Divorce affects every aspect of your financial well being. Most of what is established in your divorce agreement is on the basis of money. Support, division of assets, debts, personal property, etc. When the divorce is completed, you and your spouse each have about half as much. For many, that may not amount to much.
Regardless how much you have left, halving your financial net worth, paying legal fees, taking on separate household financial responsibilities is never a good feeling. Among those who already had money tension that led to the ending of their marriage, it's common for divorce to make things worse. In a 2017 Magnify Money, Divorce and Debt Survey whose respondents cited money as the reason for their divorce, 60% said they had a lower credit score following divorce and 59% said they went into debt after divorce.
Even if you feel your agreement was an equitable distribution of assets and debts, you may find it hard to repay your share on one person's salary. Some of you may find keeping up with your own household expenses a challenge, while others will have overall investment concerns at the top of the list. No matter what keeps you up at night, you will have to learn to live with less of it.
What are common money concerns following divorce?
Divided Debts
Waste no time. Determine a way to get your debts within your budget.
In a 2018 Worthy Study consisting of 1,700 recently divorced women across the country, 48% said they had financial surprises after divorce. You may find some of your decisions made at the time of your divorce were less advantageous than you thought. Perhaps you anticipated you would have a better paying job or were too forgiving in taking on some debts in an effort to end the marriage quickly. Most of us find one thing or another that cause us some financial grief.
Don't delay. Resolve such problems with increased income, refinance, consolidation or reduction in other expenses. Don't waste too much time being disappointed over what is settled. It is unlikely it can be changed unless you have a very forgiving spouse or a reason for the court to re-open the case, which is rare.
Ex's failure to pay debts
Rule # 1. Life is not always fair and neither are divorce settlements and spouses who don't regard them.
One of the rudest surprises following a divorce is to find that a debt in both spouses names, that has been assigned in your divorce agreement to your former spouse to pay, has gone into arrears. Worse yet, when you find out your credit has indeed been damaged despite a divorce agreement established as a judgement in a court of law.
While you may have a small claim case against your former spouse for the money due for mutual marital debts he/she is legally responsible based on the divorce agreement; you are technically still on the hook to the creditor for any debt that was originated in both your names.
Speak with your ex to determine the reason the debt has not been paid. Get the debt up to date as soon as possible to avoid any action taken that may affect your credit which may include: derogatory reporting to the credit agencies, garnishment, repossession, forclosure, collection calls, etc. Discuss a repayment plan with your former spouse for any amount you have paid. Let him/her know you would like the debt refinanced out of your name. Seek the advice of an attorney to take further action.
Assets
Know what your worth every minute of everyday. The more you know, the more you will be worth.
Take the time to routinely analyze your remaining assets to insure any loans against them are most advantageous. Consult with your accountant or mortgage professionals for analysis.
Discuss your current insurance with your local insurance agent to determine if your real property should be covered for the replacement value instead of market value. This would ensure you would have enough funds to cover more than the current value, but would cover the cost of debris removal, reconstruction and any other costs associated with replacement of said property. Your home is a large investment, protect it.
Discuss possible savings with wealth advisors to ensure your current investments are in-line with your short and long term goals. Don't overreact to market fluctuations unless you are planning an upcoming withdraw. If that is the case, your investment should be a low risk - low yield investment with less chance for abrupt fluctuations.
Review your current 401k selections during open enrollment to ensure your selections are also in-line with your investment goals. Understand how much your company matches for every dollar you invest. If they no longer offer matched funds, you may find your money would work better in other investments outside of what is currently offered in your compensation plan. Also, know your tax liability and benefits of your 401k. Speak with a financial and tax advisor for help.
Taxes
Know the laws associated with your type of income and assets.
Tax laws change every year. The year following your divorce would be a good idea to consult with a tax professional at least once to ensure you are paying the least and/or getting the best return possible. Things to discuss:
- Filing status compared to last year
- Self-employment schedules, write-offs and depreciation
- Deductions and Carry-overs
- Changes in support deductions no longer available
- Rental property tax shelter options or rental property sale
- Past or anticipated home sales and capital gains
- IRA, ROTH IRA, 401k and other investment tax liability
Home
So you have a nice home, but can you really afford it?
If your home is outside your budget, despite your best efforts, you should seek the advise of real estate and financial professionals to determine if it is time to sell, refinance or consolidate some debts into a low interest second mortgage or line of credit. Be cautious if consolidating and immediately close any accounts that have been paid off with the loan.
A common trap is to get a second mortgage for the purpose of saving money, then charging revolving credit back up over the next few years. This can leave you in a worse situation than before the loan. Also, consider ways to pay your home off sooner by making one or two extra payments per year, perhaps with a bonus from work, tax refund or money from your divorce settlement when applicable.
Household expenses
Household expenses can account for 20% to 40% of your monthly expenses.
Reduce. Reduce. Reduce. This is an essential part of your financial survival and future success. You should review each of your current expenses such as utilities, home, auto, food and fuel. Look for tips from the source, on-line or through budget saving apps. Use coupon and savings apps that can save money at the grocery store. Grocers determine the longer you are in their store, the better you know the layout, the more you will spend. This, along with convenience makes on-line grocery orders with in-store pick-up a great cost saving option.
Review your current debts in an effort to refinance into lower interest loans. If you can save 10% annually on monthly expenses (including mortgage) of $1400, you could use that $1,680 for an extra mortgage payment every year. This amount could shave 4-7 or more years off your mortgage which could end up saving you tens of thousands of dollars. All that just to clip a few coupons or skip the weekly grocery store ordeal. Utilize our 2020 DMK Budget Series for tips, apps and ideas to help with everyday household expenses and your annual budget.
Insurance
Cover your health, family and assets
Health
If you are a healthy individual and your family is relatively healthy, you may speak with your Human Resource Specialist during open enrollment to change your health plan to a higher deductible and higher co-insurance plan. Review your previous 3-5 years of health care costs to determine if the risk to raise your deductible would be advantageous.
Home and Auto
Contact a local insurance broker to determine if he/she could save you money on your current insurance needs.
Speak with your local agent to determine any savings if you raise your deductible to an amount that would be sufficient for the lenders, but higher than your current deductible, in an effort to lower your annual premiums.
Always discuss any options that may reduce your insurance premiums with discounts (e.g. auto: good student, low mileage, driver education/ home: home alarm, home surveillance or multi-line discounts).
Make sure your home and auto are always properly insured to avoid replacement expenses or legal liability in the case of underinsured circumstances.
You should have a roadside assistance plan on your current auto insurance. Otherwise, initiate a AAA membership for less than $90/annually. It could save you hundreds in cost saving discounts, lock-out service and roadside assistance.
Life
Speak with a life insurance agent that has a large selection of whole life and term life insurance plans that are in-line with your current worth and long term goals. This may mean you will need to move your life insurance coverage from your current insurance provider to a insurance agent who specializes in life insurance plans.
Make sure if you have your life insurance with another company other than who you currently have your home and auto that you are not missing out on any multi-line discounts associated with your life/home/auto.
Umbrella Policy
In many cases adding an additional one or two million dollars in liability coverage may be a nominal fee when you factor in your multi-line and umbrella discounts. If you have sizeable assets this is an essential policy in your portfolio.
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