Put Finances in Order After Divorce
Today we will talk about a couple of things regarding your finances immediately after the divorce. This is not an in-depth financial planning tutorial. I recommend that you do a solid long-range financial planning with a good financial advisor, in 6-12 months, when you have settled down a bit more with your life. For today, we are focusing on the few things that need to be taken care quickly. I will give a list of what you need to do; I will not be able to get to all the details of how to do them, but will have some links for you to follow up.
Before we start the to-do list, first I want you to say that I know how we all want to get our life together quickly, but it takes time and it is a process. Please be patient and kind with yourself. Try to minimize unnecessary life changes if you can. Keep the some parts of your life, such your job, or where kids go to school, stable for the time being. Some people choose to move to be close to family or because the old house is not available. That is ok and having family around can really help. The idea is to try to minimize changes that can add to your stress.
If you are one of the lucky people who do not have to worry about money, and you have a good financial advisor and a lawyer help you, that is great, I am happy for you! You may skip this section and check this off your list.
For the rest of us, managing finances is never easy. During this period immediately after the divorce, you are still in the aftermath of the divorce and probably feeling anxious and fearful about the future, the money questions may be on top of your mind.
There are some financial questions such as college planning and retirement planning that can wait until later.
However, there are two urgent questions you want to address quickly:
If I lose my job or get really sick/injured, how will my family be taken care of financially?
Do I have enough income to support my family and myself right now?
I hope that no bad things ever happen to you, but I also know from personal experience the importance of planning for them. I remember, right after divorce, I was feeling very alone and these were my biggest worries. I was not too worried about myself, but I wanted to ensure my kids were provided for even if something happened to me. Having answers for these two questions helped me move forward with less anxiety.
Question #1: If something happens to me or my job , how do I ensure my family are provided for?
Hopefully you had discussed about this with your ex, in case anything happens to you, they would step up and take care of the kids. But for today’s purpose, we will not make any assumptions, and focus on what you can do to protect your family financially.
Step 1. Update the beneficiaries for all your financial accounts, including bank accounts, investment accounts, 401ks, IRAs, etc. If the kids are old enough and you trust them, you can also add them to the accounts so they have signature rights. This is very simple to do, and you can take care of most of this online. This will make sure they can access your money if needed.
Step 2. If you don’t have a living trust and a will, you must take time to make one. If you have one, it is time to update them. Without them, in case of death, the kids will have to wait 1-2 years’ probation before they can have access to your assets, not to mention all the stress and complications with court hearing, legal fees, possibility of interference/challenges by other people. Many people procrastinate on this as it sounds very complex. It does not have to be complicated, nor does it have to be perfect. You just need to cover the big items for now and can always adjust it later. Here are the main points:
Identify one or two people as your trustee. Trustee is the person who will execute your trust or will. They don’t have to be your family member, just need to be someone you trust.
Make a list of your major assets such as properties, bank accounts, major investment asset. I will not get to the details of living trust or will. I will let you to read about it, I recommend you have both. As a general rule of thumb, you should list all of your assets in the Will, and put most items except retirement accounts in the Living Trust. For your retirement accounts such as IRA and 401k, there are some special processes and you may consider just adding their names as beneficiaries rather than putting them in the living trust. This is what I am doing personally. It is 2021, and I live in California, thus rules may change or may be different where you are, please double check on this information before you make the decision.
Here is a link with some basics about Will and Living Trust
Find a local lawyer or an online-law firm who specializes in preparing wills and trusts. Ask your friends for a referral. If your assets are not too complex, you can do it online, but do check the online firm’s reputation. This process involves a lot of critical personal information. If your assets are complex, for example you have company, or complex family structure, I recommend you get a local lawyer to help you. The regular lawyers charge about $1-2K for each document.
Here is a good note from California Attorney general on some tips. https://oag.ca.gov/consumers/general/living_trust_mills
Step 3. Purchase a termed life-insurance policy. This is very inexpensive; you can get it from AAA or any life-insurance company. Be careful, don’t unintentionally buy the whole-life insurance policy, unless you have money to spare. Whole-life insurance is quite expensive, and it is a long term commitment, usually it will lock you in for at least 10 years. It is used by some people as an investment vehicle rather than a typical insurance for a life emergency, and it is not for everyone.
Step 4. Buy some or add more accident protection/job loss insurance. This is a good source of the income protection. If you are a full-time employee, most companies have this as part of the benefit package and it is usually very cheap. Since your marriage status changed, you can update your benefit elections and get some more coverage.
Health Directives
Another related, though non-financial item is the health directive. This is for you to specify what actions should be taken, who can have access to your medical files and make decisions in case you are unable to make decisions for yourself.
Every state may have different rules, you can get a general idea of what it is, by looking at this example of the California health directive form. Here is the link:
Question #2: Do I have enough money to provide for myself and my kids?
