A MOMENT OF CLARITY
Top 7 Financial To-Do’s After a Divorce
You have just signed your divorce papers and are now ready to put all the stress of the long and complicated process behind you. Emotions ranging from relief and peace to sadness and anger, and most likely fear and uncertainty, are running through you. You know that you need to take steps to begin planning for the next chapter of your life, but where do you begin? What are the top priorities?
Here are our Top 7 Financial To-Do’s after a divorce. We hope that this list helps empower you to get started on a path towards financial confidence and independence.
1) Build Your Balance Sheet
First things first, you need to know what you have. This begins with building your personal balance sheet. Doing so will help you track what assets you own now and how they can serve to meet your long-term financial goals. It is also empowering to see the big picture of your net worth and how it will grow over time.
The best resource to compile your balance sheet is the marital separation agreement that you just signed. This document should include every asset and account (marital or individual) along with who is keeping it post-divorce. These assets include bank accounts, investment accounts, individual stock, retirement accounts, real estate, business interests, personal property and so much more. Remember to include any debt that you have taken on too, such as a mortgage, auto loan or credit card debt. Feel free to use our Women of ClarityTM resources to complete your personal Balance Sheet.
2) Retitle Assets
As part of the marital settlement, you may have received a portion of what was previously held in a joint bank account, investment account or even a portion of your spouse’s retirement account. Do not delay in moving these accounts/investments to a new account or accounts in your individual name, preferably at a different financial institution to give yourself a fresh start. When you transfer the assets, make sure to keep records of the cost basis of your investments for income tax purposes.
If half of your spouse’s 401(k) is granted to you, consider rolling it over to an IRA instead of leaving it with your ex’s employer. You may also need to retitle other property such as automobiles, real estate and partnership or business interests. The sooner you begin this process the less likely it is that something will be left behind. And once the assets are in your name, you can work with a financial advisor who understands your needs so that you aren’t relying on stale investments that may not suit you post-divorce.
3) Establish a New Budget
To begin designing your future, you should better understand your financial parameters first. In order to understand how much you can (or should) spend, assess all sources of monthly income available to you such as your earnings (net of all taxes), alimony, investment income, retirement income, etc. It is also important to identify which sources are fixed, such as salary and alimony, and which might fluctuate, such as commissions.
Once you have compiled your sources of income, the next step is to determine the amount of your fixed monthly expenses (mortgage/rent, utilities, auto payments, insurance etc.) as well as your variable monthly expenses (such as entertainment, dining out and travel). Be sure to factor in a monthly savings amount to help you continue to grow your wealth. We have a detailed cash flow worksheet that we review with our clients. If you would like us to send it to you, please reach out.
4) Rebalance the Investment Portfolio
As you review your new balance sheet, you will likely notice that your account values are now different than what they were before the divorce. You are now in control to make decisions on how to grow these assets while protecting your future. This can be intimidating at first, especially if your ex-husband handled the investments in the past. But you can do it! It is helpful to have a professional financial advisor guide you through this part.
Ask yourself the following: Do you know what investments you now own in the various accounts? What percentage of the portfolio is invested in stocks? Did you somehow end up with riskier investments than you would normally like? Are your accounts fully invested, or are they mostly in cash? After setting up a budget, this is probably the most important step to get back on track for the long-term. Depending on your stage of life, having an overly aggressive or overly conservative portfolio can put you at serious financial risk. Your financial advisor can help you identify how much risk you can afford to take.
5) Update Your Long-Term Financial Plan
With your budget now in place and your investments with just the right allocation, you should be all set, right? Not necessarily. You could have a five-star portfolio and a strict budget, but if your goals are not clearly identified, you are the equivalent of a ship in the ocean without a compass or a destination. If you have never developed a long-term plan, try reflecting on the purpose of your money and what you envision your future to be.
Having a long-term financial plan will let you know whether your expectations are attainable or whether some changes need to be made (i.e., change your retirement date or adjust your expected retirement lifestyle). The plan can be revisited every few years to see if any additional changes are needed or if circumstances have changed, making it necessary to revise the goals.
6) Review Your Beneficiaries/Estate Plan
As you start this process of getting organized, now is the time to make a concerted effort to review your estate plan. Your last estate plan most likely named your ex as the beneficiary of your estate. This would need review and updating along with all your retirement accounts, pension benefits and life insurance policies. You should also work with an attorney to update your other estate planning documents like your Will, any Trusts, Health Care Proxy, and Power of Attorney.
You may have already begun to make some changes as part of finalizing your divorce decree. However, now is the time to set up an appointment with a professional to help you see the whole picture, including any insurance, income tax and estate plan changes. These decisions can sometimes take longer than expected, so it should not be put off. Begin discussions now.
7) Check Your Personal Credit
Being independent can be very exciting, but part of being independent is having established credit for when you need a loan. It is possible that you do not have established credit because you were only an authorized user on your spouse’s credit card. That is very different than having a card in your name, which contributes to your credit score over the years.
Not sure where you fall? Request a copy of your credit report with one of the three credit agencies – Equifax, Experian, or Transunion. See which accounts are still reported as open and which have been closed. If you don’t have a credit history and need to start building one, make it a gradual process in obtaining credit. Don’t rush to apply for several credit cards at once, because this can have the opposite effect and actually reduce your credit score. Try waiting about 6 months between credit card applications.
Each of these areas play an important role in securing your financial future. Do not let yourself get overwhelmed, take it one step at a time. You can use this outline to create your detailed To-Do List that includes specific accounts to move and items to address, then begin checking them off one by one. If you get stuck, have questions, or need assistance, recruit the help of a professional financial advisor (look for the CFP® credential) to help you focus on the whole picture as well as help you navigate the more complicated details. The Wealth Advisors at Round Table Wealth Management, as always, are here to help.
If you take away anything from this article, please let it be that the most important item is to not procrastinate. There is nothing more empowering than completing tasks that initially feel so daunting and require time and patience such as these – especially when it provides a clearer focus on what matters most and all that is ahead for you.
If any of these tasks seem too difficult to handle alone, recruit the help of a professional. Partner with someone you will trust to have your back in the future.
I wish you all the best as you turn the page on the next chapter of your life!