Major life events can have a tremendous negative impact on your finances. From a death in the family to an unexpected job loss or divorce, they can put you in a position that you never planned on. The emotional toll of these life events can grow increasingly complicated when you have troublesome finances to deal with – which is why financial planning for divorce is an important step to ensure financial security despite a difficult situation.
While divorce impacts an entire family, it can be even more challenging for women, especially when there are children involved. One study found that about 20% of women fall into poverty as a result of divorce. To help women avoid financial insecurity, there are steps you can follow to avoid an extremely challenging situation. Discover more about Kristen’s story and read on for essential tips to help you stay in a stronger financial position, even if the unexpected should happen.
Kristen's story of divorce and financial challenges
Although Kristen Ellis had taken a step back in her career for the last five years to stay at home and raise her two young children while her husband took on the role of breadwinner, she felt financially confident about her future as she neared her 42nd birthday. She'd recently reentered the workforce full time as a medical sales representative, earning nearly six figures each year.
Despite the fact that their household income was lower while she was at home with the girls, Kristen and her husband had been diligently working toward shorter- and longer-term financial goals since getting married at age 30. They had made the final student loan payments for their own college degrees five years ago. The elimination of that debt allowed them to save for a down payment for the home they bought three years ago so their daughters would have access to top-notch public education.
While their monthly mortgage payment with taxes and insurance took up more than half of their monthly income, it was worth the short-term financial strain, since Kristen and her husband planned to stay in the home well into retirement.
Now Kristen's facing an entirely new financial reality. She'll have to pay for all of her household expenses, get her own health insurance and juggle a demanding job with a shared custody schedule. The retirement that once seemed like an attainable goal no longer looks possible as she isn’t sure what the next step in her financial plan would look like. Prior to the divorce, her plan was oriented around her and her husband, but she never looked at the possibility of a retirement on her own.
Kristen is thankful she has half of the emergency savings fund she and her husband built together over the years to support her and her children through the transition, but she's not even sure what she can afford each month based on her new budget or how to plan for a future as a single woman.
Kristen is not alone in worrying about her finances after her divorce
This story is reality for the nearly 800,000 women who divorce each year, according to the latest data. Unfortunately, women tend to pay a higher price for divorce than men.
Data compiled by the United States Census Bureau revealed that in 2019, even women in well-paying jobs like Kristen's still earned about 82 cents for every dollar their male counterparts commanded. In the long term, that pay gap means Kristen will have to work 11 years longer than her ex to make up that difference.
Plus, when women like Kristen take a break from the workforce to care for children, those years of reduced earning power could mean lower Social Security income and gaps in retirement contributions.
On top of that, the average life expectancy of a woman is longer than that of a man. Kristen may need her retirement income to pay for basic living expenses more than two decades after she leaves the workforce.
Divorce is a major life transition full of uncertainty and change, but it doesn't have to dismantle a woman's financial future. Here are some ways women can emerge from divorce feeling financially empowered.
Evaluate your assets and liabilities as part of your divorce
For many women, divorce may mean becoming the sole breadwinner for the first time in several years. That shift in financial responsibility demands a new budget and a revised look at priorities, spending and saving habits, and wants and needs.
1. Create a spreadsheet
- Organize all assets and debts once the divorce is final, including account numbers, creditor names and balances.
- Update the names of beneficiaries on investment and retirement accounts, on insurance policies, and in your will and estate plan to reflect someone other than your ex.
- Update any joint account holder permissions on deposit accounts or credit cards so your former spouse is no longer named as an authorized user on the account.
2. Reexamine your bills and budget under your new monthly pay
Calculate your monthly take-home pay once the divorce is final, accounting for any alimony or child support you'll receive, or be made to pay to your former spouse. Don't forget to reflect any changes to your take-home pay that may result from a change in the cost of your workplace benefits like insurance, flex care plans or retirement contributions.
Don’t forget to give yourself latitude for the “unexpected” after divorce. As you are building your new budget and evaluating your finances, you should be prepared for items that you haven’t dealt with in the past. For example, look at how you could allocate your budget for unexpected legal fees if the divorce proves contentious. If there are kids involved, take into consideration that child support payments could be delayed. Factor in what a delayed payment would impact within your budget.
