Editor’s note: This is part two of an ongoing series throughout this year focused on helping older adults navigate the financial difficulties of gray divorce. The introduction to the series is Happy New Year: Let’s Get a Divorce, and part one is How Does a Gray Divorce Affect Social Security Benefits?
You’re going through a midlife divorce and you need to prepare a post-divorce budget? As if the divorce wasn't bad enough!
Preparation of a budget and a net worth statement may be a necessary evil during divorce, but in my experience, having been divorced at age 52, both are essential for our financial well-being after divorce. Particularly if you are approaching retirement.
Your personal budget lists all sources of monthly income minus all your monthly expenses. After the simple math, there's either money left or you're in a deficit. The net worth statement lists your assets (the things you own) minus your liabilities (debts). The bottom line is your net worth.
As a Certified Divorce Financial Analyst (CDFA®), I'm always grateful when I work with a client who takes care to accurately compile their financial data during divorce. The stakes are high for gray divorcees (those over 50). Divorce is often the largest financial transaction of our life. In your 50s, 60s or older, there is less time to recover financially. So, it’s crucially important to ensure that the property division settlement and any spousal support lay a solid financial foundation for life after divorce.
Working out your budget post-divorce
First, the budget. Your income may have been reduced after divorce as you move from a two-income household to a one-income household. Your job, any spousal support you're receiving, pensions and income from investments are likely your chief sources of income. If your post-divorce budget includes spousal support, be aware of the day that support ends.
For most people getting divorced over the age of 50, child support is not an issue. Social Security is a more likely income source. My article last month (link in the editor’s note above) covers this subject in-depth.
Your budget should be based on monthly income and expenses. Most people get paid every couple of weeks, so it's easy to track monthly expenses. Spousal support is typically paid monthly, as are most major expenses like mortgages and utilities. For those non-monthly expenses, perhaps travel or Christmas gifts, divide the cost by 12 to enter them as a monthly expense.
Don't just divide your marital expenses in two. You're going to be living in a separate household and have your own set of unique expenses. It’s important to prioritize those expenses.
Consider: What needs to be paid? There may be expenses like a new car or a new house, or you may assume all the expense of the mortgage if you keep the house. These are all priorities, along with essentials like food, transportation and insurance.
Which of your expenses could you eliminate or perhaps reduce? These are discretionary expenses, or items you want but don't necessarily need. I've experienced the $150-a-month gym, and I've experienced the $20-a-month gym. You don't get more than seven times the value in the expensive gym! You may not need to eliminate luxuries like restaurant outings entirely, but you may want to lessen their frequency.
If there's any money left over, you may want to pay down any high-interest rate debt first.
If you are in a debit and expenses can't be cut, you're going to need to find more sources of income. Everybody's different. Some people might be willing to work a couple extra hours a week to maintain their entertainment budget. Others may be resistant or unable to work. For older divorcees, finding a job may be more of a challenge due to health issues and ageism.
A budget isn't a static thing; it can change and should change over time. You may find that you don’t miss driving an Audi and that you'd prefer to put the money toward a trip to Machu Pichu. Experiences may assume more importance than things in your new life.
Counter net worth worries by watching it rebuild
Second, tracking your net worth as you rebuild financially can be helpful both financially and psychologically. For older divorcees not yet retired, it can be disheartening to see your net worth cut in half as you approach retirement. After my divorce, I found that tracking my net worth quarterly showed me I was on the right track and built momentum to regain the wealth that I had lost.
The beauty of the net worth arithmetic is that your net worth can go up even if your bank account or your retirement account are flat or even drop. If your debts are decreasing faster on a dollar basis than your assets, your net worth is still improving.
After divorce, I had a car payment. Which I hated. I made it a point to pay the car off as quickly as possible. Paying off that car over time led to a consistent improvement in my net worth even though my checking account and retirement account balances were flat. It's that net worth math: Assets minus debts equal net worth. My assets were pretty much the same, but the debt was going down. My net worth was growing. This created positive momentum to rebuild my finances.
The only time not to be in a rush to pay off car debt is if you've got a lot of high-interest credit card debt. Any extra cash sitting in a bank account or brokerage account might be well used to pay off credit cards promptly. Just be careful about taking any money from retirement accounts where penalties and taxes might come into play. Speak to your financial adviser.
Anyone going through divorce has a unique story. It's been my experience, and the experience of my divorcing clients, that people who commit to educating themselves about the financial aspects of divorce will emerge from the process in better shape both financially and emotionally. For those of us in middle age and beyond, the stakes are even higher. There’s a lot you can do to take control of your finances in divorce. Keeping an accurate budget and tracking your net worth are a good start.
