This is the seventh blog in the Divorce and Finances series, addressing common questions I hear as a Certified Divorce Financial Analyst (CDFA) during the pre- and post-divorce process. This blog will address questions regarding personal finances after a divorce settlement. A podcast version of this blog series can be found on our resource center here.
What is the first step I should take in reviewing my finances after divorce?
Analyzing your finance and financial condition is a process that should start before or during the early stages of divorce. It is a process that will continue through the divorce negotiations and into your financial independence. You should start by taking full inventory of all the assets and liabilities you now have after the divorce is final. Some examples of assets include real estate, retirement accounts, investments accounts and bank accounts. Liabilities can include mortgages, credit cards and loans – just to name some examples.
How do income and expenses come into play?
Take a close look at what income you expect monthly from sources such as alimony, child support or salaried/part-time work. Then look at all your monthly expenses, including items such as rent/mortgage, car payments, living expenses, entertainment, taxes, medical expenses (including insurance premiums) for some examples. Be sure to document all these income and expenses numbers and revisit them a few times to ensure you are not forgetting anything.
Compare the two categories. Are your monthly expenses less or more than your monthly income? If they are less than the income, you are off to a good start and can begin saving this monthly excess amount to help establish your emergency fund for those unexpected expenses. If expenses are greater than income, you will need to review all expenses more closely to decide what needs to be done to reduce them.
What should I do with my savings after divorce?
You should work to save an amount equal to 6-9 months of expenses, in your emergency fund. These funds are best saved in a high yield savings or money market account with low risk and a steady interest payment. After you have accumulated enough for an emergency fund, you should begin redirecting your monthly excess savings to an investment account where you can invest in a diversified portfolio for greater growth over the long-term.
If this is left unaddressed, you will begin spending savings or accumulating debt – neither of which is going to help grow your wealth. It will only reduce it over time. This can be the most challenging part of getting back on track after a divorce – deciding what expenses need to be adjusted and determining the ideal standard of living today to reach your future financial goals.
For more relevant blogs on divorce finances, please check out the other articles in the series: