Newly Divorced? These 8 Essential Money Tips Are for You
By Mark Yatros
Congratulations, your divorce is final!
At first glance, this may seem like an odd event to celebrate. But, having been there, I know that the end of your marriage is truly a new beginning.
The year after the final papers are signed is a time of intense change, not just personally but financially. It marks the end of shared goals and the start of your solo financial journey. You now have the opportunity to create a financial future that works for you – and you alone. This is the time to rebuild and enhance your financial independence, which can lead to long-term security.
Here are 8 tips to help you begin again financially:
1. Recognize Your New Financial Reality
The financial ties that once bound you to another person have been cut, leaving you to lead an independent money life. It’s time to consider your situation with clear eyes: Most likely, you’re now in a one-income household, so you have less buying power. Your expenses might look different, too, from the basics of housing and utilities to the costs of starting over. And then there's the matter of assets and liabilities — the pieces of your financial puzzle that need to be rearranged into a new picture that represents you, and only you.
To navigate this new terrain, construct a “post-divorce financial checklist.” This list is your financial compass, guiding you through the essential tasks that will lay the foundation for your future. Prioritize what needs to be tackled first, like separating joint accounts (if you haven’t done so already), adjusting your budget to reflect your new income and expenses, and reassessing your savings goals.
Pro tip: This checklist isn't just about staying organized; it’s a tangible representation of your commitment to take control of your finances and your future. It’s an empowering step that affirms ‘I’ve got this’ at every checkmark.
2. Establish Long-Term Financial Goals
As you begin your post-divorce life, think of your long-term financial goals. It’s time to define what success looks like for you. Is it the comfort of a fully paid-off home, the pride in funding your children’s education, the security of a robust retirement nest egg, or the thrill of turning a passion project into a profitable business? These aren’t just daydreams; they are goals you can achieve with determination and a well-designed plan.
Setting these goals isn’t just a mental exercise; it’s about etching a clear, actionable path forward. Employ the SMART framework to set goals that are Specific, Measurable, Achievable, Relevant, and Time-bound. This isn’t about setting vague aspirations but establishing concrete milestones. For example, don’t just aim to save money; plan to save a specific amount each month that gets you to a down payment on a house in five years.
Pro tip: Write down your SMART goals and put them somewhere you’ll see them every day. This constant visual reminder keeps your financial targets top of mind, turning them from ideas into actions.
3. Build a Solid Emergency Fund
Now that you’re on your own financially, create an emergency fund for unexpected expenses. An emergency fund is a financial cushion that can soften the unexpected blows life might throw your way. After your divorce, the size of this safety net might need to change. Now’s the time to calculate what three to six months of your expenses look like on a single income. This number will be your new baseline target for an emergency fund.
Starting to save for this fund can feel like a daunting task, especially when you're adjusting to a new financial reality. If your budget is tight, begin by saving a small, manageable amount. As you adjust, you can increase your contributions. It’s the act of starting that’s important; any amount of savings will help you as you move toward a more secure financial future.
Pro tip: If you're receiving alimony or child support, consider channeling a portion of this income directly into your emergency fund. This can be an effective strategy to build your reserves quickly.
4. Reevaluate and Adjust Your Retirement Planning
After a divorce, it’s crucial to take a fresh look at your retirement planning. This is the perfect time to update how much you’re putting into your retirement accounts and make sure the right people are listed as beneficiaries. (Hint: Your ex is likely named on these documents. Is that what you want?) Also, your divorce may change how you'll benefit from social security and any pension plans, so you’ll want to get a clear picture of what those changes are and how they’ll affect your retirement.
It's also important to consider how the divorce impacts your timeline and strategy for retirement. You may need to adjust your savings rate or investment choices to stay on track with your new retirement goals.
If you're over 50, the IRS has special rules that allow for catch-up contributions to retirement accounts like 401(k)s and IRAs so you can boost your retirement savings more quickly. For 2024, you can invest an additional $7,500 in catch-up contributions, raising your contribution limit to $30,500 (this doesn’t include any employer contributions).
Consulting with a financial advisor at this stage will help you get clear guidance on your retirement strategy. My colleagues and I at Allegiant Wealth Strategies are happy to meet with you to talk about your individual situation. You can schedule a free, no-strings-attached consultation anytime.
Pro tip: Even if you're not over 50, start increasing your retirement contributions as soon as possible. The earlier you start, the more your money will grow over time, thanks to compound interest.
