Getting Your Money Straight After Divorce

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Updated on Tuesday, March 17, 2015

The Marriage Penalty

Divorce is not a happy topic to discuss. It can be a long and expensive process and it’s never something enjoyable – but sometimes, it’s a necessary step in life. As one of my favorite comedians put it, “no good marriage has ever ended in divorce.”

Whether or not you feel you can make light of a crummy situation, you may feel you have a new lease on life after divorce. But that also comes with a load of new financial responsibilities.

Don’t ignore money matters. Understanding your finances and creating a solid plan for life after divorce is a must before you turn your attention to your life after marriage.

The First Step to Getting Your Money Straight After Divorce: Step Back

While you may be ready to take action immediately, you may benefit from first taking a step back. Aaron Britz, a financial planner and founder of Legacy Wealth Management, says he advises his clients to create a “Decision-Free Zone.”

“The purpose is to create an environment that is free from stress-based decisions and free from the influence of others,” Britz explains. “It’s a ‘time-out’ to begin organizing and establish priorities in the form of a list.”

Andrew Mohrmann agrees. Mohrmann is the founder of Modern Dollar Planning and explains that his clients sometimes need help to hold off on big financial decisions immediately after a divorce. He tells a story of one woman who wanted to purchase a new home after her divorce. Mohrmann convinced her to wait until the distribution of assets from the divorce was settled and until she could make a more rational – instead of purely emotional – decision.

“Going through a divorce is an emotional time,” Mormann says. “Give yourself time before making big financial decisions like buying real estate, moving across the country, or completely revamping your portfolio. Keep yourself mobile, liquid and avoid locking into long term commitments.”

Determine Your Financial Priorities

When you’re ready to get your money straight –which means you’re prepared to make rational decisions, not emotional ones – you need to determine what’s highest on the financial priority to-do list.

Britz suggests that you find the right financial professionals to help you navigate the divorce process and the changes to your personal finances that will take place after divorce. “Retain the services of a tax preparer, preferably a CPA,” he says. You may also want to hire a financial advisor and an attorney to ensure your marital settlement agreement is completed correctly.

Next, Britz says it’s time to look at setting up your finances on your own. You’ll need to create a new budget based on your own income as well as your expenses. Then, open new bank and brokerage accounts. “Open new accounts in your name only and close any joint accounts,” says Britz.

In addition, you need to evaluate your consumer debt situation. Britz suggests opening a new account in your name and ensuring any joint accounts are closed. It’s smart to order a credit report about a month after this process is finalized; you can verify that all joint accounts are closed.

Once you’ve handled making these changes, devote some time to sit down and evaluate your new financial picture. You may need to create new plans and goals for your money now that you’re no longer married. Here’s what you need to establish so you can get your money straight and keep it that way after marriage:

  • A system for tracking your spending
  • A system to track any ongoing payments in relation to your divorce, like alimony or child support
  • A budget that reflects your income and your expenses
  • A comprehensive financial plan that includes action steps to reach your financial goals in the short- and long-term.

Handling Issues with Taxes, Investments and Insurances, and Other Accounts

If you filed jointly when you were married, there are tax issues to consider after divorce. Even if you filed separately, your status is still different and if you have children it’s important to consider which parent will claim them on their return.

Within the first year of your divorce, you need to devote some time to evaluating your new tax situation. “It’s probably a good idea to sit down with a professional and have an income tax projection prepared,” says PJ Wallin, a CPA and CFP® at Atlas Financial

“In terms of tax status, you are likely moving from married filing jointly to either single or head of household. Depending on housing status and other itemized deductions, you may also be moving back to standard deduction from itemized.”

Wallin also advises that, after a divorce, W2 employees revisit their withholding form. “You may have too little or too much being withheld based on the status changes,” he explains.

You also need to take a look at your investments and insurances. “Following a divorce, an individual needs to re-evaluate their beneficiary designations on their company benefits, their IRA accounts, and insurance policies to make sure they’re in-line with their wishes and their current situation,” says Erik Klumpp, founder of Chessie Advisors.

Don’t forget to update your coverage as necessary when you’re changing beneficiaries. If you relied on your spouse’s health or life insurance, you need to purchase that protection for yourself. Or if you’re now over-insured, call your provider and make changes so you’re not overpaying for protection you no longer need.

Sophia Bera of Gen Y Planning says that recently divorced individuals need to do this after the divorce is final. “Don’t make these changes while the divorce is in progress because this could hurt your case,” she advises. Bera also points out that investment and insurance accounts are important, but you also need to “re-do your estate planning documents as well.”

Susan Pack elaborates on the issues of estate planning. Pack is a CPA and CFP® at Pomeroy Financial Planning, and says you must give special consideration to your estate plan if you have children.

“Since your financial assets will likely pass to your minor children at your death, carefully consider who would be as responsible with them as you would,” she suggests. “Otherwise a financial guardian will need to be appointed by the court. Do you really want to take the chance that the court would appoint your former spouse as the financial guardian of your children’s assets?”

What to Think About in the Long Term

Your investments and your retirement plan are two of the biggest money changes to consider after divorce. For better or worse, you no longer have another individual to help you plan, save, and manage your money.

But that doesn’t mean you’re completely on your own. If you didn’t handle the household finances before your divorce, start by gaining some basic financial education. Make a list of questions you have about managing money and write down tasks that you’re not sure how to do or handle.

Start by doing some research to educate yourself. You’ll receive a wealth of information in response to a Google search for how to create a budget. Check out personal finance blogs, listen to financial podcasts, and browse your local bookstore (or library, for free) for resources and educational materials.

Then, consider working on a long-term basis with a financial planner. Look for an advisor who is fee-only and who carries the CFP® designation. They can help get your retirement planning on track, help you make wise decisions around your investments, and answer your questions about personal finance.

A pro can also help you achieve your new goals in your new life. Once you get your money straight after divorce, you should focus on achieving what’s important to you and aligning your finances with your values.

Dealing with debt after your divorce? Try our FREE dig out of debt guide.


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