It is no secret that your life is going to change after your divorce. If you are already in the process you know this. In fact, it may feel like nothing is going to stay the same. Do you feel this way? However, there are things that you can do prior to finalizing your property distribution and support award that will help you get ready for life on the other side. One of those things, and in my opinion maybe the most important, is your post divorce budget.
Why is a budget particularly important for divorced persons?
A solid budget is particularly important for divorced persons. In a recent CNBC study, 56 percent of divorced Americans said they almost never talk about their finances with family members, versus 27 percent of all survey respondents. What’s worse, most women cite money as their biggest concern about getting divorced! Even more so than custody of their kids! Those two statistics add up to a lot of anxiety about your finances.
Are you feeling anxiety about how you are going to pay your bills after your divorce?
Yes? This is why we need to talk about money. Like, ASAP. I know it may be uncomfortable but we need to talk about money. You need it and you need to understand it. Part of that money talk is talking about how you make it and how you spend it, i.e. budgeting.
You may be saying, fine Liz, I’ll talk about money. Great, glad to have you on board. But are you thinking, I have no clue on how to prepare a post divorce budget? Don’t worry you are in the right place.
In this article, I’ll discuss:
- Why it is so important to set up a post divorce budget prior to finalizing your divorce award;
- The main components of budgeting;
- How your post divorce budget may be different from the budget you had prior to separation;
- Examples of categories that should be included in your post budget; and
- Some great resources for budget templates.
Why do you need a post divorce budget?
Simply put, unless you are Mackenzie Bezos, you need a budget to be financially successful. This is particularly important after you separate and divorce. Why?
You need to learn how to live off one income post divorce
When you are married, you likely have two incomes and spend and save your money based on this assumption. However, when you separate, you must now live off of one income (not including any child support or spousal support you may receive) and adjust your finances accordingly. This can be difficult for people, particularly if they were married for a long time.
This applies to both parties, not just the one that makes less income. However, making this mind shift to budgeting post divorce with one income is so important. If you don’t sit down and look at your income and expenses post divorce, you run a real risk of overspending and setting yourself up for financial ruin.
A post divorce budget will help you meet your financial goals
Another reason for budgeting is to help you meet your post divorce financial goals. Has your divorce left you without significant retirement? Do you want to be able to purchase a home again or move out of your apartment?
You will not be able to do this without taking a hard look at your income and expenses and developing a realistic financial plan.You may be saying, but Liz, what if I had a budget prior to divorce? Can’t I just use that?
Not necessarily.
While that budget may be an excellent starting point for your post divorce budget, it will likely need to be revised. Why? Because your income and your expenses are going to change after your divorce. Therefore, any budget that you had before will need to be updated.
How so? Read on . . . .
What are the income components of your post divorce budget?
There are two many components of every post-divorce budget: Income and Expenses. Your expenses can not exceed your income otherwise you have blown your budget. Sounds pretty simple right? Let’s dive deeper on each.
There are three main types of income for divorced persons:
- Earned income from employment;
- Child Support and/or Alimony; and
- Income earned from assets received in the final property division.
Let’s discuss each of these separately.
1. Earned income from employment
For some of you, this may be the only aspect of your budget that will remain the same. However, even divorce can have affect on the income that you earn from your job. Consider these scenarios:
Overtime or income from a second job
You may have been able to work overtime or even a second job while you were married, allowing you to earn additional income for vacation, holidays or savings. However, overtime hours may no longer be an option because of your custody schedule or because taking such shifts would result in childcare costs.
Part-time income
Did you work part-time during the marriage? While that may have been okay while your spouse was contributing his/her income to your household, this may not be enough to meet your monthly bills when living solo. Will you be able to get a full-time job given your custody schedule and work history? Is it in your financial best interest to find full-time work given the childcare costs that you may have to pay?
Bonuses/commissions
We’ve discussed how hard divorce is. While some people find work as a sanctuary from the chaos surrounding separation and court dates, others do not. They are so preoccupied with the transition in their life and struggling with their emotions, that their work suffers. As such, they may lose out on bonuses or commissions that are calculated based on work performance.
Loss of promotions or job offers because of custodial arrangement
After separation and divorce, one spouse may be offered a new job. Or, they could receive a promotion at their existing job that would require them to relocate, travel more or change their work hours. However, what if this relocation would require a significant loss of custodial time? Depending on the circumstances of your case, you could lose income because of your inability or refusal to change jobs because of your custody schedule.
2. Child support and alimony
In addition to income from work, you may also be receiving child support and alimony in your final divorce award. If you have not yet calculated what those awards would be, now would be a great time to do that. How can you make a budget when your full income is not known?If possible, have your attorney provide you with estimates for these figures. You can then use those estimates to help craft your budget.
However, remember, these sources of income are not forever!!!
Child support will terminate either when your child turns 18, graduates high school, or completes college, depending on the laws in your state or country. Generally, alimony is awarded for a finite period of time. It may also terminate if you remarry, your former spouse dies or you move in with a romantic partner.
As such, it is important to revise your budget when these support awards expire or, better yet, do your best to not heavily rely on these sources of income. Then, when they terminate, you are not faced with a dire financial situation.
3. Income earned from assets received in the final property division
If you have a diverse marital estate, you may receive certain assets which will provide an income stream to you post-divorce. Here are some examples:
Rental income
Did you and your spouse own rental properties during the marriage? Or, were you awarded a vacation property that you could rent out post-divorce? These assets could provide you with some additional income. In order to assess the potential earnings from these assets, I suggest reviewing your last year’s tax return to see what the net rental income was after expenses.
Unless you need to do significant repairs, it will likely be a good indicator what you will earn. If you have never previously rented out the property, contact a realtor familiar with the geographical area in which your property is located. He or she will be able to give you an idea of what you can charge and what the expenses would be.
Dividend and interest income
Were you awarded an investment account in your final divorce award? Depending on the size of the account and the rate of return, this asset can provide you with supplemental income. A financial adviser would be able to provide you with an estimate of your annual income from this asset. Remember, you will have to pay taxes on these monies, so consider this when budgeting. An accountant can help you determine your potential tax liability.
Stocks
I have a lot of clients that work in the pharmaceutical industry. Big Pharma is huge in Philadelphia. As such, many of them have stock and stock options which they are awarded as part of their employment compensation. Both stock and stock options can be considered marital assets. Selling stock at the right time can result in income to the seller.
However, tax consequences will also need to be considered. I would not suggest factoring in this income into your basic monthly income unless you can work with a financial adviser to develop a trustworthy and consistent estimate of what you will earn. Again, remember to consider the tax consequences as well.
Sale of personal property
Want to get rid of that engagement ring? Have an art collection that you don’t have room (or love) for? Did you spouse leave you with a pile of electronics that you don’t know want? All of these can be sold for cash.
However, make sure that you use a site or a seller that will get you the most bang for your buck. For jewelry, I highly recommend, Worthy.com. Art and antiques should be taken to a reputable appraiser/dealer. Electronics can be sold on Decluttr, Amazon or Ebay.
Annuities
An annuity is a retirement asset, which once the owner of the account (the annuitant) reaches a certain age, will pay out a certain amount per year. While I think these types of assets are less popular than they used to be, you may still have one. The plan summary should provide the amount of the payout. As always, remember that taxes will be owed on these monies.
Retirement Accounts and Pensions
Retirement assets vary and I plan on devoting a separate post to explaining the different types of retirement accounts that are available so stay tuned! (Or better yet, subscribe to my newsletter so you don’t miss it!). However, if you have any retirement accounts, it is best to determine what amount of income they will provide to you and at what age.
While the statements may provide some insight, a financial planner can provide you with a more accurate assessment of the available income. Also, depending on what type of retirement asset it is, taxes may be owed when the money is distributed.
You should particularly keep this in mind if you receive part of your spouse’s monthly pension payment. Whatever type of account it is, do your best not to draw on these funds prematurely. This could result in financial penalties that could torpedo your budget.
Don’t forget to include these expenses in your post divorce budget
By now, you should have a good idea of what your monthly income is going to be post divorce. Now is the less fun part of budgeting: expenses. Cue scary music.
Remember, certain fixed expenses are not going to change just because there is one less person living with you. I know, it’s unfair. If you lose half your household income your bills should also go down by 50% right?
Unfortunately, certain bills such as cable, mortgage/rent, car payment, etc. aren’t based on the number of persons utilizing the service. That’s what makes budgeting on one income so hard. Here are some major expenses that you will need to include in your budget:
Rent/mortgage and house related expenses
This is likely going to be your largest expense. First, are you planning on staying in the marital home after the divorce? If so, do you have to refinance the mortgage? Refinancing the mortgage can be an excellent way to save money on this expense. This is particularly true if you have a high interest rate or can roll additional home equity loans or line of credit into one mortgage, reducing your monthly payment.
However, often times, the party keeping the house has to refinance the mortgage for a higher amount than their present mortgage balance because they need to obtain funds to buy out the other spouse’s interest in the property. Does this apply to you?
If so, your monthly mortgage payment maybe more than what you and your spouse were paying during the marriage. This is because the balance is increasing as a result of this buyout. Can you afford that new monthly payment? Make sure you can before you agree to this.
If you are not keeping the house and are planning to rent or buy a new property, make sure that you understand the costs associated with both of these options. Remember, buying a home does not mean budgeting for just a mortgage payment. You need to also consider taxes, general upkeep and maintenance expenses. Rentals don’t require these expenditures but do not allow you to build up equity which you can borrow against later.
