After a divorce, it’s natural to look at your new financial situation and immediately ask “How do I get back to where I was?”.

In a relatively short period of time, a household that was built around two sets of resources and a shared financial plan becomes something entirely different. Getting back to where you were isn’t the goal anymore.

The initial objective after divorce is not recreating the financial life you had while you were married. It’s to understand what your financial life looks like now, establish a baseline, and build from there.

 

Start with your new cash flow.

Expenses don’t always decline proportionately when there’s a split. Housing, utilities, insurance and other fixed costs may remain largely unchanged despite the change in household income. Your old budget isn’t going to be very useful now.

Build a new budget from the ground up. Get a feel for your new situation by mapping out essential fixed expenses, discretionary spending, debt, and savings. Understand how far your take-home pay will take you with this new cost of living. If household income has declined substantially, and expenses haven’t, we’ll need to identify the gap before we decide what to cut.

 

Emergency fund.

Emergency funds are the foundation of the “protection” element in any financial plan.

Conventionally, 3-6 months of expenses in a liquid account covers it, but with only one income that may not be the case. Emergency funds are calculated in months of expenses to make sure that any lapses in income are covered. In a dual income household, one spouse losing a job might be no more than a short-term inconvenience. After divorce, in a one income household, it is a full-blown emergency. Your fund needs to be able to carry the full load until you can get back to gainful employment.

The size of your fund will depend on job stability, existing debt, dependents, and of course, your own comfort level. Maintaining additional cash is worth the opportunity costs simply because there are fewer financial safety nets.

 

Ensure the divorce agreement is carried through to your financial life.

Accounts don’t update automatically. You’ll need to review the terms of the property settlement and carry through the division of assets. Qualified Domestic Relations Orders (QDRO) may require new brokerage and bank accounts while real estate may need retitling.

Don’t overlook beneficiary designations during this process. The last thing you want is your ex-spouse listed as beneficiary after a divorce. Make updates, work with your advisor on how to approach the new registrations so that your estate plan is reflected appropriately.

 

Insurance and taxes.

In a divorce, you may have lost access to your former spouse’s health insurance, leaving you with an immediate coverage need. Review your options through COBRA, health insurance marketplace, or your own employer. You’ll want to take care of this before existing coverage ends, within the 60-day grace period after the divorce decree.

You’ll also want to work with your CPA and financial advisor on your tax situation. Filing status, withholding, deductions, etc., can all impact your tax liability. Update your W-4, run projections, and work with professionals to ensure your financial plan reflects the new situation.

 

Baseline first. Big decisions later.

Divorce often creates pressure to make financial decisions quickly: sell the house, invest proceeds of a property settlement, reduce spending. Some decisions are time sensitive, but many are not.

Before you try to optimize your long-term plan, determine exactly where you stand. Understand what you own, what you owe, your new cash flow, and what has changed.

Your post-divorce financial life doesn’t need to look like the one you had before. The first step is stability. From there, you can start deciding what you want it to become.