We’ve often said that life events equal significant financial events. Marriage, birth of a child, home purchase or sale, job changes, death and divorce all require you to re-evaluate your financial plan. Unfortunately, divorce is all too common. Those who have recently or are in the process of getting divorced now face the reality that their financial life is dependent on one income rather than two. Additionally, they may be facing life as a single parent.
If you find yourself in such a situation, you should start at the beginning, looking closely at your budget and determining if what you’ve done in the past still makes sense or if changes are warranted. For example, you may need to evaluate your living situation, considering not only if your mortgage is affordable, but also if you can afford the maintenance, insurance and taxes on your reduced net income.
You should also look at your debt. During a divorce, joint debt is often divided among the spouses, while consumer debt often goes to whomever incurred it. If you find yourself with a significant amount of consumer debt that is not a mortgage, where interest paid is not tax deductible, you may need to re-evaluate your savings plan as well. Compare the interest rate on the debt to what you are earning on your investments. You may need to pay down debt before you begin saving again.
After a divorce, you will likely need to reconsider your emergency reserves. You may have chosen to use your emergency reserves to pay down debt incurred during the divorce process. Now that you are on your own, you have to re-establish this financial cushion. While three- to six-months of expenses may have been appropriate when married, you may consider increasing that once you are single again, especially if you have custody of your children. Additionally, you may need to reconsider how much life or disability insurance you need if you are the sole caregiver for a dependent.
Next you’ll want to update your beneficiaries for your life insurance, 401(k) or IRA accounts, as these assets pass by beneficiary designations, not by your Will. Of course, you will likely want to update your Will, as you may want to ensure your assets benefit your children should something happen to you.
Finally, you should reassess your investing priorities. Now that you are again single, you are solely responsible for your own retirement. Once you have established and funded your emergency reserves, you should save in your employer-sponsored retirement plan, especially if your company provides a match. This is free money you cannot afford to miss out on. Next, direct your savings to a Roth IRA if you are eligible. This will provide you tax-free growth of your money. Once you have maxed your Roth IRA contributions, you should continue to save to your 401(k) to take advantage of the tax-deferred growth. Once you are in a position to save more, you can then consider a taxable brokerage account or a 529 plan for your children’s education.
During a divorce, and even in general, your first instinct may be to provide for your children’s future; however, you must remember, your children will have access to loans for their education, but you will not have access to loans for your retirement. Allow your children to take out education loans. You can always help them repay the loans when you are in a better position to do so.
Divorce can be messy, but it does not have to mess up your financial life. Reassessing your new financial position and making the needed adjustments should help you recover from this life event. If you have questions on adjusting your financial plan after a divorce, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures: This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
