It can be a brave new world when it comes to newly divorced couples and finances. Often, due to liquidity of marital possessions can result in having a tremendous amount of cash or liquidity on hand. Coupled with being single again, the kid in a candy store phenomena can occur. Being newly single, lots of cash on hand and only partial responsibility for raising children can allow some to let loose while embracing this new found freedom. Sooner or later, reality kicks into high gear and you come to the sudden realization that your net worth has been cut in half and most of your tangible assets are now liquid. All these factors contribute to money management mistakes that divorcés encounter.
So what are the biggest money management mistakes that new divorcées should avoid? Here are a list of things that you should be aware 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 it 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.
- 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 small incidental items can add up quickly and leave you scratching your head at the end of each month questioning where your money has gone.
- Put Together Financial Goals: If 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).
- Your Standard of Living Will Likely Drop so 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. Another reason why working from a strict budget is a great idea.
- 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 place
- Forgetting About Insurance to Protect Your Income: Whether you are receiving monthly spousal or child payments from your ex-spouse or you are self-sufficient and earning your own income, your greatest risk is your inability to make an income, whether it be through critical illness or disability. Conversely if you are receiving or paying 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 a more significant impact to arise if the earning party were to become critically ill or disabled.
- Having an Emergency Fund: The opposite of having too much liquidity is not having enough cashflow 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 can affect your ability to work in the short term.
Divorce and its effects can be devastating emotionally, physically and financially. Managing money for the first time, if you’ve always relied upon your spouse to manage the household finances can be a daunting task. Surround yourself with people who can help you, invest in yourself and perhaps take 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. Money management mistakes are common, just remember to learn from them early on.
You will get through this but make a concerted effort follow the above mentioned strategies and you will eventually be back and financially flourishing.
Chris Coulter is the Founder and President of The Finish Line Group. He works with business owners to leverage their businesses to increase their wealth, reduce corporate and personal taxes, create viable succession strategies, enable employee retention strategies and allow them to exit their businesses on their terms.
Chris’ passion for what he does evolved from the mistakes he made in his first business; by not diversifying his risk and not utilizing a lot of the opportunities within his business to create significant wealth. Chris found out the difficult way and now educates business owners on how to avoid many of his former oversights and ultimately control where their finish line ends.
Money management mistakes