Understanding your Finances During and Post Divorce
Now that you’re thinking about divorce or are divorced, you need to take control of your finances. Don’t panic – tracking your finances is not overwhelming! Here are some simple steps to get you up to speed.
Taking an hour now to go through these three areas and an additional 15 minutes every month will make a huge difference in your understanding and management of your finances moving forward.
Colibri Life Pro Tip:
Keep a spreadsheet with all of your assets and liabilities and use a quick and easy tool (like OnePassword) to safely keep all of your passwords in an easy to access location
STEP 1: CALCULATING YOUR ASSETS (what you have) & LIABILITIES (what you owe)
- Make a list of your assets (what you have that has value) and your liabilities (what money you owe)
- Your asset list can include the current value of your house, condo, car, savings account, stock portfolio, retirement plan, life insurance, cash value, business interest, jewelry, etc.
- Your liabilities list should include the amount you owe on your mortgages, credit card loans, student loans, car loans, personal loans, etc.
This exercise will give you a picture of what you have and what you owe today. The difference (subtract the total liabilities from the total assets) is your net worth. If you owe more then you have, that’s okay. However, you should work to develop a plan to increase your assets or decrease your liabilities over time to aim for a positive net worth.
STEP 2: UNDERSTANDING YOUR CASH FLOW (where your money goes)
- Cash flow is simply where you get money from and how you spend money. Make a list of where you get money (your cash inflow) which can include salary, alimony, child support, stock dividends, tax returns, etc.
- Make a list of where you spend your money (your cash outflow) which may include your monthly bills, food, credit cards, rent, mortgage payments, car payments, tuition, insurance (car, health, life), taxes, etc.
This exercise should be done using monthly amounts. The ideal situation is to have the money coming in greater than the money you spend but this is often a challenge. If your outflow is greater than your inflow, you have two options:
- Cover the difference with available funds from your asset list
- Reduce the outflow to only your necessities until you can increase your inflow of funds.
If absolutely necessary, people do leverage credit cards to cover this gap however this should only be a temporary solution. Interest rates on credit cards quickly get overwhelming and create a deeper hole. There are other alternatives to credit cards that have lower interest rates that should be explored such as home equity loans and life insurance loans. If you are in this situation, speak to a financial advisor as soon as possible to determine what your alternative solutions might be.
STEP 3: BUILDING YOUR FINANCIAL TEAM
Find a group of professionals you can trust who will assist you with this process. These individuals may include:
- An Accountant – Prepare tax returns and advise on all tax related matters, i.e., gain on the sale of your house, alimony versus child support, minimizing tax payments, etc.
- An Insurance Agent – Ensure you have the minimum insurance to protect you and your assets. A good agent can give you the details and guidance on health, home and life insurance.
- An Estate Planning Attorney – Create a plan to pass your assets to your children in case something happens to you. Estate planning attorneys can also help develop living wills with health care directives and advise on establishing trusts.
Colibri Life Pro Tip:
If a substantial portion of your income comes from your ex via alimony or child support, make sure you have a life insurance policy on your ex-spouse to protect you financially if anything should occur.
Colibri Life is here to help you, whether you are dealing with your finances, career, housing, social life, legal issues, identity challenges or just overwhelmed. Contact us today to learn more about our community.