Regardless of the circumstances leading to your divorce, now that it’s final, you have to think about your future. First and foremost, you need to take time to deal with the emotions you may be facing. Be patient. It will take time for your family and other relationships to adjust to your new situation.
At the same time, you need to deal with some very real financial issues that come with this life transition. Failing to do so could result in future challenges for you and your family.
Here are five steps that will help you achieve financial security after divorce:
1. Carefully evaluate your tax situation
Depending on how assets were dealt with during the divorce, you may be in for a rude awakening during tax time. Did you sell your home? If so, you may be responsible for some or all of the capital gains taxes due on the sale of that property. This will be dependent on the titling of the deed and who owned the home at the time of sale.
If the deed is titled in both names, you would each share equally in the capital gains tax. It’s important to note that a $250,000 capital gains exclusion per person applies to home sales provided you owned the home for the past five years and resided there for at least two of those years. Ask your accountant for further information on this exclusion to see if you qualify.
Likewise, you need to fully understand which party can claim certain deductions, especially if children are involved. Both parents are not allowed to claim the same child as a dependent. Are you claiming your children? Is he? Is there an arrangement in place for each party to claim a dependent if there is more than one minor child? Make absolutely certain you understand who and what you can claim to avoid costly audits and penalties from the IRS.
2. Clean house
Depending on the length of your marriage, most of your assets and obligations may be jointly owned. This includes utility accounts, auto loans, mortgages and investment accounts. This list could be quite extensive.
Make a list of everything that may have your ex-spouse’s name attached to it, including beneficiary designations on insurance policies and employee benefits packages. Begin a thorough review of those documents. Make sure each and every one is updated to reflect your new marital status and future wishes. In many cases, it may be necessary to provide a copy of the final divorce decree to have his name removed.
3. Create a budget
Your financial situation has changed significantly. Take a realistic look at where you are right now. Include the good, the bad and the ugly. Remember, you can’t move forward if you’re not willing to deal with the reality of today.
Make a complete list of all your expenses as well as your sources of income. Are you making ends meet? Or are you living beyond your means? It’s common to suffer a financial setback after divorce, particularly for woman.
This doesn’t mean you have to be a statistic, however. Once you create a budget based on your current financial status, stick with it. This will ensure you live within your means and are able to rebuild your financial future.
4. Rebuild your credit
Chances are some or all your credit was created jointly with your spouse. If this is the case, now’s the time to start fresh. Close any accounts that were not closed during the divorce proceedings and open new accounts in your name.
Use these new accounts wisely. Make sure you only charge what you will be able to pay off each month. You do not want to find yourself in a credit crunch as you’re taking your first steps at rebuilding. Pay in full and pay on time. This will help you establish and maintain an excellent credit rating.
5. When in doubt, ask for help
No doubt your divorce attorney has given you an excellent foundation on which to rebuild your life. Now, you need to seek additional guidance from other professionals.
First, start with a good CPA. A capable CPA can evaluate your current tax situation and determine if you are subject to additional tax liabilities. They can also assist you with planning your future taxes to maximize your deductions and minimize what you owe the IRS.
Next, hire a financial planner. A good financial planner can work with you to create a practical plan for meeting your financial goals. Are you saving for your kid’s college? What about your retirement? Would you like to buy a new car in a year? Are you trying to pay down debt?
Bring a list of goals, your concerns, and that newly created budget with you when you meet. Your planner will then assist you with your plan and help you stay on target for the duration. And be sure to interview several financial planners and other professionals until you find one that you’re completely comfortable with.
Finally, hire a good attorney to help establish or update your estate plan. Now more than ever, you need to make sure your wishes will be carried out. Consider who will make end-of-life decisions for you now that you no longer have a spouse.
Who will care for your minor children? What will happen to your assets? These issues need to be considered and addressed before any unforeseen event happens that could render you incapable of making these decisions.
And it’s a good idea for your CPA, financial planner and estate planning attorney to communicate and work together on your behalf.
If you’ve gone through a divorce, what was your biggest financial concern once the divorce was finalized?
Russ is a Certified Divorce Financial Analyst and fee-only financial advisor based in Atlanta, GA, and has provided personal financial advice to individuals and families for 20 years. His focus in on serving women, especially widows and divorcees. You can learn more about Russ and the work he does by visiting WealthcareForWomen.com. Find him also on Twitter, LinkedIn, and Google+.