Healthcare and Medical Insurance
If you are on your spouse’s health insurance plan, it is imperative that you investigate the cost for you to obtain your own medial insurance. This is available through the either the Affordable Care Act, Medicare or an employer sponsored plan (if available). Seriously, stop reading this article and go investigate. Your spouse will no longer be able to cover you after the divorce decree is entered. Therefore, you must make sure that you have healthcare available to you when you are divorced.
Medical insurance premiums and unreimbursed medical expenses can be a significant part of your post divorce budget, particularly it you are not employed and not yet eligible for Medicare benefits. I particularly suggest that you do this research prior to finalizing your property distribution and alimony award. If the cost is significant, the court may consider it when determining the amount of alimony.
When selecting a health insurance plan, make sure to also review your potential out of pocket medical expenses. A plan with a low monthly premium may end up costing you if your copays and unreimbursed expenses are high. This is particularly true if you have regular prescriptions or have pre-existing health issues requiring specialists.
Childcare
Separating from your spouse may result in the need for childcare. This is because the stay at home spouse now has to go to work in order to pay their bills (remember that whole, living off one income thing?). Now, with both parents working, the children may need to attend childcare or, at a minimum, before and after school care.
While you and your ex will likely have to share in this cost, you need to be budgeting for your share of this expense. There are many types of childcare services available: au pairs, nursery school, babysitters, pre-school, and private schools. Do your research and select one that fits both your budget and your children’s ages and needs.
Work-related expenses
Are you going back to work? While working is the way that we earn money, there are also expenses associated with being in the workforce that will need to be factored into your post divorce budget. Examples of those expenses include, gas and car maintenance, lunch, work wardrobe, dry cleaning, transit pass and electronics.
Professional fees
As we discussed above, managing certain assets that you receive post-divorce may require assistance from professionals such as accountants, financial advisers, and/or tax preparers, all whom charge fees for their services. Also, if you think there will be additional litigation related to your divorce, i.e. additional custody or support hearings, it is a good idea to factor in the cost for future legal fees into your budget too.
Related: Essential tips for keeping your legal fees low.
Taxes
Certain assets assigned to you in your divorce may also result in tax consequences. Make sure that you budget for your potential tax liability all year long so that you aren’t surprised in April. Again, an accountant or tax preparer can assist you with this.
Also, remember to adjust your withholding with your employer after your divorce is final. As you will no longer be filing your taxes with your spouse, it is important to make sure that your withholding reflects your current marital status and number of dependents. If you don’t make this change you may under-withhold, also resulting in an April tax bill you didn’t expect.
Other Debt
While walking away with just assets post-divorce is a nice thought, it is likely that you also will leave with some debt. This debt can include pre-marital student loans, your share of marital credit card debt and even legal fees still owed to your divorce attorney.
If you aren’t able to pay these off all at once with monies that you received in your settlement, try to work out a payment plan with your creditors. As I have discussed previously, it is really important to maintain good credit and build up a credit history after your divorce.
What else should I include in my post divorce budget?
So far I’ve talked a lot about how to set up your monthly budget for post divorce success. However, while your day to day expenses need to be in the forefront of your budgeting, you can not forget to make room for your long term savings and spending goals. What are those for you? Here are some ideas:
- Savings for children’s college education;
- Retirement;
- Travel;
- Large purchase such as a car or home; and
- Emergency savings fund.
The end of your marriage is a chance at a fresh start. Dare to dream big for your future. Just make sure to include it in your budget!
Where you can find helpful post divorce budgeting resources
While I have a passion for personal finance, I am by no means an expert. Here are some articles from some of my favorite personal finance bloggers that will help you create a budget and save money:
- Making Sense of Cents’ Master your Money Course: Reasons that you need a budget. This is a 10 day free email course that walks you through why you need a budget and how to create one.
- Lauren Bowling of Financial Best Life’s 6 easy steps to set up a budget. Lauren’s articles particularly appeal to those who have struggled financially and are just starting out learning about personal finance.
- Deem Beam’s 3 easy budgeting steps. This article also provides a budget template that you can use.
- Looking for tips on how to live on one income? Read this great article by the Budgeting couple.
- Mint.com. If you have read my Recommendations page, you know that I love Mint. I recommend it to all my clients and use it myself. You can create a budget and budgeting categories on mint. Then, when you earn or spend money, your budget will automatically be updated as long as your accounts are linked to your Mint profile. Mint also will give you an average that you spend on certain categories, which can really guide you in determining what your budget should look like. Best of all, it’s free!
Are you ready to create a post divorce budget?
You knew that your life after your divorce was not going to be the same. Why would your money? Make sure that you prepare a post divorce budget as soon as possible so that you are ready to embark on this new chapter in your life and financially ready for whatever is to come.
Do you have a budgeting tip or expense hack that you want to share? Curious to learn more about how divorce affects your finances? Comment below.
Looking for what to do next to help you to get to your best post divorce life?
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