December 17, 2022
Post-Divorce Cash Flow Planning
After your divorce is final, you enter into a new world financially. You may have a support agreement in place that impacts your finances or may be fully responsible for your own financial wellbeing for the first time in years, if not decades or longer.
Post-divorce cash flow planning is a critical step for creating a level of security. It allows you to identify an approach that will ensure you can cover your genuine needs without undue hardship today, as well as down the line. If you aren’t sure where to begin, here are some post-divorce cash flow planning best practices that can help you gain your footing.
Post-Divorce Cash Flow Planning Tips for Everyone
Certain post-divorce cash flow planning best practices apply to essentially everyone, regardless of whether there is a support agreement in place. They serve as the foundation for short- and long-term financial wellness, creating a sense of stability during what can be tumultuous times.
If you want to start off on the right foot, here are some areas to cover.
Create a Budget
First and foremost, you can’t create a post-divorce financial plan without a budget. You need to take a close look at your current income levels, as well as your existing expenses.
Record every source of income, including how much is typically received and when. Then, make a list of your usual and expected expenses. Depending on if your living arrangements changed once your divorce was finalized, you may need to actively track your activities for two to three months. If your situation has remained consistent from a cost perspective for several months, you can use past data – like bank and credit card statements – to review your spending habits.
Once you have determined your expenses compare that to your new income level.
Ideally, you want to reach a point where your money in exceeds your money out. That way, you can room for saving, which is crucial for planning for the future.
If that isn’t the case, then it’s time to consider how you can cut back. You may need to downsize your home, reduce discretionary spending – including non-essential purchases in categories like entertainment and dining out – and find opportunities to save on necessary expenditures.
While rethinking your approach to grocery shopping, home utility use, transportation, and more can be difficult, it may be necessary, at least for a while. That way, you can create a strong foundation.
Start an Emergency Fund
Establishing an emergency fund is a must. It ensures you are ready for the unexpected, such as a sudden illness, vehicle repairs, or similar events. Generally, an emergency fund will consist of an amount equaled to 3-6 months of your basic living expenses.
Plan for the Future
If you have an emergency fund and your budget is in decent shape, it’s time to start looking forward. This can include anything for maximizing retirement contributions, saving for college, purchasing real estate, charitable contributions, inheritance planning, and more.
Additionally, it can include a career growth plan. It’s often wise to seize opportunities that allow you to secure your financial future, ensuring you can bring in enough income to meet your needs long-term.
Additional Best Practices When There Are Support Arrangements
When there is a support arrangement in place, this adds unique aspects to the situation. If you’re receiving support, you have a source of income easing your burden. If you’re paying then you have an obligation you need to cover, creating a potential challenge.
In either case, along with coming up with an immediate solution that allows you to live reasonably, you also have to be forward-thinking. In many cases, support arrangements aren’t permanent. As a result, you need to account for how your circumstances will shift once that comes to an end.
Post-Divorce Cash Flow Planning Tips for Support Recipients
Cash flow planning can be challenging even if you are owed some form of financial support from your ex-partner. While it may legally give you a source of income, reliability can be an issue.
For example, while approximately 6.8 million1 custodial parents have an official or informal child support agreement entitling them to financial support from the other parent, only 43.5 percent2 get the total amount due. This can make budgeting difficult for many, largely because there is a degree of uncertainty surrounding income.
Plus, support is typically finite. While you may have access to it for several years, the odds of it being permanent are practically null. Thankfully, this doesn’t mean you can’t plan effectively.
First, follow all of the universal tips above to get started. If you have children and there is a support agreement in place, it’s also wise to take steps to manage reimbursements. For example, you can try apps, such as Our Family Wizard or D-Comply, that both parents can use together to track the costs and arrange for reimbursements.
After that, take future planning to the next level. Determine what it will take to keep your income stable once support ends. Whether that’s investing in your education to improve your earning potential, aggressively saving, or other options for covering the gap. By starting that now, you are giving yourself the gift of time, making it more likely that your financial picture will remain bright today, tomorrow, and well down the line.
Post-Divorce Cash Flow Planning Tips for Support Payers
If you are paying support to an ex-spouse, you need to account for those payments and ensure they are covered. The consequences of child support non-payment can be incredibly severe, including wage garnishment, fines, and criminal convictions3 that can lead to jail time. You can run into similar issues for failing to pay alimony or spousal support.
When you follow the best practices above, treat your support payment as a critical budget line item. In some cases, you’ll need to reevaluate your spending habits to make space, seizing opportunities to cut back.
If you are in dire straits, you may even have to consider reducing retirement contributions or other forms of saving. However, it’s still wise to build an emergency fund, particularly if you may be responsible for reimbursing unexpected child-related expenses.
Now, you may want to keep saving levels as high as you reasonably can. That way, you’re securing your future, too. Though it’s also important to remember that your financial situation may ease once the support payments end. You can figure this into your long-term planning, allowing you to make adjustments down the road to help you achieve your goals.
Are you ready to learn more about how you handle post-divorce cash flow planning effectively and how you can navigate any challenges successfully? Then attend a Second Saturday Divorce Workshop in your area. You’ll gain access to experts who can answer your most pressing questions, ensuring you have the information and guidance you need to walk the road ahead.
Jeneen Slack, CFP®, CDFA® is a Financial Advisor who works with her clients and their counsel to help handle the financial and practical elements of their divorce.