As a divorce financial adviser, I'm often brought in to work with clients who are still going through a split, but I'm just as often brought in afterward. Newly single clients are typically concerned about their finances and want to make sure they have enough for their immediate needs, and that they'll have enough when they retire. Even my very wealthy clients -– those with millions of dollars after a divorce –- have the same nagging questions and fears keeping them up at night.
Considering that many divorce proceedings last a year or longer, once the marital settlement agreement is reached, you may want to take a long break from paperwork, lawyers or even thinking about your finances. That's a normal reaction. But resist it: There are some things you need to examine soon to make sure you're protected and on the right track financially.
So go through this checklist to be sure nothing has slipped through the cracks. Once you're done, you'll have financial peace of mind -- and you'll be able to sleep like a baby.
Your 22-Step Checklist to a Financially Sound Post-Divorce Life
22 Tips to Transform Your Financial Life After a Divorce
If you haven't already, cancel and close all joint accounts with your ex-spouse immediately. Joint accounts that remain open are liabilities that could come back to haunt you. The last thing you need is to be on the hook after your ex-spouse runs up charges on credit cards or overdrafts a bank account. If you currently have a balance on a joint account that can't be paid off (for example, a credit card), instruct the bank that you want to suspend the account to prevent future charges. Confirm that the account cannot be reopened or unsuspended.
Depending on your situation, it may make sense to apply for new credit cards before you cancel joint accounts. If you have marginal credit and don't have an emergency reserve of cash, getting access to a credit card should be your priority. I don't advocate using credit cards, but I've seen what can happen in the short-term if someone does not have sufficient funds to cover their core bills. Sometimes you need a small bridge loan after a divorce while you get on your feet, and a credit card can be that temporary bridge.
You'll also need to open new bank accounts, investment accounts, etc. Make a list of the accounts you had while married, and seek to replace these as soon as possible.
I cannot overestimate the importance of changing the beneficiaries on your accounts. If you fail to do this, your ex-spouse could end up with your IRA, 401(k) and other assets when you pass away. Changing beneficiary designations is an easy process that can usually be done with a simple form. Most forms list a primary beneficiary and a contingent beneficiary. If you have a new living trust, ask your estate attorney who should be listed as primary and contingent beneficiaries on your accounts.
Contact your insurance broker and update your auto, homeowner's, and umbrella liability coverage. Pay particular attention to the list of assets you scheduled on your homeowner's policy. Jewelry, firearms, collectible and artwork are often listed, but some of those listings may no longer apply to you if your spouse received the items in question in the divorce, or if they were sold. There is no sense in paying insurance premiums for assets you do not own. For asset protection purposes, make sure you have an umbrella liability policy on yourself. It's cheap, and I view it as a must-have.
Now that you're single, it is more important than ever to have a cash safety net. Have six months of living expenses set aside in a bank account. Or, given that interest rates are so low, consider putting it into an ultra-short term bond fund to get a 2 percent to 3 percent yield.
One of the most common fears I hear from men and women alike after a divorce is that they feel financially vulnerable –- that they don't have anyone to turn to if they get laid off or suffer a financial setback. One solution is get disability insurance, which provides you with a monthly "paycheck" if you become injured or ill and can't work. It is often not cheap, but it can provide peace of mind that your financial life will not be ruined if you suffer from a long-term disability.
During and after a divorce, you should check your credit score at all three credit bureaus. You can receive a free credit report (note that you will receive a report, not your credit score), but if you can afford to get your score, I would recommend this as well. If you see errors or other issues on the report, contact the bureau immediately and get them resolved. Otherwise, they'll cause you to pay more for loans, insurance, and possibly even make it harder for you to get a new job or rent an apartment.
There is no better time to think about your estate plan than after a major life change. If you have children, you may need to update your will, but even if you don't, many estate planning issues still apply. Update or create a living will, a power of attorney for health care and finances, and other documents. If you had a living trust, work with your estate attorney to create a new one.
Post-divorce, there may be many assets that need to be retitled. For example, if you owned your house in a trust with your spouse, you'll want to retitle it in your name personally or in the name of a new living trust you create.
Immediately after a divorce, work with your accountant and do a new tax projection based on your income and deductions. Based on your new tax liability, you may need to change your withholding, pay more or less in estimated taxes, and change your investments. For example, if you were in a high tax bracket with your spouse and owned tax-free municipal bonds, after a divorce, your tax bracket may be low enough that you'd do better by selling the munis and investing in taxable bonds. Run the numbers and find out.
If your spouse handled the investing, you may now own things that you aren't familiar with or that aren't right for you. Do a deep analysis of each investment to see if it is prudent and makes sense for your risk tolerance and goals. Work with an independent investment adviser to create an appropriate asset allocation and analyze the tax consequences of selling and buying replacement investments.
Work with an independent financial planner to help you analyze your financial situation post-divorce so you know what you should be saving for retirement, what your budget should look like and how to make the most financially of your new life.
If you cannot afford a full-fledged financial plan, at a minimum, craft a budget. List your income sources (e.g., work, marital support, child support, investments) and list your new expenses. Track what's coming in and going out so you can see how much you have to save and invest, and how much you have to spend on non-essentials.
Since you will have all new accounts, policies and documents, this is the perfect time to create a new filing system. The time you spend getting organized in the beginning will pay off later in time saved locating documents when you need them, and by giving you the data you need to make the right financial decisions for you.
If you want to be able to see where you stand financially at any time, considering using a website such as Mint.com or the others to track your expenses, income, assets and liabilities in real time. The financial insecurity many newly divorced people feel can be lessened or eliminated by having access to their financial world at a moment's notice.
If you were the "out spouse" (the one who didn't have the relationship with the accountant, financial adviser, attorney, insurance broker, etc.), then you'll need to create your own team. Start slowly. There's no rush. Ask your family law attorney for referrals. Use AdvisorFit to help you evaluate financial advisers.
You'd be surprised how often couples going through a divorce forget about their safe deposit box. Check what you have in it and then close the account. Consider getting a new safe deposit box if you have valuables that need to be secured.
If you didn't get the safe in the division of assets, get one to protect your valuables.
Identify theft is all too common and it can cost you thousands of dollars and countless hours to resolve. Buy a good cross-cut shredder so you can destroy old credit cards, credit card offers and other items you don't want to fall into the wrong hands.
Just because you're divorced doesn’t mean you are not both on the hook for past taxes and joint debts. If you get the dreaded IRS audit letter, you’ll want to make sure you have all of your financial records. You don’t want to rely on your ex to have these or to help in an audit. Before you part ways, make copies of everything –- past tax returns, agreements, loan documents, check registers, bank statements, investment reports, 1099s, etc. Hopefully you won’t need any of these after the divorce, but if you do, you’ll be glad you have them.