What you can do now to build a better financial future for you and your family.
How to pay for two households with the same money supported one during the marriage...
“The first time some of my clients ever look at their finances is when they are divorcing. Everyone wants to maintain the status quo, but when reality sets in, they realize that is simply not possible. It’s amazing how sobering that is.” Stephanie is a collaborative divorce attorney based in Northern New Jersey and says this story is not uncommon. “What I offer people married, single, or divorced is they need to take ownership and understanding of their finances. I think people know how to deal with the emotions in and out of a relationship better than they can manage their own finances.”
We all agree that understanding your finances is a very important aspect of any relationship and if you break it down to its simplest essence (albeit cold), marriage is a legally binding, financial contract. While marriages typically start in a church, they invariably end in a courtroom. And resolving that contract at the end of a marriage is a often a difficult process, especially when one or both side realize that the lifestyle they were accustomed to during the marriage is no longer possible. When the same pool of money that paid for one household, now has to support two households, things have to change. Besides downsizing to smaller homes/apartments, other things that are taken for granted, like the $20 per month to get the local newspaper, may have to be discontinued. Accepting this reality is difficult for most.
We spoke with several practicing financial professionals specializing in divorce and each offered sound advice on how to better manage your finances during and after a divorce. Here’s what they said.
1. Be realistic about your needs. This is often the most difficult thing for divorcing couples, especially if they were married for a long time. As a married couple you may have lived in a comfortable house, in a nice neighborhood, with a big yard for the kids to play, with great schools, went out to dinner twice a week, took family vacations, paid for dance/karate lessons for the kids and saved for retirement and college. The same amount of money that made that all possible for one household, cannot possibly support the same lifestyle for 2 households, after the divorce. It is difficult to accept the fact that you have to downgrade your lifestyle, especially if children are involved. “Some people walk into my office and expect that they will keep the marital home, keep all the children’s activities, continue to take vacations, and expect their ex to pay for it all. The longer someone lives in a particular lifestyle, the more they feel entitled to continue living that way. I see the same shocked expression on their faces when I tell them that it is not going to happen. After they get over that, we get down to business, figuring out what they can afford.”
Focus on the basics first, determin how much money you have each month and start at teh bottom of Mazlow’s heirarchy of needs and make sure you can provide food, shelter, clothing and security to yourself and your children. Then look to add more items to your new lifestyle as money permits.
1. Prioritize the short, medium and long term needs. Typically there is one person in a relationship that makes most of the short term (we need to pay bills), mid-term (we have to plan for vacation or braces) and long term (planning for children’s college and/or retirement) from a financial perspective, so when a split happens there is one partner that is at a distinct disadvantage having to learn how to manage household finances from scratch. For these people Daniel, a Certified Divorce Financial Analyst® (CDFA®) offers this advice. “It’s overwhelming to take on past, present, and future financial needs all at once. You’ll drive yourself crazy. The individuals that take the Short, Medium, and Long term (SML) approach find stepping into this new financial dynamic is easier when they prioritize.”
Here’s a simple organizational chart that can help get you started. Prioritize the top three items you need to manage and include a due date. Then tick one item off the list at a time. People find if they can prioritize and break the financial responsibilities into bite-sized chunks they can celebrate small victories and it gets more manageable.
Get a wall calendar, put it up and right on it when you plan to have these items completed. Put this calendar where you can see it every day and when you complete a task, indicate it on the chart to show your progress.
|Short Term (1 - 2 months)||Mid-Term (6 - 12 months)||Long Term (5 - 10 years)|
|1. Set up new online banking||1. Get quotes for orthodontist||1. Prepare/update will|
|2. Balance checkbook||2. Find new accountant||2. Plan college savings|
|3. Budget expenses||3. Set budgets for camps and vacation||3. Is retirement an option?|
|Due Date||End of week||End of Next Quarter||By End of Year|
2. Know your credit score and know how to protect it. Cynthia is a financial professional in the San Diego area with half her practice focussed on helping divorced people manage a new financial reality. Her advice is fundamental to getting back on your feet sooner and moving on. “Benjamin Franklin famously said “In this world nothing can be said to be certain except death and taxes. I add ‘credit score’ to his list and don’t think Mr. Franklin would argue with me.”
“Your credit score is the reflection of every financial decision you (or your partner) makes, good or bad, and knowing how to protect it and keep it healthy will make it easier to stand on your own two feet in your new financial dynamic.” Credit scores, often known as a FICO® score, are being used to make hiring decisions in many companies which tells us how important that number is to companies trying to determine who you are as a person. FICO® is short for Fair Isaac Corporation, a publicly traded company who developed the algorithm for calculating your credit score that they then sell to companies that lend. Much like our couple in the opening paragraph, with one person of the couple that takes charge in securing loans, lines, credit cards, etc. which leaves the other person at a disadvantage and not clear of their credit score. They may be surprised by what’s on their report.
