First, create a new budget based on the changed financial realities. Instead of a two-earner household, you will be a one-earner household, who may receive or pay child or spousal support. Given the lesser revenue, reconsider what you can afford, especially with the largest obligations – housing, automobiles, memberships and the like. If you start out planning to live within your means, you will avoid falling into debt and keep yourself financially sound.
Second, find out your credit score. Your economic future has in many ways been tied to your former spouse, which may have helped or hurt your credit depending on spending habits. If you find yourself less able to obtain credit, consult with credit agencies to determine the steps to take to rebuild your credit standing so you will be able to finance a home or auto loan.
Third, understand the changes to your retirement plan. Usually, the court divides retirement funds, which means you may have a lump sum of money coming to you. To avoid the temptation to spend and the tax penalty, open a new account so you can rollover the funds, keeping a nest egg and suffering no adverse tax consequences.
Speaking of taxes – become familiar with filing as a single individual. Will you have a higher or lower marginal tax rate? How will your deductions change? Who claims the children as dependents? In order to budget properly, you need to know if filing as an individual under new income realities will reduce or increase your tax burden.
And finally, revisit your insurance. In all likelihood, you have one or more life insurance policies that have your former spouse as a beneficiary. Rather than cancel a term policy, change the beneficiary and consider setting up a trust for the children.
Following all of these tips will definitely help you avoid some of the common financial pitfalls associated with divorce.
If you have questions about finances after divorce, contact us – we can help.