It can be a brave new world when it comes to newly divorced couples and finances. Often, due to liquidity of marital possessions, people can end up having a tremendous amount of cash or liquidity.
Being newly single, with lots of cash on hand, and having more free time as a result of a new co-parenting arrangement can create a “kid in a candy store” environment where people feel like they can let loose and spend freely. But sooner or later, reality kicks into high gear, and they come to the sudden realization that their net worth has been cut in half.
So, how can new divorcées avoid common money management mistakes? Here is a list of things that you should be aware of:
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Toronto’s Experts in Family Law and Divorce
1. Adjust Your Lifestyle: Being newly single usually means your expenses increase, your net income decreases, and your net worth has been cut in half. You need to modify your lifestyle to reflect your new living arrangements. If you’re used to eating out a couple of times a week, or shopping for clothes on a regular basis, you will need to revisit these habits. That leads me to the next point.
2. Put Together a Budget: Figure out what your new living expenses will be and determine a monthly budget. It’s important to capture everything, even the smallest items. Those little things can add up quickly and leave you scratching your head at the end of each month questioning where your money has gone.
3. Create Financial Goals: If, for example, your goal is to buy a house again, it’s important to have a plan (including how much you can afford, where you want to live, how much you would get pre-approved for a mortgage, etc.).
4. Hire a Financial Adviser: A credible financial adviser or planner can help you with your budget, your goals, your retirement, and put in place an action plan to help you get to your desired results.
5. Take Care of Large Sum Money Settlements: In the case of large sum cash settlements from spousal and/or child support, or the liquidation of marital assets, resist the temptation to keep it in cash. If the money represents a child or spousal support lump sum amount, consider putting it into an annuity that will pay you a monthly amount over a certain period of time. If the cash came from the liquidity of the marital home, put it into a safer investment (T-Bill or Segregated Funds) that can be converted to cash in a relatively short period of time.
6. Don’t Forget About Insurance to Protect Your Income: If you are self-sufficient and earning your own income, your greatest risk is your inability to generate an income if you become critically ill or disabled. Similarly, if you are receiving support payments, your livelihood and that of your family could be impacted if the source of your family’s income was no longer able to provide the support payment. This could have a catastrophic impact upon two households instead of just one. Many separation agreements mandate life insurance to be in place for the paying party, but there’s a more significant impact that would come into play if the earning party were to become critically ill or disabled.
7. Have an Emergency Fund: The opposite of having too much liquidity is not having enough cash flow on hand. You don’t want to run into a situation where you’re house poor and cash starved. It’s important to have at least a 3-month emergency fund on hand to address any emergency repairs or other significant incidents that may affect your ability to work in the short term.
Divorce and its effects can be devastating emotionally, physically and financially. If you’ve always relied upon your spouse to look after household finances, managing money for the first time can be a daunting task. Surround yourself with people who can help you, invest in yourself by taking a course on personal finance, and leverage friends and family who have gone through similar events in life and came out thriving on the other side.
You will get through this. Make a concerted effort to follow the above mentioned strategies to avoid pitfalls that could have lasting financial consequences.