For most of us going through or starting the process of filing for divorce produces a lot of personal finance related questions:
Where will my children and I live?
How am I going to pay off my debt?
How can I prepare for my children’s future, my retirement?
All are valid questions and should be addressed as soon as you are able to think about your situation clearly. Financial decisions should never be made based on emotions or in haste but rather be well thought out with goals in place.
Setting up financial goals to achieve financial independence is important for everyone, not just those going through a divorce. We should all be aware and play an active role in what we earn, spend and save. It’s careful thought and planning that keep us from accruing debt and the financial issues that come from being indebted. This means budgeting, setting aside savings and being prepared for those bumps along the road—like divorce.
Start by identifying your financial needs both for today and the future. Once you know where you stand you can develop a plan to help you achieve balance between your income and expenses. By staying on track with the goals you have set for yourself and planning for them you can achieve financial independence and the freedom not to have to rely on someone else.
Achieve financial independence
If your financial accounts (bank accounts, loans, credit cards) were in both your name and your ex’s, the first step toward financial independence is to establish new accounts in your name alone.
This makes keeping track of things much easier, not to mention involves less communication with your ex. As an added bonus you are working toward being financially independent! Here are a few goals to set for yourself:
- Open a checking account. A checking account gives you the ability to easily manage your money. You can have your paychecks and usually child support direct deposited here. A checking account will enable you to pay bills and stay on top of your finances.
- Open a savings account. Or, two or three one for each of your financial goals; emergency fund, down payment fund, college fund, you get the idea.
- Create a new budget. Hopefully you and your ex had a household budget, if not the new you will want to have one. Your budget should reflect your current situation and balance your income with all of your expenses.
- Establish or fix credit. While many of us get by without a credit card or loans, it can be difficult to move forward with your goals without an established credit profile. So if home buying is in your future you will need to make establishing credit a priority. It’s also important to protect your credit during and after a divorce. Make sure your name is not associated with loans, mortgages or credit accounts that are no longer your responsibility. Keep an eye on your credit history to ensure all the information being reported is accurate. You can visit AnnualCreditReport.com and obtain a copy of your credit report once a year for free. If you find your credit needs some work it may be time to seek some debt help.
Let’s take a look at the top three questions asked when a divorce plays a role in your life, and how you can establish the right goals to achieve financial independence.
Where will my children and I live?
If you are not staying in your marital home, your first priority might be to find a place to live. Deciding whether to rent or own can be a difficult decision. Renting can afford you the flexibility to see what life will be like on your own financially, physically, and emotionally. So if you are not sure if you plan to stay in the area or may need to relocate to find employment that pays more renting for awhile may be your best option.
If you do decide to buy, there are financial goals you may need to set for yourself before you are able to buy in today’s tight mortgage market.
- Saving money for a down payment. Saving a large sum of money for a down payment may take time and certainly will require diligent saving. Consider opening a separate savings account for your “house fund”, set a goal of $25 per week, or whatever you think you can afford. No matter what happens stick with the payment to your “house fund”.
- Don’t forget your credit. In today’s mortgage market credit scores are more important than ever. If you have less than perfect credit set a goal to improve your credit rating. Be sure to pay all of your bills on time and pay off any old debts that may be weighing you down. Again, set aside an amount you can afford each week to pay down your debt. Treat it like any other bill and don’t miss payments. If you have no established credit of your own and plan to purchase a home its time to get started. Open a credit card account and pay the balance in full each month.
How am I going to pay off my debt?
To help you get back on track financially, you’ll want to put old debts behind you. You may have court costs and lawyers’ fees, and you and your former spouse now will be supporting two households instead of one.
If you have multiple loans or credit cards, debt consolidation can help make your payments more manageable. You may even want to look into debt consolidation simply to lower your monthly debt payments.
How can I prepare for my children’s future, my retirement?
There are no guarantees in life, and now that you are single it is even more important to take the time to prepare for the “what if”. By setting goals for your future and the future of your children you can gain piece of mind that things are in order. Here are a few goals to work towards.
- A plan for your kids. No one likes to talk about the “what if” but, what if something happens to you? Think about whom you would want raising your kids and caring for them in the event something happens to you. Be sure to get it all in writing; a will is a great place to make your wishes known.
- Plan for college. Of course not all kids go to college, but what if yours does? College costs today have skyrocketed and by being prepared you may be able to help them with the gift that will last a lifetime, an education. Consider opening a 529 plan, the money placed in it grows tax free! The downside is that this type of savings vehicle may only be used for education purposes.
- Take advantage of a 401K. If your employer offers a 401K, use it and max out your employer matched contributions if you can. I talk too many people who ignore this “free” money. Not only is it a great way to save for your future, but there are tax advantages as well.
By setting the right goals today, you can gain financial independence for you and your kids before you know it. What steps have you taken to gain financial independence since your divorce?
The Divorce Coach Says
I think it’s helpful to start with a lofty goal, such as,
- I want to buy my own home in five years time
- I want to pay off my mortgage by the time I’m 55
- In five years time, I have to be making at least as much as what I’m receiving today in spousal support
- In two years I will have an emergency fund equal to six months living expenses
Next you can figure out how much money you would need to achieve that goal. Then you can take what your income is today, and see what the gap is that has to be filled. Next comes figuring out how to increase your income and how to reduce your expenses. But it’s the lofty goal that keeps you focused and motivated.
credit: 401k