Divorce can be difficult on many levels, with the financial strain being one of the most formidable challenges. Making sense of your finances during and after a divorce takes work and time, but with proper planning and a responsible approach, it can be done.
Here are 10 financial steps to take during (and after) a divorce:
1. Close all joint accounts.
If you haven’t already taken this step, do so immediately. Review all your financial accounts and credit cards and close all the ones that are jointly owned by you and your ex-spouse. In the best-case scenario, failure to take this step can leave your accounts open to fines and maintenance charges for accounts you don’t really use. In the worst-case scenario, your ex-spouse can rack up huge bills on a shared credit card or leave a shared checking account in the red, leaving you to pick up the tab or risk ruining your credit score and financial health. If there are children involved, you may want to keep one joint credit or checking account open for shared expenses, but monitor it closely.
2. Monitor your credit report.
You are entitled to one free report from each of the three major credit bureaus each year, and you’ll want to take advantage of the opportunity these offer to guard against potential fraud. Visit annualcreditreport.com, the only federally-authorized website for free credit reports; be on the lookout for new accounts an estranged or ex-spouse may have opened in your name.
3. Establish your own credit.
If you don’t already have accounts in your own name, it’s important to begin establishing a solid credit rating on your own, as it is the key to your financial life. Your credit score determines whether you’ll get a mortgage or car loan, allows you to get a credit card with a low interest rate, and has become the new litmus test for landlords, insurers, and even employers to see if you are reliable and responsible. Opening a credit card is a good place to start; just be sure to limit spending to what you can afford and pay off your balance each month.
4. Decide whether you want the house.
Many people have strong emotional ties to a jointly-owned family home. But a home that was purchased with two incomes may be unaffordable when you’re on your own, so take a hard look at your post-divorce income and financial status before deciding how to divide joint assets. Understand that the rights to the house aren’t necessarily going to be split 50/50. Every situation is different and states often have unique laws. There could be a sizable impact to your taxes, too. Consult with your divorce attorney or your Certified Divorce Financial Analyst (CDFA) to get a handle on what your share of the home’s value is anticipated to be.
5. Change beneficiaries on your savings and retirement accounts.
This step is equally important and is also often forgotten about by divorced individuals until it’s too late. Neglecting to change the beneficiaries on your accounts after a divorce can mean your ex-spouse ends up inheriting your IRA, 401(k) or another savings account after you pass away. Changing the beneficiaries on each relevant account can be done quickly and easily with a single form. Look for the designation of “primary beneficiary” and “contingent beneficiary” on each account’s form and list your choice.
6. Review estate-planning documents and make any necessary changes.
Your spouse is probably named as beneficiary in your will, and for your life insurance and retirement accounts, so you’ll want to update those and other documents right away to reflect your new situation. Don’t forget to also revise your living will or advance health directive, and change any powers of attorney that designate your spouse as a decision-maker for you.
7. Create a budget.
Even if one spouse is required to pay child support, it’s likely that both of you will be living on less money after the divorce. Avoid getting yourself into financial trouble later on by creating a budget that’s based on a realistic estimate of your post-divorce income. Remember, as a single person you’ll now be fully responsible for your own retirement savings and necessary insurance, so be sure to include those in your financial planning. If you have children, you may also need to determine how long-term goals like college planning will be addressed.
8. Track child support expenses.
If you have children, be sure to create a system—a spreadsheet’s a good idea—to track both child support payments and costs. This type of documentation can go a long way toward minimizing financial disagreements with your ex.
9. Collect all of your vital information.
Preparing a folder of all of your essential information—whether electronically or in paper form—should make navigating all the required paperwork and decision-making less stressful. Below is a checklist:
- Tax returns from the past five years
- List of items in safe deposit boxes or storage
- Proof of both spouses’ income, such as W-2 or 1099 forms
- Statements from checking and savings account
- Statements from investment accounts
- Real estate and mortgage records
- Home equity loan statements
- Most recent property tax bill
- Promissory notes
- All insurance policies
- Complete records for any businesses owned
- Titles to any vehicles
- Three most recent credit card statements
- Statements for retirement accounts
- Health insurance policies
- List of personal property owned
- Most recent property tax bill
- A current household spending plan
- Account statements for student loans
- Account statements for personal loans
- Most recent paystubs for both spouses
- Medical savings account information
- Statement on the mileage and condition for all vehicles
Should your name or address change, send these changes to:
- Financial institution(s)
- Home, life, health, auto insurance provider(s)
- Accountant/tax professional
- Credit card companies
- Investment account provider
- Unemployment office
- State tax board
- Social Security Administration
- Pension/retirement plans
- Student loan providers
- Mortgage company
- Online business accounts
- Credit bureaus
- Titles or deeds that will be in your name
- Veterans affairs
10. Open new accounts.
Once the divorce is finalized, you’ll want to open new accounts with your name exclusively listed as the owner. This includes credit cards, checking and savings accounts. Once you have new credit cards in your name, take steps to build up your credit quickly, like making regular, small purchases on your cards and paying the balance in full each month.
11. Update your insurance coverage.
You don’t want to get stuck paying for coverage you don’t use—or worse, get stuck with no coverage at all. Review all your insurance policies, including life, health, auto and homeowner’s insurance, then change any plans that were shared with your ex-spouse. Pay particular attention to assets you may have listed in your homeowner’s policy as you may not own all of them any longer and each asset can increase your premium. Now that you are on your own, you may also want to consider taking out a disability insurance policy, which will provide you with the monthly equivalent of a paycheck if you become injured and are unable to work for an extended period of time.
12. Build an emergency fund.
Divorce is often expensive, and you may have wiped your savings clean after splitting up with your ex. Now that you are single again, it’s more important than ever to have a safety net that can tide you over in case of an emergency. You can open a new high-interest savings account for just this purpose and save aggressively until you have enough to cover three to six months’ worth of expenses.
13. Update all legal documents and records.
If you’ve changed your legal name during the divorce, be sure to change the name of record on all your legal documents and accounts, including your driver’s license and Social Security number. You can contact your local DMV and the Social Security Administration for assistance.
14. Purchase a new safe and shredder.
If your ex walked away from the divorce with the safe and shredder, be sure to replace them as quickly as possible. A home safe is the best place to keep valuables and important documents, and shredding any documents containing sensitive information that you no longer need is an important part of protecting yourself from identity thieves.
15. Analyze your investments.
If your ex-spouse handled all the investing in your marriage, you’ll need to analyze your investments and create a new portfolio that fits your own investment style and needs. Consider working with an investment advisor for guidance.
Getting divorced can spell disaster for your finances, but it doesn’t have to be that way. By taking the steps outlined here you can keep your financial independence after a divorce.