Financials after a divorce often require additional planning and preparation than they did when you were married. Taking the time to do additional planning can help save you stress and allow you to live a happier, less financially stressful life after divorce.
3. Make a list of monthly expenses
In addition to the fact that costs of living inherently take a bigger chunk of one person's income than bills split between two spouses, divorced women need to consider new expenses, like health insurance.
While children can stay on either spouse's health insurance plan after divorce, divorce expert and Forbes contributor Jeff Landers explains that an ex who was a dependent on the other spouse's plan may qualify for COBRA benefits coverage temporarily, but should plan to secure independent health insurance coverage as soon as possible.
Take the time to list every monthly expense, as even the smallest ones can make an impact, especially now that you are down to one income. List expenses that you previously might not have thought about as they were “shared” expenses for the household. Items such as car insurance, internet, mobile phone service and more should all be listed to help you have an accurate view of your actual expenses. Be prepared to consider what expenses may need to be cut, in order to leave room for necessities.
In addition, courts may require that a spouse secure a life insurance policy to ensure that alimony or child support payments will continue if he or she dies.
4. Find a budgeting strategy that fits with your finances after divorce
Calculate new monthly expenses for home and car payments, utilities, childcare and any shared debt that was included in the divorce agreement.
In her book, All Your Worth: The Ultimate Lifetime Money Plan, for example, Senator Elizabeth Warren recommends a 50/30/20 budget. This means that half of your monthly take-home pay is dedicated to necessary and unavoidable expenses like housing, utilities, food and loan payments; 30% goes to non-necessity expenses like dining out, a gym membership or a child's activities; and 20% goes to savings (including an emergency fund), retirement or paying off debt more aggressively.
5. Take control of your financial accounts
Whether you were the household CFO, you relied on your ex to manage the money, or the two of you shared the task equally, you're now in the driver's seat of your financial life. Establish individual checking and savings accounts under your name and take advantage of digital banking tools that make it easy to keep tabs on all of your bank account activity, including the ability to pay bills online, deposit checks from your mobile device, and access and move money digitally, when and how you want.
If you weren’t the primary financial leader in your household, don’t forget to be patient with yourself. Give yourself time to take control, understand you might get frustrated, and don’t forget that you can ask for help or guidance to get a better understanding of your financial situation. Leverage the financial professionals in your life, such as your accountant, financial planner and your banking representative, to help you make the transition.
Set new goals for your finances after divorce
Women in particular may be tempted to fight for the family home, cars and other property to maintain some semblance of “normal life," but those all represent expenses that stand in the way of other goals that may be meaningful post-divorce.
Set one attainable, short-term goal like automatically contributing money from each paycheck into a savings account to build an emergency savings net or investing a specific amount of money into your own brokerage account to grow money over the long term.
As you make progress and reach these small goals, you'll gain confidence in your ability to control your financial destiny, regardless of how much the divorce may have set you back.
Look to the future for a positive financial outlook
A study published by the National Bureau of Economic Research revealed that divorced women may be more likely to work full time after the age of 50, mostly driven by the need to generate income longer, in order to prepare for retirement. (Regardless of marital status, the AAUW reports that women have only 70% of the retirement income that men do, thanks to the gender pay gap).
In addition to maxing out annual retirement contributions to the extent possible (both to reap benefits like a “match" offered by an employer and to potentially reduce current taxable income), consider how divorce may impact future Social Security benefits. If Kristen is still unmarried when she's 62 years old, she may be eligible to claim at least part of her ex's Social Security benefits because she was married for at least 10 years.
Secure your own story of financial independence after divorce
Divorce uproots the personal and professional lives of many women like Kristen, but it doesn't have to derail your financial security or define your life. Focus your energy on knowing where you stand today financially and where you want to be moving forward.
Being in charge of your financial destiny after divorce can feel overwhelming; however, your financial success is ultimately the sum total of small, consistent and intentional steps that will eventually lead to reaching your goals.
Take control of your own finances: Connect with a financial advisor at First Horizon Advisors for guidance.