Life after a divorce can be pretty complicated, since this life-changing instance can have a direct impact on your finances. Regarding money, there are plenty of things going on in your life that are going to need your attention. These five tips will help you improve your financial situation and limit your stress during this difficult time.
Assess Your Current Financial Strategy
One of the most important things you can do after a divorce is assess your financial status. First, you should take a look into all of your accounts including, bank statements, credit cards, insurance policies and anything else that is a monthly expense.
When it comes to permanent life insurance coverage, it’s especially important to review your current plans since this type of policy has a cash value component and can be considered a marital asset. Also, you should revisit your beneficiary and decide whether or not you need to make adjustments.
After you revisit insurance plans and determine your expenses and income, you should then set a budget. This will make sure that you don’t overspend and that you are allocating funds to the right things. We will talk about how to correctly set up a budget in the next tip.
The next step you should take to improve your finances is to create a budget. Budgeting can help you regardless of where you are in the process of your divorce. For many, your household is going from two incomes to one, which can have a big impact on your lifestyle. Setting a budget may seem like a daunting task, but it’s actually pretty easy to do if you use an online tool like Excel. Creating an Excel sheet for your expenses will allow you to set formulas and copy them for each month in a workbook.
As mentioned earlier, the best way to start the budgeting process is to look at your financial status, to determine how strict your budget needs to be. It may be a smart decision to list out each expense you’re responsible for. Make sure to include all recurring payments like, utilities, mortgages, rent, alimony and child support. You want to have a clear list of recurring, monthly expenses to reference. After analyzing these payments, find the total amount of money that is required to cover them all.
Once you have determined all your expenses, conclude what your total monthly income is. Determine how much of your total monthly income it will take to cover your monthly expenses. The amount of your money should be divided, a portion should go into a savings account while the rest can be used for entertainment or as “fun money” for non-essential purchases (ahem, those candles you’ve been eyeing).
Create A Savings Plan
Saving money is very important, especially right after going through something as life-altering as a divorce. Many times, a divorce can impact your pre-existing savings account. Creating a savings plan will help you get back on track. Setting your budget will help you save money, but another way to really build up your savings is to have 10-20 dollars taken from your paycheck and directly deposited into a savings account.
If you choose to do this make sure you do your due diligence when picking a bank. Some banks have fees associated with their accounts, like minimum balance and overdraft. While some banks offer accounts without fees attached, which will allow you to save the most amount of money.
Pay Down Your Debt
After looking through your finances and setting up your budget, the next step is to pay down your outstanding debt. Having outstanding debt impacts your finances in more than one way. It impacts your credit score, making it harder for you to get loans, purchase a vehicle or a home. It can also add more financial stress to your life, since you will constantly know that you owe money on a loan.
There are two methods you can use to pay off your debt, the snowball method and the avalanche method. The snowball method says to pay off the loan with the lowest balance first and work your way through to the highest. While the avalanche method says to pay off the loan with the highest balance and work your way down to the lowest.
Regardless of what method you choose, it is important to remember that you should always make at least the minimum payment for all loans, each month. These methods are designed to help you allocate overpayments on loans.
Live Within Your Means
The best way to improve your finances is to make sure that you are living within your means. To do so successfully, always utilize a financial plan to determine what you can and cannot reasonably afford, and set strict spending limits to avoid making too many luxury or unnecessary purchases. This does mean that you may need to give up some luxury purchases if they bring you happiness, such as dining out or buying clothes. However, in the long run, you’ll have more money to spend on what you really want instead of short term indulgences.
You should also be aware of lifestyle creep–a term for when people overspend once they start earning more. For example, if someone gets a big raise at their job, their inclination might be to start buying new products that would have otherwise been out of their price range, such as designer clothing or more luxurious dinners. While there’s nothing wrong with treating yourself, the dangers of lifestyle creep is that this type of spending soon becomes a habit, which can lead to slowly overspending. It’s the main reason why lottery winners end up going broke.
So if you do end up getting a raise, don’t be afraid to treat yourself, but remember to reassess your budget to take your new income into account, and plan accordingly.
Following through with a divorce isn’t easy, especially when financial hardships get in the way. With the right mindset and tools, handling your money during and after this tough time will become easier. Don’t lose hope, and stay positive!