It’s probably not going out on a limb to say that just about everyone knows of someone who either got divorced or is getting divorced. Over the years, I have worked with several people getting ready to divorce and I find many are unprepared for what life is like financially afterwards. Going from two incomes to one means an overhaul of your finances and for some, a readjustment of their lifestyle. If you find yourself wondering how to put all of this together after a divorce, consider using the following tips to get you on the right track:
1. Know what money is coming in. Review payments you may be getting or receiving from your divorce and adjust your total income accordingly. Typically, child support does not impact your income tax whereas alimony paid can reduce your income and alimony received counts as income. If you are getting or receiving alimony, you can use the IRS tax withholding calculator to make sure you aren’t paying too little in taxes or giving the IRS a large tax-free loan
2. Know what money is coming out. Create a spending plan to account for how much money you need to have monthly to maintain your lifestyle. Consider ALL of your expenses beyond mortgage/rent, car payments and debts. Typically, the most underestimated and forgotten are auto and home maintenance, groceries and eating out.
If you are not sure where to begin, consider using online tools at your bank to find out how much you have been spending. Most online tools will categorize your spending, so first consider adjusting the categories. Then choose a 30-90 period to see what your average spending looks like.
3. Know what the difference is. Subtract your income from your expenses to gauge if you can afford your current lifestyle. If you have a surplus, review your numbers to make sure they are realistic, you have a category for savings and you have a buffer (10% or greater) to account for unexpected expenses (better known as Murphy’s Law).
Also review how much you are spending in each category. For instance the guidance is for household expenses to take up no more than 25%-35% of your net income and auto expenses (car loan, insurance, gas and maintenance) should be no more than 20% of your take-home pay. If you are spending more in those categories, you may not have the cushion to lessen the blow of an unexpected expense. If you have a deficit, then you may not be able to afford your current lifestyle and expenses may need to be cut. This could mean downsizing to a less expensive home, a less expensive car and in some cases, a less expensive neighborhood.
Divorce is hard enough on its own. You don’t want it to cause too many financial problems as well. Taking the time to review your expenses after a divorce can go a long way into making the transition process easier.