One of the foundations to financial success when going through a divorce is creating and adhering to a budget. Creating a budget is an important starting point, but if you can’t adhere to it, then it’s not worth the effort of putting one together in the first place. The greatest plan in the world is useless if it cannot be properly executed.
In addition to creating budgets that are unrealistic or unsustainable, new divorcées make other money mistakes that could be avoided if they had a little guidance. So below is list or things that you should consider when making a budget as a newly single person:
1. Pay Yourself First – It’s easy to neglect, but saving needs to be top of mind. Without savings, you’re living only for today. You may not be able to do this right away, but you should be trying to sock away at least 10% of your income every month. Over time, try to increase that amount to 15% or 20%.
2. Create an Emergency Fund – The best budgets take into consideration a contingency fund. A contingency fund is essential because it provides you with some financial security should any unforeseen expenses arise. A roof that develops a leak, a significant car repair, or needing to take a sabbatical from work to look after a sick relative are all costly surprises that can throw a budget into chaos. Having an emergency fund of $10,000, or an investment that has greater liquidity, would be a smart consideration. A TFSA account is also a great place to put an emergency fund. Alternatively, one could consider applying for a Line of Credit so that there is cash available if needed. Just ensure that the money can be easily accessed if it is required.
3. Don’t Leave Large Sums of Cash in a Bank Account – Bank accounts yield next to nothing in interest payments. Putting cash into a TFSA (provided you have room) allows you to invest without paying any capital gains. You can access all the money in a TFSA account, where all money withdrawn in one year can be 100% replenished the following year.
4. Children’s Education – By contributing to a Child’s Registered Education Savings Plan (RESP), the government will contribute up to $7,200 per child through its Canada Education Savings Grant (CESG) program.
5. Retirement Planning – It may seem like a long way off to some, but the longer you plan, the longer you’ll benefit from the effects of compounding. You may have heard of Theodore Johnson. Theodore worked for UPS and never made more than $14,000 a year, and yet, in his old age, was worth more than $70 million. When he said he had no money to save, a friend told him that if he were taxed, the money would be taken out of his account and he’d never see it. So he created a tax for himself to make him wealthy. Even though he made little money, he took 20% of it, and it went straight into an investment account. Over a period of more than five decades, the money compounded to make him $70 million.
6. Getting Sick Changes Everything – Although many of us believe we will lead healthy lives into old age, a critical illness or disability can have a catastrophic effect on our finances. Trying to figure out how you will make your finances work once you are already ill can leave you emotionally devastated if you don’t have the appropriate insurance already in place. Many will argue that they can’t afford these types of insurance, but this will pale in comparison to the difficulties you will experience if you get sick or become disabled without adequate coverage.
7. Budget For Your Dreams, Too – Whether you want to go on a holiday with your kids every year, or buy a vacation property, putting away a little extra every month will help to make dreams a reality.
The key thing to keep in mind about post-divorce finances is that expenses increase while income remains the same (or potentially decreases if you’re responsible for child or spousal support). Creating a realistic plan that you can stick to will help you adjust to your new situation.