Finalizing a divorce? By now you've heard all of the clichéd advice: 'there are other fish in the sea' or 'this is the beginning of the rest of your life.' Meant to make you feel better, that advice doesn't provide you the means to change anything. One thing you can do is evaluate your new financial situation and take steps to reduce the stress of money issues that may arise after a split.
When people get married, they should develop a plan to achieve shared financial objectives. When they get divorced, it's time to refocus on personal financial goals. It's important to go over the numbers, because your assets and net worth are likely to be quite different in your new circumstances. Unlike before, your entire financial strategy should now be shaped by the needs and wishes of a single person: you.
To make matters more complicated, you have to redefine your financial plan under entirely new income and expense constraints. New commitments and obligations such as alimony, child support and relocation can significantly change a person's financial landscape and the amount of discretionary income that can go toward saving for the long term.
For people that did not take on many financial responsibilities in their married lives, these new arrangements may require that you relearn many personal finance skills that allow you to accumulate the capital required for investment. Dealing with new fiscal and investment issues can be tricky, especially when rational decision making may be impeded by the highly emotional state that most people find themselves in immediately after a divorce.
Due to the pressures involved in facing the future alone, many of the newly divorced neglect to reorganize their finances until money becomes an issue. In addition to creating havoc with your finances, not having a plan and not being disciplined about financial matters can cause additional uncertainty and anxiety.
Although challenging, the best course of action is to stay disciplined and think through the following considerations while developing a new financial plan.
Review your current financial situation
Since it probably looks different following your divorce, it's important to take account of your income sources, your new set of expenses, the assets you have and your current tax situation. The next step is to create a detailed post-divorce budget that highlights any surpluses that can be used to manage debts or save and invest for the future. Once you have done that you should also come up with a savings target. Expenses for discretionary items like entertainment, dining out, and buying new clothes should be adjusted to ensure adequate savings necessary to achieve long term investment objectives.
Revisit your financial needs
Once you have determined a savings target, you must then allocate the money you'll be saving among various mutually exclusive options like debt and investment management. Staying disciplined in these activities and understanding your real financial needs will help you realize all your financial goals, including long-term ones.
For debt management, split your obligations between long-term loans for the purposes of buying assets (mortgages, or car and student loans) and high interest consumer debt. Once you've made sure that your former spouse is no longer party to any credit vehicles and can't influence your credit status, try to pay down high interest loans. This will result in a riskless return that is usually higher than what you can expect from the investment market.
Having organized all your accounts, it is important to review your credit status by pulling a credit report. These days your credit score can influence more than your ability to get credit. It can also affect pricing for other financial obligations like insurance and even cell phone services. Remember that creditors are not party to your divorce decree or property settlement. All debts that are in the name of both spouses before a divorce remain the obligation of both parties afterwards.
Plan for the future
Redefine your investment goals
Financial goals drive everything. It's near impossible to build thoughtful strategies for savings and investment, asset allocation, risk management and portfolio management without having clear targets. These priorities are commonly much different after divorce, which means it's time to start from scratch and build a financial plan that will help you achieve financial independence.
It's critical to be introspective about why you are saving and investing. You must also determine your risk profile by understanding the amount of price volatility or value loss you can tolerate in a given period in order to achieve the investment returns that will help you achieve your objectives.
Assess your financial advisor
If you have been using an investment advisor previously, this is the time to do an in-depth review of their services to determine if you want to continue working with the same individual or firm. An investment advisor should be your partner in achieving your unique financial goals, and the person who was helping you as a couple may not be the right person to help you as an individual.
Create a new financial plan
Produce a new financial plan that matches your goals and risk profile. It should include the percentage of assets by type (bonds, equities, real estate, etc.) that will make up your investment portfolio.
This asset allocation will determine your expected investment return and your risk management indicated by the percentage of riskier assets (equities) vs. more stable income oriented securities (fixed income/bonds). The next step in constructing your portfolio is selecting the funds or individual securities to make up the correct percentages in each asset class.
As part of the portfolio construction process, you have to review existing assets to see if they still fit with your overall plan, fall within your risk profile and have the potential to help you achieve your long-term financial goals. Any assets that do not fit these constraints should be liquidated and these funds should be used to purchase ones that do.
By following these steps, you'll build a good foundation for your future and hopefully avoid many of the money issues that can plague people after a divorce. At a time when your world has been turned upside down, you'll be glad that you took the hard steps necessary to start over.