There are many aspects of divorce that can be hard to predict or control —such as the emotional fallout, how your kids will respond, or the impact on your extended family and friends — but you can count on one thing: Your finances will change. And yet few people consider this inevitability until after the ink on their divorce papers is dry.
“Most people don’t prepare themselves financially or emotionally,” says Fada Baradihj, Certified Divorce Financial Analyst. “More often than not, the standard of living of both spouses drops in the first few years after divorce, because the same cumulative income and pool of assets now has to support two households instead of one.”
The good news? If you take a proactive approach, you can minimize the stress this aspect of divorce may cause. As you start your life over as a single person, you can begin to gain better understanding of your relationship with money, rein in spending, minimize debt, and build up savings. The first step? Create a budget.
Say the word budget and many people think of deprivation or “tightening the belt.” While you may need to trim expenses, the exercise of creating a budget is designed to help you understand how much income you realistically need to cover your typical expenses. Only then can you make smart choices about saving and spending.
“Develop a budget based on needs– not wants – and keep in mind that your expenses need to stay within your post-divorce income,” Baradihj says. “Consider all sources of income – including spousal and child support, keeping in mind that they won’t last forever – as well as investment income.”
Step 1. Consider ALL expenses. Start with a detailed worksheet so you don’t overlook any monthly expenses. If you bank online, your monthly expenses may be just a click away. If you tend to pay cash, keep your receipts or a journal of your spending so you can track where that money goes.
Then account for those quarterly and annual bills, such as auto or life insurance, income taxes, or HOA fees. (This annual expenses worksheet can help you consider all the variables.) And don’t forget to include the money you (hopefully) set aside each month for long- and short-term savings goals, including emergency funds and college and retirement accounts. (When considering cut-backs, it can be temping to leave savings off the budget, financial experts advise thinking of these accounts as another bill that must be “paid”.)
Step 2. Consider all income. You’ll also need to estimate your income, taking into account all viable sources — monthly, quarterly and annual.
Step 3. Get accountable. No matter how you try, sometimes it’s hard to own up to spending habits. You may have hidden those expenses from your spouse, but now is the time to come clean about your penchant for Italian shoes or your weakness for Cuban cigars. Rather than create a lump fund for “incidentals” or “miscellaneous” expenses, set judgement aside. Document where your money actually goes.
Need help? Baradihj has this smart suggestion: “Ask a reasonable and critical friend or family member to review your budget and challenge the expenses that seem unreasonable. Keep an open mind and not to get mad if he or she challenges one of your items; remember that this person is trying to help you.”
Step 4. Rethink spending and savings. Now that you’re on your own, you have complete authority (and total responsibility) over spending and saving, maybe it’s time to become more mindful of your money. You may need to trim unnecessary expenses, look for a better paying job, take on a side-gig, or establish a long-term savings plan.
No matter your next steps, armed with an accurate accounting of your expenses and income, you’ll be in a position to have more control over where it will be going in the future.