If you can plan your post-divorce life with a realistic budget, you’ll be better prepared to protect your finances and reach your long-term goals.
Are you starting over as a single Grownup? Don’t panic. If you’re willing to make some tough budgeting choices, you can keep your finances on track.
- Don’t expect things to stay the same.
It’s simple math. If you’re like most married Grownups, you and your spouse both work. While you may earn different salaries, as a married couple, you both contributed to shared expenses like rent/mortgage, utilities, TV/internet, groceries, etc. Post-divorce, in most cases, you will have the same salaries with double the expenses, resulting in a monthly shortfall. Unless you increase your income and get a second (or better-paying) job, you will likely have to reduce your expenses.
The good news is, the sooner you accept the fact that your lifestyle is most likely going to change, the more temporary that change will hopefully be. If you make smart decisions early on, you can avoid getting yourself into debt and focus on planning for your post-divorce future.
Avoid sentimentality—it’s a budget killer. For example, many people rack up a tremendous amount of debt trying to keep the family house they can no longer afford. While in some cases it makes sense to keep your house (e.g., no equity, other living arrangements would have similar costs), in many cases selling the house and dividing the equity will give you an opportunity to start fresh and purchase or rent something you can actually afford. If you base your decisions on your new post-divorce budget rather than your fear of change, you’re off to the right start.
- Be smart before spending your settlement.
Are you being bought out of a house or retirement fund? If you’re receiving a lump sum as part of your divorce settlement, how you invest or spend that money can have a major impact on your financial future. Should you pay off debt? Purchase a new house? Save for retirement? With the assistance of a financial planner, you should carefully consider your options before you spend a dime.
If you’re the one paying out a settlement or dividing your retirement account, seek out expert guidance on how to rebuild your portfolio. You will likely have to reduce some of your monthly expenses if you want to get your savings and retirement planning back on track.
- Research insurance options before you get divorced.
While this may seem like a minor detail, insurance costs can be substantial and should be part of your post-divorce budget. Once you’re divorced, most health insurance policies will not allow you to stay on your spouse’s plan. If you have an alimony or child-support obligation, many states require you to obtain a life insurance policy naming your ex-spouse or child as beneficiary. Premiums vary greatly depending on your age and health, the policy’s face amount, and whether you’re getting a term or whole life policy with a cash surrender value. Finally, once you’re living in two separate households, most automobile insurance policies will require you to get two separate policies. Research the cost of obtaining all these new policies before your divorce is final and you can budget accordingly.
- Understand the tax consequences of post-divorce support.
In most cases, alimony is taxable income to the recipient and a tax deduction to the paying spouse. Alternatively, child support is not considered taxable income. For your new budget, if you’re receiving or paying child support, aim to calculate the actual net impact of paying or receiving spousal support. (Consult an accountant if this gets too overwhelming.)
- Factor in child support and child care costs.
If you’re receiving or paying child support, it’s important to know which expenses child support covers and which are considered “extras.” For example, if you’re receiving child support, does this mean you’re responsible for paying all your child’s extracurricular activities—or are these going to be shared as an additional expense on top of child support? How will medical expenses and work-related child care be paid? The law varies from state to state, but in most areas, both parties will be required to contribute to the cost of medical insurance, medical expenses, and work-related child care, which sometimes includes summer camp.
Problems arise when parents can’t agree on which expenses are appropriate for their child. Should we get a nanny or send our child to day care? Should our child get braces? Will you be required to contribute to costs you consider inappropriate? If parents are at an impasse, depending on the state you live in, you may be required to go to mediation before litigating in court. A detailed divorce agreement that addresses how these types of expenses are paid can often avoid future disputes.
- Don’t cancel your credit cards.
If you have a joint credit card or your spouse is an authorized user on your accounts, you may want to think twice before canceling that card. Closing a credit card account can actually reduce your credit score. Instead, it may be better to keep the card open and remove the other party as an authorized user.
Budgeting helps make Grownup decisions less stressful, and it’s no different with the decision to divorce. If you and your ex can plan your post-divorce life with a realistic budget, you’ll both be better prepared to protect your finances and reach your long-term goals.
Kristin M. Capalbo is a family law attorney based in New Jersey.
This post is not legal advice and does not create a confidential attorney-client relationship. It is being offered for informational purposes only. For personalized advice, consult a family law attorney in your area.
Read more in our Grownup Divorce series: