Important tips on how to deal with your finances after a divorce.
Many people are starting an important chapter in their lives in the New Year with the finalization of an uncontested or contested divorce. We decided to kick off 2015 with five top financial matters to consider after divorce. These issues are not only important for a person wishing to maintain control over his or her current financial affairs and avoid problems, they are a strong investment in a safe financial future.
These top five considerations come after a 2015 Forbes article about “money matters divorcing spouses often overlook.”
- Get a Credit Report
Once a divorce is finalized, there will still be outstanding issues to consider when it comes to a person’s newly independent life and his or her finances. One of the first tasks to take on is getting a credit report, which is also covered in a good article called “Money Matters Divorcing Spouses Often Overlook.” A credit report is important because it shows any open credit cards, along with any debts that are under the person’s (and possibly their former spouse’s) name, like home and car loans. If these show up on a credit report, it’s time to close them. And if there is a balance on a card or loan, the person can get in touch with the lender to suspend the account. This prevents future charges and penalties, and it allows the person confirm that the account cannot be reopened. Reviewing your credit report should be a yearly endeavor. But for a newly divorced individual, getting a credit report right away will shed light on any inconsistencies that need to be addressed.
- Consider Your Investments
Another matter to consider after divorce is investments. The distribution of marital assets is usually done during the divorce proceeding, but in the aftermath individuals are often left with investments that don’t meet their new financial goals. If a person finds his- or herself in a new tax bracket, he or she may need to think about different or more diversified investments. A recently divorced individual can also end up with an investment plan that is too conservative or too bold. Working with a financial planner can help divorced spouses create an updated strategy that better reflects their goals.
- Review Your Tax Information
The next step we suggest to clients is reviewing tax information. This review can include looking at tax withholdings, marital status and tax exemptions, all of which change after a divorce. It’s helpful to fill out a new W-4 form with the IRS, along with any state and local forms that will help you determine your new tax information.
It is also essential to review any investments or income beyond wages, such as capital gains or income from investments. Newly divorced individuals may have shared investments, along with any investment taxes, with a spouse in the past. Looking at this information anew and taking taxes into account can help avoid penalties and extra fees. It is also beneficial to work with an accountant or financial planner to create an updated tax projection. A recently single person also has new deductions and income, and the future of this income needs to be assessed.
- Draft a Budget, then Compare Your Projected Expenses with Actual Expenses
The next matter we address continues to look to the future. Spouses who file for divorce in New York often make guesses about how their finances will change after they become single, which is great. But once that future becomes reality, it’s a good idea to compare those estimations with real life. These can include looking at daily expenses, impulse purchases and additional expenses like childcare. Every divorce is unique; in one case one spouse may run the household finances while the other spouse was left in the dark when it came to the true cost of running a household. In another case a spouse may feel neglected after the divorce and fill that void with unnecessary spending.
No matter the situation, it is beneficial for newly divorced individuals to keep an eye on spending with budgeting tools that get them in the habit of tracking their financial activity. Comparing financial targets with real spending habits every quarter or annually is another way to prevent penalties and navigate a new financial lifestyle.
- Review and Update Life Insurance Policies and Wills
The final suggestion we point out is updating your after-life plans. Many people list their spouse on beneficiary forms, and those forms will then need to be updated post-divorce. Review your beneficiary information given to banks and employers, and other plans like life insurance policies. These changes may also need to be made to powers of attorney, which give one person the ability to make decisions for another if needed. Beneficiary and power of attorney changes vary; some can be completed by re-submitting a form while others may be more involved.
When making the first steps in your new life after divorce, we highly recommend looking at all stages of a person’s financial life. Look at your current spending and investments, review your plans for the future, and keep in mind the plans you have set for your financial legacy.