Divorce can change your life. Especially, a messy one can be financially damaging, and you may have to give up your lifestyle. Your income will remain the same, but your expenses may increase significantly. If you were the breadwinner, you may have to pay alimony and child support.
After a divorce, people sometimes have to give up half of their savings, assets, and retirement fund. If your spouse was the primary provider, you have to have a realistic budget and downsize your expenses.
Financial recovery after a messy divorce
But all hope is not lost; with a few good decisions and practices, you may rebuild your finances. Let’s look at a few steps to improve your financial stability after a divorce.
1. Create a new monthly budget to better fit your post-divorce financial situation
Now that you have to manage your finances, you must separate your ‘wants’ from your ‘needs’ and focus on them. A divorce can be financially draining, and you also may have to depend on the alimony for your expenses. It would be best to adopt a new lifestyle and spending habits to avoid a financial crisis. Ensuring that your costs don’t outweigh your income is the first step toward financial stability.
There is a risk of falling into debt and dipping too much into your savings without replenishing it; planning a budget will help you avoid this. The sooner you start adapting to your new financial environment, the better.
2. Consider getting a job or a side gig for some extra income
The second source of income can be beneficial when you have cut back on your spending but still need money to save or pay off your debts. You may have a unique skill that you can use to start earning. If you are already working (or not), you can get a freelance job, which is easy to find online.
After getting a divorce, you may have a lot of free time as you are not obligated to fulfill the responsibilities of marriage. It can be an excellent opportunity to improve your qualifications to apply for a job or a promotion.
3. Move to a smaller house
Now that you are not living with your ex-spouse or living just with your kid(s), you may want to move to a smaller house. Paying for a mortgage, property taxes, repairs, and maintenance costs can drain your finances. If you move to a smaller place, these costs would go down significantly. If you rent an apartment, repairs would be handled by the landlord or the apartment complex.
It may not be an easy decision to make because of the emotional value a house can have, but it might just be the right decision in some cases.
4. Make sure you have a good credit score
You will need a good credit score if you want to apply for a loan or buy a new house in the future. Even though your credit report doesn’t depend on your marital status, any joint accounts you had with your ex-spouse will affect your credit score if not managed properly Separating joint accounts can be difficult if the divorce is messy.
Your divorce decree will say which spouse has to pay which debt, for example, who keeps the house and who has to pay the mortgage on it. But creditors do not honor these decrees, and if your ex fails to make a payment in time, your credit score might take a hit.
You can maintain a good credit score by sticking to your budget plan and paying your bills on time. Avoid using all of your available credit to keep your credit utilization ratio low. Creating a strategy for resolving existing debt will also help your credit score.
5. Create a strategy for resolving debt
Divorce can put you in debt because of legal fees and other costs of ending your marriage. You already may have a significant debt that needs to be paid off. Dealing with debt becomes difficult while adapting to a new lifestyle after divorce. But if you do not pay off your debts, your credit score might take a hit.
Use whatever disposable income you have towards your debts. Some high-interest debts, like payday loans or high-interest credit cards, can build up a lot over time if they aren’t paid off. You may opt for a payday loan settlement program to lower your payoff amount and eliminate late fees. The sooner the high-interest debts are paid off the less overall payoff amount you will have to bear in the long run.
6. Make sure you are paying the right amount of taxes
It is essential to ensure that you pay the right amount of taxes; otherwise, you may end up paying more. It can lead to you failing to make ends meet during this already challenging time. On the other hand, you may end up paying less than you have to and end up with a big tax bill, which is also not ideal.
- It’s common for your tax status to radically change after a divorce. You might have tax-filing status options if you were divorced on or before 31st December of last year.
- Many child tax credits are available to parents that the custodial parent can benefit from.
- If you decide to sell your home, timing can be critical to get maximum tax exemption.[1] [2] [3]
- If you sell your house when you are still married and jointly file taxes, you can get a tax exemption of up to $500,000 of the selling price. You and your partner get an exemption of up to $250,000 each. So, you will be limited to an exemption of only $250,000 if you are the sole owner of your house after divorce and you decide to sell it.
- Alimony payments are no longer tax deductible for the payer and are not included in their income tax.
7. Seek out professional help if you need to
If you’re having trouble managing all your financial obligations, you may talk to a financial advisor. They will assist you in making a post-divorce financial strategy.
You can also seek guidance from friends and family members if you know someone financially savvy.
If your debts become unmanageable, then there are many ways to pay them off. If you have especially high-interest rate debts like a payday loan, you can opt for a payday loan settlement program.
Divorce can be a significant financial setback, and rebuilding your finances is not easy. During this period, you may require other forms of financial/legal help too. For example, you might need help recovering missed child support or alimony payments.
Moving onward and upward
Financial loss and instability may be inevitable after a divorce, but it is not irrecoverable. You may have to maintain a very tight budget and sacrifice a few luxuries. But it will help you keep a good credit score because you won’t be missing any payments. As a stay-at-home parent, being financially independent may seem scary at first, but it can also be very liberating.
Staying out of debt and finding better ways of paying off existing debts should be a priority during this time. You should figure out how much taxes you should be paying and make sure you maintain a good credit score. Seeking professional advice will help you manage these things. And by keeping these things in mind, you may be able to reach financial stability in a short amount of time.
