Divorce is a perhaps unwelcome, but still common, experience for many couples. Estimates are that 40% to 50% of marriages end in divorce, and the numbers are even higher for second (60%) and third (73%) marriages.¹ Faced with dividing assets, working with lawyers and mediators to decide on custody, and all of the other decisions that have to made when a marriage comes to an end, in most cases divorce is an emotionally, and financially, challenging time. 

Once you separate from your spouse, either before, during or after legally divorcing, the new reality hits. Household income and expenses have changed, and savings and investments look radically different. Even if alimony and/or child support are part of the agreement, your monthly expenses will likely be higher now that costs aren’t being shared as they were before. 

But while divorce may mean the end of your life with your former spouse, it can also be the start of a whole new life. In order to start the next chapter on the right foot, here are a few steps you can take both during and after the divorce proceedings to build financial freedom: 

1. Educate yourself about divorce finances 

Understanding the impact of these new changes to your life on your finances is important to ensuring financial stability moving forward. This is a time to begin doing research on what your savings, spending, and investment options look like with your newly arranged finances. 

Following the completion of the legal proceedings of a divorce, you and your spouse will likely be issued a divorce decree, which is a document that contains all of the final terms of your divorce settlement, including what to do with any assets, investments like a 401k and IRAs and bank accounts. Ensure that you have a full understanding of the terms of the divorce decree and how they apply to you – these terms are legally binding and must always be followed. 

There are a number of different resources you can pull from to help educate yourself throughout this process. Friends and family members who are divorced may have insights to share once you’re ready to hear them. Your attorney may also be able to offer tips or direct you to helpful educational resources.  

Now is also a good time to connect with a financial professional if you don’t already work with one. They can work with you to create a roadmap for how to arrange your finances so that you can protect yourself, and any dependents you might have, for the road ahead.  

One advantage of the single life is that you no longer have to defer to anyone else’s opinions about how you spend, save, or invest your money. You’ll have the freedom to make these decisions on your own and develop a financial strategy  that is tailored entirely to your preferences. That process starts with understanding your options. 

2. Assemble a team of professionals 

In most cases, you should be entering your new life with an equitable distribution of the wealth you built during the marriage. Once the legalities of the divorce are settled, you’ll shift from needing legal advice from a divorce attorney to relying on support from other experts.  

Financial matters can be addressed with the guidance from one, or a combination of a financial advisor, accountant, insurance agent, or banker – there are even financial professionals that specialize in post-divorce finances. There is no obligation to stick with the financial professionals that you and your spouse worked with during the marriage. If you’d be more comfortable with someone else, make a switch. 

Getting expert advice in each of these areas is critical because there are many misperceptions about the financial aspects of divorce. This partly stems from changing rules. For example, for divorces executed after 2018, alimony is no longer tax deductible for the partner who pays it.² It is taxable income, however, for the spouse who receives it. Child support has different tax implications. The parent paying it can’t deduct it, and the parent receiving it doesn’t have to declare it as taxable income. 

If you split money in a 401(k) or similar retirement plan through a process known as a Qualified Domestic Relations Order (QDRO), special tax rules apply. For example, if you’re younger than age 59½, you might be able to avoid the usual 10% penalty tax on early withdrawals from a tax-favored retirement plan if you intend to use your QDRO distribution for another purpose, like buying a house.³  

Your team of financial, legal and tax professionals can help you understand all the tax and other financial rules that apply to your new circumstances. 

3. Update your beneficiary designations 

This is one of the planning steps people with changed life circumstances most often overlook. After you have separated all your assets, you may not want your ex-spouse to receive the money in an IRA or the proceeds of a life insurance policy that you now own solely. 

Before requesting any changes, you might need to consult with your attorney to double check the assets you now have sole discretion over. In some cases, you might want to keep your ex as the beneficiary. For example, you may decide not to change a life insurance policy if you prefer to ensure that your former spouse would be well positioned financially to care for your children if you died unexpectedly. In most cases, though, you’ll probably want to reach out to institutions where you hold each account or policy and have the beneficiary changed. 

You’ll also want to update your will if you had one as a couple. Consult with an estate planning attorney to create an updated will and estate plan to ensure your individual assets will be distributed how you intend. Don’t assume an estate plan is only for the super wealthy. A thorough plan can go beyond a will and cover key topics, like designating a healthcare proxy to make critical medical decisions on your behalf if needed. 

4. Gather all financial records 

If your former spouse handled money and the bills, or if you shared these tasks, you’ll have to take time now to make sure you have the records for all the assets you were granted during the division of property.  

This may entail getting statements and, just as importantly, passwords, for each banking and investment account. Get similar information, recent bills, and policy details for life, medical, dental, and car insurance. For any property you took sole ownership of, like vehicles, make sure the titles are transferred to your name. Even if you previously filed a joint tax return and will be a single filer in the future, getting your past tax returns is important. That information will help with future returns. All these records will also help you and your team of professionals devise  solutions for your financial future. 

5. Determine a new household budget 

You are now facing new financial circumstances. Even if spousal support isn’t necessary, you’ll each be covering many bills on your own that were previously shared. Spousal and child support impacts both sides. It can be a new significant expense for the partner paying it, and even generous support might still require the partner receiving it to change their spending habits and manage money differently. 

You’ll want to develop a new budget as your next step. This spending plan should include must-pay expenses like housing payments, utilities, and premiums or support payments for medical, dental, and other forms of insurance.  

However you define the monthly budget, taking inventory of all your current expenses and sources of income will help you determine how to meet your short-term needs and long-term goals. The latter will be especially important now that the money you had for retirement is split in half. You may need to save more to make up for lost ground.  

If you’re already a budgeter, this is more an exercise of updating what you already have. If you’re not a budgeter (not all of us are), a financial professional can assist with these efforts by helping you devise a monthly budget and a savings plan to keep your dreams intact. 

Don’t be too daunted by the task and resist any urge to pinch pennies to stay on track. Paying the bills is essential but so is having pleasurable experiences. As you manage this transition in life, indulging yourself with sources of joy, within reason, can help you stay committed to all the financial goals you have for yourself and your family. 

Planning ahead can minimize the stress of divorce 

Divorce can be a trying experience. It’s certainly not what you planned when you exchanged vows. Still, you can have considerable control over the shape your post-divorce life takes. Carefully planning your finances, with the assistance of supportive financial professionals, can alleviate some of the stress of this transition. It will also leave you better positioned to have the future life you want. 

There is no single roadmap for a happy life after a divorce, and it’s entirely normal to feel uncertainties about your future but following these steps can help to ensure that your finances isn’t one of them.