Divorce is not easy. It’s mentally, emotionally, and financially draining. It’s even more difficult when children are involved. I know it all too well; I went through it too. And while it may be scary at first, divorce creates an opportunity for YOU to write the next chapter of your life. So I encourage you to feel empowered to take this as an opportunity to write the next chapter on YOUR terms, especially in regard to your financial future.
In a marriage, couples make most financial decisions together, but now you may find that it’s all on you. If finances do not come easy to you, or you simply need a push to get motivated, below are a few simple actions you can take to get your financial house in order.
Step 1: Know Where You Are Now
Just as your navigation app asks your current location before it can provide directions to your destination, you need to know where you stand financially before you can start moving down your new path.
Create a Net Worth Statement:
Make a list of all your assets and liabilities. Under your assets, you should include values for your checking and savings accounts, investment and retirement accounts, and real estate assets such as your home or rental properties.
Liabilities would include debts such as your credit card balances, mortgages, and student loans. Be sure to note the interest rates for each loan, so you can aim to pay off the higher interest debts first, and in the case of a mortgage, determine if it makes sense to refinance.
Ultimately, you arrive at your net worth by subtracting your liabilities from your assets.
Create a Spending Plan:
Detail your monthly bills as well as the ones you pay annually. List out how much you spend on your groceries, gas, and entertainment. Create a list of annual savings such as 401(k) or IRA contributions. Once you have a list, try to group them by fixed and variable expenses. This will help you determine what expenses you have control to trim, if needed.
Once you know how much it costs to run your life, subtract that from your annual after-tax income. You will either have a cash flow deficit or a surplus. If you have a deficit, you should identify what expenses can be reduced; if it’s a surplus, you have an opportunity to save even more.
Review Your Insurance Policies:
Make sure you have adequate healthcare, car, and homeowner’s insurance, plus an additional umbrella policy. Keep in mind that these policies may have originally been in your spouse’s name, so you may need to shop around for new ones. Also, if you have children, you’ll want to determine how much life insurance you need to ensure they’re taken care of in the event something happens to you.
Step 2: Plan for the Future
The purpose of figuring out your current financial situation is so you can determine where you want to be five, 10, and 20 years from now.
Create an Investment Plan:
Once you have a handle on what assets you have, the next step is to review your investments (i.e. stocks and bonds) and create an investment strategy that is designed to meet your new short- and long-term financial goals. It is important to know and understand what your risk tolerance and liquidity needs are; after all, your investments are the engine to your financial plan.
If investing is new to you or you simply don’t have the time to devote to managing your own investments, consider seeking a financial professional who is a fiduciary advisor and a Certified Financial Planner®.
Setting up a sound financial plan is a great way to build financial confidence after a divorce.