avoids giving the government an interest-free loan. Paying too much out of a paycheck in taxes through withholding may limit the amount of cash netted each paycheck and thus increase the challenge of living within a set budget. Be careful not to under-withhold though. Paying less than required results in a large tax bill in April each year which is also not ideal.
5. Reviewing the investment portfolio to ensure that the investments are in asset classes (stocks, bonds, alternatives) that align well with risk tolerance levels is another important step in gaining financial security. Often, one of the spouses is more risk averse than another. Reallocating asset classes over time, while paying heed to the tax implications of doing so, will allow for a portfolio that appreciates with the level of volatility that is acceptable. Being able to ride out a down market is another important trait that should be acquired post-divorce. A financial advisor can help with this and ensure that impulsive and fearful decision-making does not derail the goal of financial stability.
Sometimes, the first year, post-divorce is the roughest in getting acclimated to a new income level and eliminating some expenditures that are customary. But during this transition, it will elevate the importance of increasing the cash inflow and eliminating debt issues which are key in achieving financial stability.
This article does NOT constitute legal advice and is for general information purposes ONLY. Prior to making any decisions, seek legal counsel from a licensed attorney.
