Divorce is one of the most traumatic life events for the spouses, the children and the family as a whole. No financial mechanism, investment strategy or financial plan can put a lid on the boiling water of financial emotions. However, having some direction and clarity can reduce the temperature by a degree or two.
Should you be in the midst of a divorce or anticipate one in the near future, here are five financial questions to help navigate your exploration of the economics of the next chapter of life.
What do I do about health insurance?
Often, one spouse is the primary covered on a group health insurance plan, and the spouse and children are considered “dependents” of the group. When a divorce occurs, the spouse is no longer a dependent. Under the Consolidated Omnibus Budget Reconciliation Act (COBRA), they have 60 days to decide if they want to stay on the plan. This may turn out to be a costly option, so many divorced spouses turn to their employer or the Health Insurance Marketplace for either individual or family coverage.
Should I sell the house?
Many factors determine whether you can afford it or not, and the reality is that this is as much of an emotional decision as a financial decision. Memories have value. However, if we consider the economics alone, the cost of maintaining the home should not add stress or be a burden. This means that the home’s monthly payments—principal, interest, property taxes and insurance—should be no more than 25% of your take-home pay
You should also consider the cost of upkeep, which varies depending on the home but can be budgeted at approximately 2% of the home’s value annually. If you can stay under the 25% and 2% rules, you will likely avoid the burden of homeownership that steals from future memories.
How much should I have in financial reserves?
You may have a specific amount in mind that makes you feel comfortable. But generally speaking, it’s recommended to start with about six months of expenses set aside for an emergency fund. This will give you some leeway in case something devastating happens, like a job loss or a significant health event. In that situation, six months of reserves will be sufficient to cover the time deductible period required for long-term disability policies to take effect.
Will I run out of money?
This depends on how much you spend. Start by keeping track of your money with budgeting software. Pay careful attention to your fixed and revised variable expenses like groceries, dining out and the “frenemies” that frequently violate your budget, such as popular retailers.
When you have a handle on your monthly spending, it’s essential to work with a financial advisor to model the future and confirm whether you have enough income and savings to support your standard of living. If not, make it a point to acquire training, education or skills so that you’re not forced to dip into your retirement. Keeping your hand out of the 401(k) “cookie jar” will allow your future self to benefit from compound growth.
Who do I trust?
Recently divorced persons are, unfortunately, a target for fraudsters and manipulators. If you have money and you are emotionally fragile, people will take advantage of you—yes, even family. Be very cautious in making decisions, be careful about who you trust, and wait. I suggest waiting six months to a year before making any material financial decisions. This is especially crucial for decisions involving significant expenses or long-term commitments.
If possible, develop a sturdy team of attorneys, accountants and financial advisors. Introduce them to each other so that if there is a bad apple in the group, they will be identified by the other trusted professionals.
In the early days, it may feel like your financial dreams have been crushed, and you may be overwhelmed. However, by asking the above five questions, you can begin to look forward with your head held high as you slowly, gently and methodically put together the pieces of a new financial life.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