Get a copy of your credit report and see check your. You may be able get your credit report from your credit card companies or a free online source like CreditKarma.com. Your score and credit report shows many things that are of interest to future landlords, banks or even employers. Credit scores are based on many factors including amount of available credit card limits, amount borrowed against those limits, timeliness of payments, frequency and number of inquiries, installment loans, etc. Many of the reports show you how to improve your score and what steps you can do to get a higher score. For example, if you have 30% used up on your available credit cards or lines of credit, if you reduce that to 20%, it will improve your score.
3. No plan is going to be perfect so don’t expect it to be. This is a great perspective from David a financial strategist who deals with high risk divorce cases. “My clients come to me with the world crashing in on them. There is so much emotion tied to every pragmatic decision we need to make and quite often there are large assets at play so the tension is magnified. What I offer (and I file this under more philosophy than anything) is that no plan is perfect. You have to approach it from the perspective that we are making the best decisions we can with all available information, but you can always expect something unexpected to show up unannounced...and it will. Anyone remember 2008? Few saw that coming.”
David goes on to explain that there is a lot of analysis, planning and forecasting we can do to help insulate against dramatic financial events. “I don’t think we’ll see another 2008 in our lifetime, but newly divorced people experience a very similar dramatic downturn almost instantly so on the somewhat brighter side the chances of seeing a similarly tragic financial event are much smaller. Start making your plan and build adjustments into your plan. Evaluate your plan periodically to make sure you are on track.
4. Seek out and Attend Divorce Support Groups. There is no time in life when a person feels more alone as when they are going through a divorce. It is a brutal time and it seems like there is no one to talk to and no one that truly understands, and you may be correct. The lawyers get paid by the hour and many won’t tell you what you want to hear (e.g., that it will be over quickly and you will be able to maintain your current lifestyle). The ones that do tell you what you want to hear are probably out of line. Your married friends don’t really understand the situation. Some may try to convince you to reconcile, so may provide false hope that “Everything will be OK.” Your single friends don’t have a clue about the process. Your Divorced friends have a nifty way of telling you how great their divorce was (willful blindness). The children often blame one or both parties. It is an extremely lonely time. The best thing you can do is to seek out a divorce support group, whether it is associated with a church or independent. There are many Meetup.com groups that are specifically for people going through a divorce. They seem to always have events, especially around the holidays, so no one is left alone. If you have a parenting plan that provides for the children to go to one parent on one holiday and other parent on the next holiday, your first holiday without your kids is brutal. Find a group, make some friends and don’t be alone.
The members of the divorce support group are usually people in the same situation as you, and it is very comforting to hear that you are not alone. Often these support groups include a financial advisor, a psychotherapist and a mediator, so you can get realistic answers from independent parties that are not billing you by the hour. Of course, these specialists attend tehse groups to hopefully gain new clients, but meeting them at this group is usually free.
4. Have an emergency plan. Wanting the best and planning towards those outcomes is a smart strategy. But if we heed that age old saying “the best offense is a good defense” we can imagine that having an emergency plan should be high on your priority list. Maria based in Clearwater explains how she helps clients set up emergency plans. “I approach my client relationships in a very different way and in many cases there is a bit of emotional counseling that goes into our planning sessions. But one of the first items we tackle after an assessment is to start planning for what if. What if you lose your job, stop getting alimony (yes, men too), tragic loss scenarios and then build a plan around what you will need to provide for you and your family.”
Maria gives us a list of items to cover such as;
· Update your will
These are some of the big items you are going to want to address and your trusted professional will be able to make more suggestions but this is a great start.
NOTE: this is tough since most people getting out of divorce are focusing on the day to day issues, and not retirement or an emergency plan.
5. Separating Emotions from the Financial Plan. Divorce is emotional, very emotional, and depending on the type of divorce you want (or get), collaborative or combative, those emotions can cloud your true responsibility in setting up your financial plan. It is estimated that when you are going through a divorce approximately 80% of your brain is consumed by the divorce process and the surrounding atmosphere. That makes you less productive at work, less functional all around.
“Divorce is about money...period.” says Carol, an experienced divorce financial planner based in St. Louis. “I don’t want my clients to use me as an attorney or therapist, everyone would be disappointed with that outcome. My job is to guide my clients, with clarity, through the financial process to create the optimal outcome for them and in most cases, their family. So part of my job is to get my clients to focus on the facts and figures and minimize emotions in this process.”
Know that feelings are not about finances is a huge undertaking but spite and “payback” are not a basis for building your financial future. Think of yourself and your family that need a new way to get to a better place.
In order to help deal with the extra emotions associated divorce, it is important to exercise to help burn off some of the anxiety. It will make you feel better and have a better outlook on your situation, and it will help you sleep better.
Use this information from trusted industry professionals as a basis for setting your own plan. Planning builds confidence that your new financial reality is manageable.
About the author
Philip St. Jacques is Co-Founder and Vice President of Marketing at ExExpense an expense management and document storage application for divorced households. Upload receipts, split expenses according to agreed upon percentages and store and share important documents from one powerful application. Learn more at exexpense.com
· Know where all insurance policies are (are beneficiaries correct?)
· Add insurance coverage where needed
· Choose a trusted person to keep a copy of all information safe
· Determine how much money an emergency fund would need
· Establish a contact chain of command; who do you call first