5. Tackle Debt Strategically
Next up: It's time to create a strategic plan to deal with any debts you have so they don't hold you back from your new financial goals. Start by listing all your debts, from credit cards to loans, and include their interest rates and how much you still owe.
Consider tackling your debts with the highest interest rates first. This method, known as the “avalanche” approach, will help you save money on interest payments in the long run. As you pay off each debt, you can redirect the extra money to the next one on the list, creating a snowball effect that will help you pay off all your debts faster. Even though paying off debt can be a challenging process, remember that every dollar you save on interest is one more you can invest in your future.
As you pay down your debts, be sure to live within your means so you don’t acquire new debts. This might mean saying no to some things you want, but it’s a sacrifice that will pay off in the long run as you gain control over your finances and reduce financial stress.
Pro tip: You don’t have to do this alone. My team and I are happy to help you review your budget and figure out how to pay down your debts faster. Please schedule a free, no-strings-attached consultation with us.
6. Review Your Insurance Needs
Following divorce, it’s essential to reassess your insurance needs. Life has changed, and your insurance coverage should reflect that. Take a thorough look at all your policies — life, health, auto, and disability insurance. These policies were likely set up with your former spouse in mind, so you’ll need to ensure they’re now tailored to your individual needs and new financial situation.
For life and health insurance, it might be necessary to update your beneficiaries to ensure the right people are designated to benefit from the policies. You might also need to adjust the level of coverage. If you were previously on a spouse’s health plan, you’ll need to secure your own. With auto and disability insurance, ensure the coverage is appropriate for your current lifestyle and income needs. Don’t forget to update any other policies where your marital status is a factor, such as home or renters’ insurance.
Pro tip: Now is the time to shop around. Insurers often give different rates based on changes in marital status. Additionally, you may find that you no longer need certain types of coverage, or you may require more coverage than before. Use online comparison tools or speak to an insurance broker to get the best deals.
7. Create or Update Estate Plans
As you move into your post-divorce life, it’s vital to review your estate plan or create one if you don’t have one already. This might not be the most cheerful of tasks, but it’s a powerful step in taking charge of your future and ensuring that your wishes are respected. Start by revisiting your will, trusts, and any advance directives. Given that your marital status has changed, these documents will need to be updated to reflect your current situation and the people you now want to include or exclude.
Aligning your estate plans with your long-term financial goals is also crucial. Your estate isn’t just about assets. It’s about your life’s work and who you want to benefit from it in the long run. Whether it’s ensuring your children can attend college or that a lifelong friend receives a special memento, your estate plan is the blueprint that will make those wishes a reality.
Pro tip: Make it a habit to review your estate plan regularly, especially after any significant life events like a divorce, the birth of a child, or a major financial change. Life is fluid, and your estate plan should be too.
8. Expand Your Money Knowledge
Post-divorce, it’s a good idea to learn more about money management and investing. Diving into the world of financial management, exploring investment options, and understanding the nuances of tax implications can transform your approach to money. It’s not just about saving and spending; it’s about making your money work for you and growing it through wise investments and smart tax decisions.
Because the financial landscape is always changing, with new laws and regulations that could impact your financial planning, it’s critical to stay informed. Subscribe to financial newsletters, read reputable finance blogs, and don’t shy away from financial literature. The more you know, the better equipped you’ll be to make informed decisions that align with your goals and adapt to changes in the financial environment.
Pro tip: Don’t go it alone. Consider enlisting the help of a financial advisor to craft a personalized investment strategy that fits your unique situation. A financial advisor can offer tailored advice that considers your financial goals, risk tolerance, and the specifics of your post-divorce financial landscape. My team and I are proud to offer free, no-strings-attached consultations. Schedule yours today!
As you move forward into your new life, remember that financial well-being is not a destination but a continuous journey. It requires continuous learning, adaptability, and a willingness to adjust your strategies as life evolves. Embrace this newfound independence and look forward to the future with confidence and a sense of empowerment.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Allegiant Wealth Strategies offers securities and advisory services through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Allegiant Wealth Strategies has offices in Battle Creek and Portage, Michigan, from which we serve Calhoun County, Kalamazoo County, and Kent County (Grand Rapids). The Allegiant Wealth Strategies team offers no-obligation financial planning consultations; call 269-218-2100 or contact us here.