- 5-Minute Article
- Sep 20, 2019
Managing the Financial Impact of Divorce or Loss of a Spouse
Four steps to take as soon as possible.
Created in Collaboration with Kiplinger.
- What is the first thing you should do to preserve your finances after a divorce or the death of a spouse?
- How do you boost your credit score?
- How much emergency savings do you need?
Everyone can benefit from taking proactive measures to secure their financial well-being, but the following actions are even more important for someone experiencing a divorce or the loss of a spouse. And while many aspects of these life-changing events may be overwhelming, there are four fundamental steps you can take in the immediate aftermath to help increase your financial security going forward.
The standard of living for both spouses typically drops in the first few years after a divorce.1 That’s because the same income and asset pool now must support two households instead of one. And, in the event of the death of one spouse, surviving spouses may not see expenses increase, but they may experience a drop in annual household income if the deceased spouse was employed.
So, what can you do? A crucial starting point is to fully assess your current financial position, says Page Harty, CFP®, CDFA®, a partner and senior relationship manager in Georgia.*
First, identify all income sources and itemize all expenses to realign your monthly or annual budget. When accounting for income from all sources, you’ll want to include:
- Take-home pay, including bonuses
- Additional pay from freelance or second jobs
- Investment income such as interest and dividends
- Social Security, pension, or annuity income
Then, determine fixed, variable, and periodic expenses. Fixed expenses tend to be recurring and somewhat predictable – such as a mortgage, rent, a car payment, and insurance premiums. Variable expenses fluctuate and include things like groceries, utilities, and entertainment. Periodic expenses are costs that may occasionally occur, like car or home repairs and travel.
To build a new budget plan, you can use a basic budget worksheet. Alternatively, you can explore budgeting apps like Mint or PocketGuard, which can help automatically create and track a personalized budget based on income, expenses, and goals.
Lastly, create an itemized list of assets. This should include retirement accounts, stocks and bonds, cash or cash equivalents, real estate, personal property, cash value life insurance, and business property. Be sure you have access to all important documents (such as deeds, policies, and statements) related to each, and talk to a financial advisor to make sure you understand the worth of each asset on your list. Triage like this is especially important for spouses who weren’t active participants in money management during the marriage. “I met with a woman the other day who’s going through a divorce and has no idea if she has a dollar in savings or $1 million because she let her husband handle 100% of the finances,” says Harty.
Preparing for unexpected financial hurdles is essential for everyone, but it’s especially critical after a major life event.
Strengthening this buffer with a reliable emergency fund can help you weather a sudden job loss or surprise expenses, such as a broken appliance or an emergency room visit – without being forced to take on debt or jeopardize assets. A common rule of thumb is to strive for an emergency fund that’s equal to six months’ income. You can use online calculators like this to help determine how much you might need on hand based on your situation.
It’s also wise to review your credit score, which lenders use to evaluate credit risk. It’s calculated from data in your credit report from the three major credit bureaus – Equifax, Experian, and TransUnion – each of which independently tracks data on your debts and credit history. You’re entitled to a free report from each bureau every 12 months, and you can access them via AnnualCreditReport.com.
Whether you need to sustain your credit or reestablish your credit profile, there are steps you can take to enhance your score when life situations change. These include:
- Paying your bills on time. This is arguably the most crucial step since payment history determines 35% of a FICO score2 and is considered “extremely influential” in calculating a VantageScore – an alternative credit scoring model developed by Equifax, Experian, and TransUnion.3
- Reducing your total credit utilization. This refers to how much you owe compared to your credit limit. As a guideline, try not to exceed 30% of a card’s credit limit.4 To help lower utilization, aim to hold two or more cards with lower balances, rather than one or two with higher balances.
- Building up a personal credit history. If your spouse had been the primary account holder on your credit cards, you might need to establish and strengthen your credit history. One way to start is to open a new credit account in your name. Options might include a secured credit card that requires a deposit, a retail store card, or a gas card.
- Reporting inaccuracies to each bureau. Incorrect information on a credit report is the most common credit or consumer reporting complaint. In fact, it’s not uncommon for divorced consumers to report cases of identity theft in which they suspect ex-spouses of opening an unauthorized account.5 If you find incorrect information in your credit report or suspect fraudulent activity, you should dispute the inaccuracies in writing to the credit bureaus and consider placing a fraud alert and credit freeze on your report.6 The federal government offers an online resource for these and other steps to take at IdentifyTheft.gov.
You should also evaluate how your insurance status and needs may be different now. For example, if you were on the health insurance plan of your spouse’s employer, you may need to either buy temporary extended coverage through COBRA to stay on the policy or purchase new health insurance.
Another type of insurance to consider is protection against disability. What would happen if an illness or accident left you unable to work for an extended period? More than 1 in 4 working-age adults can expect to be out of work for at least a year because of a disabling condition before they reach retirement age.7 Disability insurance can replace a portion of your paycheck and is often sold through employers or private insurers.
In addition, if loved ones depend on you financially, you should consider buying life insurance or increasing your coverage. Permanent life insurance policies may even offer the potential to build cash value that you can use for emergencies or expenses such as school tuition.
Achieving financial security after circumstances in life change takes knowledge, determination, and the right support. Talk to an advisor to help you navigate financial and insurance decisions so that you can plan confidently for the years ahead.