Divorce brings huge changes to the lives of everyone involved. The emotional pain alone can be a tremendous burden, but it is by no means the only one. The financial realities that arise after a divorce are often the last to be considered, but they can present some of the most pressing challenges. With nearly half of first marriages and nearly 65 percent of second marriages ending in divorce, those financial realities are best considered early in the process, so couples can move on to a healthy post-divorce financial future. In this short article, we’ll take a look at a few ways to prepare yourself financially for life after a divorce.
Be Realistic About Your Financial Expectations
First of all, divorce can be expensive. Estimates vary, but on average, divorce costs around $15,000, and without solid financial planning and perhaps the services of a good divorce attorney, the long-term costs can be significantly higher. In the vast majority of divorce cases, the standard of living for both spouses will drop in the first years following the divorce, for a number of reasons. Not only does the income that once supported one household now have to support two, but there are often other costs, like relocation, separate health insurance, and childcare.
Develop a Detailed Budget
One of the most important tasks for getting started over financially after a divorce is to develop a detailed budget. Make sure you base your spending goals on ‘needs’ rather than ‘wants’–and keep your budget within your real income. Be sure to consider all your sources of income, including income from investments, and don’t forget child and spousal support. Remember though that spousal and child support will not last forever, so plan accordingly.
There are many detailed worksheets available online for developing a budget that can help you consider all income and expenses. Of course, you’ll need to remember that not all expenses are monthly, like quarterly insurance premiums or tax bills, so be sure to include them. Consider asking a trusted family member or friend to be of assistance here. Often, a set of “fresh eyes” on your budget can help you find expenses that seem unreasonable and can help you adjust accordingly.
Think Carefully About the House
If you own your own home, it is typically the biggest asset involved in the divorce, and you should consider your options carefully. In many cases, one spouse, usually the wife, wants to keep the house. At the emotionally stressful time of divorce, keeping the house might feel satisfying, but it’s not always the right financial decision. Remember that the equity in the house is not exactly a liquid asset — you simply can’t use that equity to pay the bills in a responsible way.
If one spouse wants to keep the house, he or she will need to buy out the other, usually, through a cash-out refinance, or by giving up another asset. Another option here is a property settlement note — a deferred payment of property value to the spouse who ‘sells’ the house to the other.
If you decide to sell the house outright in order to divide the asset, measure your position carefully. Depending on the housing market, it may be impossible to sell the house in a reasonable amount of time, or for the money, it’s actually worth. And for many divorcing couples, neither can afford to maintain the household on his or her own. In these cases, consider renting the house to a third party, or even having the ex-spouse remain and pay rent until the housing market improves. Another viable option, especially when kids are involved is called “birdnesting,” or renting a small apartment nearby and taking turns living in the house with the kids. Selling the home at a loss is another, often less palatable option, but it will allow the recently divorced couple to move on with their lives.
If you owe more on the mortgage than the house is worth, the situation is even more tricky. Make sure you both agree on who is responsible for making up the difference between the sale price and what’s owed on the mortgage. If one spouse can afford to keep the house, be sure to get pre-qualified for financing before the divorce is final. Often one spouse alone will not qualify for the new loan on his or her own.
Start Rebuilding Today
Once the divorce is final, start working toward financial independence immediately. To begin the process, you’ll need a concrete plan. Set some goals, like preparing for retirement or paying off the mortgage, and create a formal, written financial plan. State your objectives and set up an investing program tailored to the specific goals. Through the magic of time and compound returns, it is possible to build (or rebuild) your wealth even a bit later in life.
Make your commitment to take action, and stick to it. If possible, automate your savings. By setting up automatic withdrawals that go directly to investment accounts, you can minimize the temptation to ‘skip’ the occasional payment that often happens when manually managing a budget.
Retool: Invest in Yourself
A new chapter in life is often the perfect opportunity to invest in yourself. If you’ve delayed your education to help raise kids, now might be the perfect time to improve your skills, and ultimately your earning and savings potential. Consider evening classes at a local community college if full-time school is too much. One side benefit from going back to school is that is can foster self-esteem and confidence at a time when they’re often low. One option for paying for school at this new time in your life is to part with your unwanted bridal jewelry. Often overlooked, your engagement ring and other bridal jewelry can be valuable assets. Diamond Estate, for example, is one good company that you can use to sell a diamond ring or sell jewelry outright, converting your assets into cash that can be used to invest in yourself and your new future.