The aftermath of a divorce can feel disorienting. You may recognize the individual pieces of your life, but the whole might seem unfamiliar and strange. It’s important to take steps to regain a sense of control over your life after a divorce, and one of the most critical steps you should take is to rebuild your finances.
Whether you and your former spouse worked and split expenses equally or whether either you or your ex was financially dependent on the other partner, ending a marriage has likely disrupted the way you organize your finances, spend your money, and save for your future. Any uncertainty around finances can contribute to unnecessary stress and anxiety during a time when you already have so much on your plate.
At the same time, the period of your life following a divorce can also be an opportunity to re-order your finances and adjust your financial priorities. As a newly single person, you now have more control over how you budget, spend your money, and save and invest for your future. When so much has changed, however, it can be difficult to know where to start. Here are 5 steps you can take to rebuild your finances after a divorce:
#1. Take an Inventory of Your Current Finances
Before you can figure out where you want to go, you need to know where you are. In terms of your finances, this means taking stock of your current financial situation by doing the following:
- Check your credit score
- Assess your assets and debts
- Track your income and expenses
- Understand the impact of your divorce on your income taxes
While a divorce does not directly impact your credit score, it’s important to understand what your credit looks like, what lines of credit you have open, and – if necessary – what steps you should take to improve your credit.
You should also take an inventory of which assets and debts remain with you following your divorce, including:
- Retirement accounts
- Investment accounts
- Student loan debt
- Credit card debt
- Auto loans
By reviewing this information, you should get a clear picture of your current net worth, which can help you to understand what financial steps you want to take in the future. You should also begin to track your income and expenses. Using a personal finance app can automate this process, making it easy for you to track and organize all your expenses.
Understanding how your divorce will impact your income taxes can also help you to get a fuller picture of your current and prospective finances. Here are a few tax-related questions to keep in mind following your divorce:
- How will your tax filing status change?
- Who will claim your children as dependents for tax purposes?
- How will alimony and child support be taxed?
For both federal and California income tax, spousal support is considered taxable income for the recipient/payee and is tax deductible for the payor. Child support is treated in the reverse; it is tax deductible for the payee and is considered taxable income for the payor.
#2. Open Your Own Accounts
While some couples maintain separate banking accounts throughout their marriage, many couples share accounts. If you shared accounts with your former spouse, you will want to open your own separate checking, savings, and investment accounts. If you have changed your name following your divorce, you will want to open these accounts in your new name.
Many people also assume that your credit automatically separates following a divorce, but it is up to you and your ex-spouse to be sure to close or separate joint credit accounts. Otherwise, you might end up responsible for debt that your former spouse accrues after your divorce. Removing your name from joint credit accounts might cause a dip in your credit score because you’ll be losing that established credit history, so you may want to open a new credit card to establish credit in your own name. However, you should be careful about accruing new debt as you begin your new life.
#3. Make a Budget
It is very common amongst couples for one spouse to manage the family’s finances. If your spouse was primarily responsible for managing your shared finances, it might feel particularly overwhelming to decide how to allocate your money wisely and responsibly. However, if you’ve already taken an inventory of your financial situation, you should have a better idea of what your expenses are, where you might be able to cut expenses, and even how you might be able to save or invest for the future.
When making a budget, the 50/30/20 rule might be a helpful rule of thumb. This is a common budgeting rule that allocates 50% of your after-tax income to needs, 30% of your income to wants, and 20% of your income to savings or debt payoff. As a newly single person, it’s especially important to consider building up a “rainy day” or emergency fund to tide you through rough times. This is even more crucial if you have children. Ideally, an emergency fund should have 3-6 months’ worth of expenses, but it will likely take some time to build up this fund if you’re starting from scratch.
#4. Ensure You Are Paying or Receiving Appropriate Support
If you have been granted spousal or child support by the court, you are entitled to receive that financial support from your former spouse. If your ex is refusing to pay either child support or alimony, an experienced family law attorney can help you to enforce those payments in court.
However, if you are paying your former spouse court-ordered child support or alimony and have lost your job or are experiencing significant financial difficulties, you may be able to request that the court modify your support obligations. A reputable divorce attorney can help you decide whether to pursue a modification to your divorce agreement and can represent your interests in court. It is extremely important that you continue to pay the full amount of support in the meantime, however, as the annual interest rate for unpaid court ordered support is 10% under California law.
#5. Update Your Will
Any major life change should trigger an update to your will, and a divorce is no exception. Although California Probate Code 6122 holds that a divorce revokes any property disbursement; power of attorney; and trustee, executor, guardian, or conservator nomination for your former spouse, it is still wise to update your will to reflect how you would like your estate to be disbursed after your death.
You will also want to appoint a guardian for your children in the unlikely event that both you and your former spouse are not able to raise them. Working with a wills and trusts attorney will help to ensure that your wishes are carried out without any unnecessary complications.
If you have recently gone through a divorce and need legal support as you move into the next stage of your life, the compassionate and experienced attorneys at Palmer Rodak & Associates can help you take the steps you need to rebuild your life and plan for your future. Whether you are seeking to enforce support payments, want to draft a will, or are considering a prenuptial agreement for a second marriage, our firm is here to support you through these life changes. Contact Palmer Rodak & Associates today at (760) 573-2223 to schedule a consultation.