8 Steps to Rebuild Your Financial Life After Divorce
divorce-timeline ·Credit.com
Neal Frankle
If you've gone through it, you don't need me to tell you how financially devastating divorce can be. Many people lose half (or more) of everything they've saved over their lives. This includes their home, retirement, business and investments. If that isn't bad enough, divorced people often see their income wither while their expenses explode. No doubt about it, divorce is bad news financially.
Having said that, all is not lost. In fact, there are plenty of things you can do to improve your situation significantly. Specifically, if you've gone through divorce recently, here are eight things you can do now to help yourself get back on track as quickly as possible.
1. Do Not Panic Or Waste Energy
This is much easier said than done I realize, but you need every ounce of energy you can muster to rebuild your financial life. Don't waste time worrying – it won't help. Also, please know that you are not powerless. There are plenty of steps you can take that will help turn things around quickly (which I'll share in a minute). Don't worry. You have many choices, and as bad as it may seem, you probably aren't going to be out in the street. Don't waste energy worrying because it serves no purpose and saps you of the energy you need to get things back on track. (A divorce survival guide may be helpful too.)
2. Inventory Your Financial Life
You may or may not understand how finances and investments work right now, but that doesn't matter. In time, you will improve your knowledge.
At this moment, it's time to account for where you are and that means putting together an inventory of your financial life; income, expenses, assets and liabilities. I suggest you create a little spreadsheet or loose leaf binder. Make a separate sheet for income, another for expenses, another for assets and the last sheet for liabilities.
On each sheet, make a line item entry with the type of account, amount, who owns the account, what the rate is and the contact information at each institution.
It's astonishing how empowering it is just to have one place to go to in order to get an overview of your finances. Knowledge is power, friend — take advantage of it.
You can also get your credit reports for free once a year — but you can't check your spouse's without their knowledge — so it's not a bad idea to try to persuade your spouse to go over both your credit reports before you split up if that's possible.
[Editor's note: You can also get a free credit report summary on Credit.com, which includes two free credit scores updated monthly, at Credit.com. Check both carefully. Your credit report should include all your open accounts, including joint accounts you may have forgotten about (and ideally, should close). And a drop in your scores could be a sign that your spouse is running up balances on joint accounts, or failing to pay joint accounts he or she promised to pay.]
3. Balance Your Budget
I mentioned above how important it is to inventory your income and expenses. This is a priority. After a split, it may take you time to re-adjust to your new income/expense story. The problem is, you could dig yourself into a debt pit during the adjustment period. Please don't let this happen.
If you don't know what you spend on average right now, start keeping track. This is the most important piece of financial information you can have. With it, you'll know if you need to cut back or get back into the workforce (if the expenses are higher than the income) or if your situation is stable.
If you figure out that your spending exceeds your income, it may not be pretty. But you are a lot better off knowing what the situation is than by ignoring it.
4. Make Sure Your Accounts Are Set Up Correctly
I get questions all the time from people who are recently divorced asking about how their accounts should be titled. Since I'm not a lawyer, I can't provide that kind of advice. Also, the right direction for you might be different from the right advice for the person next door.
If you are divorced, your legal representative is responsible to advise you on how to take title to your accounts and also, who the beneficiaries should be on your accounts.
This topic is especially important when it comes to dealing with retirement accounts. Acquaint yourself with the rules on this, but don't try to be your own attorney. Get good, sound legal advice when it comes to proper vesting and naming your beneficiaries.
5. Identify Priorities
Divorce often comes as a shock. If that describes your situation, you might feel as though everything is coming at you all at once. That's understandable but dangerous. When people have too much on their plate they can easily become overwhelmed and then freeze up.
If you determine that you don't have enough income to balance your monthly budget that has to be your first priority. If you (and your children, if you have them) depend on your ex-spouse for continued support, make sure they are required to buy life insurance and name you and the children as beneficiaries.
If you are stuck and don't know how to overcome this problem, it might be helpful to talk to a trusted friend who isn't as emotionally impacted by the split as you are. They might be able to see solutions more easily than you can right now.
If budgeting isn't the biggest problem, great. What do you want to focus on? Improving your finances? Finding new work? Moving? Make yourself a list of everything you want to do and discuss it with your objective friend in order to come up with an action plan and time frame.
6. Pick Your Team
In putting yourself back together financially, you can do a lot of the heavy lifting yourself, but you don't have to. If your situation requires it, don't be shy about getting expert tax, legal and financial advice.
Of course, you want to get referrals from trusted sources but don't stop there. Make sure your team empowers you and makes you feel comfortable. It's their job to make sure you understand what they propose doing and why. If you feel intimidated or confused, move on. It's your money. You have the right to expect a professional and supportive team.
7. Learn
By taking inventory, balancing your budget, creating a priority list and assembling a strong team, you'll learn a great deal about finance. But keep the wagon rolling. Devote 20 to 30 minutes a day to expand your education. Talk to experts. Ask questions. Attend webinars. Never stop.
I've been in this business for 30 years and I learn something new every day. Finance is fascinating and powerful. You can never learn too much.
8. Plan
By taking the steps I've mentioned, you'll be well on your way to a more solid financial footing than when you first divorced. But if you want extra points, boldly go where few others go and create a financial plan for yourself with your new circumstances.
A financial plan tells you where you will likely end up if you continue on your current path and what you might consider doing differently in order to have a different outcome. This may seem like a daunting task but it's actually not. If you don't have an adviser you can run your own projections. If you have a financial adviser, you should already have a solid plan you can refer to.
Of course, if you already have a financial plan, you should update it to reflect the changes in your financial situation.
These eight steps won't change your life overnight, but by taking it one day at a time, things will improve dramatically. And there is nothing here you can't do. Take a breather. Enlist help from people you trust and who care about you. You don't have to rush. You'll see that rebuilding your life after divorce isn't as hellish as it seems.