If you don’t have one, right now it is a good time to make a budget. It gives you visibility and a sense of control and actions you can take. A budget is essentially a list of income and expenses for the month. You want to make sure the total of your expense is smaller than the total of your income. You can use a simple excel to do this. Here are a couple of links with some budget worksheet or guidelines on how to make a budget. I have linked a couple below for reference.
https://www.consumer.gov/sites/www.consumer.gov/files/pdf-1020-make-budget-worksheet_form.pdf
https://www.cnbc.com/select/how-to-create-a-budget-guide/
If you have never done one and don’t feel comfortable to make a budget by yourself, find a friend who is financially savvy to help you set this up. Remember this is not permanent and does not have to be perfect. You just need to set something up quickly, that is good enough, while you are getting your life back. You can, and should come back to update it later.
More on budgeting.
With the divorce, some of us will have half of the income we used to have, and our expenses may not match the reduced income. If money is tight, you need to figure out what expenses are essentials and what can be cut. It is not pleasant to prioritize and cut expenses, but remember this is a transitory phase, not permanent. I found that many people adjusted and got to a better financial state not too long after.
As a parent, we already worry about how kids are impacted emotionally by the divorce, but also now have to worry about how the kids will adjust to this “tighter budget” and simpler life. Just like you, kids are feeling anxious with the new life. But they are very resilient. If the kids are old enough, it may be good to engage them in the budget planning discussion. Discuss with them on what are the essentials, what needs to cut, and what are the areas you would plan for enjoyment if money is available. This activity makes them feel they have some control over their lives and also contribute to the family. This helps to ease their anxiety. It also brings the kids and you together.
When I was going through the divorce, it was a difficult period for us financially. I also just became a committed Christian and was learning what it meant to give control to God. The Bible teaches where your heart is, there your treasure also lies. We are asked to tithe, ie. give 10% of our income to God so that we don’t hold on too tightly to our money. A famous Bible verse on money is “Bring all the tithes into the storehouse, so that there may be food in My house, and test Me in this, says the Lord, and see if I will not open for you the windows of heaven and pour out for you a blessing, that there will not be enough room to receive it” (Malachi 3:10). This is a challenge for us Christians. Interestingly, this is the only place in the whole Bible God says “Test me”.
When I was making the budget, I had a family meeting with my kids. We decided we needed to put our money where our faith was, and tithing was non-negotiable even though money was tight. We reduced all our discretionary expenses such as nice-to-have clothing and eating out, movies etc to minimum. We stopped most of extracurricular lessons. My daughter just started her senior year in a private high school at the time. I was considering pulling her out since I could not afford the tuition. Her teacher heard about it and told us to ask the school for some relief. I went and my request was turned down. A girl in my daughter’s cross-country team told her mom about this. This mom, whom I never met before, went to the school and somehow convinced them to waive the tuition for my daughter.
A few months passed, my daughter was admitted by several top universities. I was very happy, but also anxious about paying for her tuition. In February, as we got closer to the decision time for colleges, her favorite program gave her a full merit-based scholarship.
Over the past few years, I have seen God’s mercy and faithfulness again and again as we have trusted and stayed faithful to Him.
Briefly looking ahead: Long-Range Financial Planning After 6 months
Now we have taken care of the two burning questions, I want to briefly touch upon a couple of things you will do later, to give you an idea what is ahead. About 6-12 months after the divorce, it would be a good time to take care the following two things:
Revisit the budget and hopefully, be able to put some of non-essentials back to the budget. You can plan for some fun activities and maybe a much-needed vacation.
This is also a good time to start a comprehensive financial planning. That usually includes
Saving for an emergency fund (about 6-12 month living expenses).
Start paying off debts if you have any.
Saving for retirement and kids’ college education.
Investment strategies
There are many good financial advisors that can help you. There are also many good financial planning website and books. One of my personal favorite is the “7 baby steps” by Dave Ramsey.
Words of caution
When you are still settling down from the divorce, don’t purchase anything that requires a long-term commitment.
You may ask, what should be considered as a long-term commitment? My rule of thumb is - it is a long-term commitment, unless I can pay with cash or but pay off the full credit balance by the end of month. For examples, purchase of a house, a car, a boat, whole-life insurance, are all long-term commitments.
Also be careful don’t let the anyone talk you into buying things you don’t need. You are still recovering from a traumatic experience and can be quite vulnerable. You may have very good judgement normally, but trauma throws us off mentally and emotionally. I know I was. Wait at least a year to make any major purchase decision. By then, hopefully, you will have a better assessment on your new life, also be in a better mental state.
Concluding remarks
You have just finished one of most difficult chapters in life. The vagueness and the unknowns typically give us anxiety and stress. The actions you’ve taken today for the two urgent financial items in this video and having a date set for the long-range financial planning should have helped you feel more at peace.
While the road ahead still seems uncertain and scary, it will get better. It takes time to find your way in the new life, please practice self-compassion, be very patient and be extra kind to yourself. You may not feel it, but you are brave, resilient and strong. You are already on your way to build a new and better life for you and your family.
“Bring the whole tithe into the storehouse, that there may be food
in my house. Test me in this," says the LORD Almighty, "and see if I will not throw
open the floodgates of heaven and pour out so much blessing
that you will not have room enough for it.”
Malachi 3:10