Life After Divorce: Where Do You Begin?
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The prospect of divorce can be terrifying for multiple reasons. The financial fears associated with divorce can quickly become overwhelming, or downright impossible to overcome, when you think about trying to start over with one income when you’ve become accustomed to a two income household. If you’re like many families, you’ve struggled to maintain a monthly budget and have accrued debt across many categories. Recent studies suggest that most American families are living with upwards of six figures in annual debt, costing them thousands in yearly interest payments. So how will you manage your finances once you are on your own? When preparing for life after divorce, there are a few initial factors to analyze in your newly single budget such as housing expenses, spousal support, and child support.
Housing Budget and Spousal Support
Divorcing today looks very different from fifty years ago. Entitlements like alimony (also referred to as spousal support) are no longer guaranteed sources of transitional income. Depending on the state you reside in, and the court that ultimately handles your property settlement agreement, you may have more to consider beyond “who keeps the house”. The first thing you will need to list on your new individual budget spreadsheet is how much you (based on only your income) can afford to spend monthly on housing. Keeping the marital house may not be an option if your NET monthly income doesn’t provide enough for you to cover the mortgage payment, taxes, fees, and HOAs. You may need to look at comparable rental rates in your community. When looking into renting an apartment, townhouse, condo etc., keep in mind that on average no more than 25% of your GROSS monthly income should go toward rent. Having a roof over your head often entails more than just four walls and a roof. Consider the following items in your monthly housing and utilities budget:
- Base rent or mortgage payment
- HOA and/or monthly condo fees
- Renters (or homeowners) insurance
- Umbrella policy
- Utilities such as water and sewer, electric, gas, trash/recycling
- Yearly property taxes (for homeowners)
- Cable, phone, and/or internet packages
If you are awarded a transitional spousal support payment for a specific time period, we suggest that you do not factor that in as a part of your monthly cash flow. A court order does not guarantee you will receive these monthly payments on time. While your ex-spouse may face penalties or legal repercussions for payment delays, neither of those will help you on the first of the month when your rent is due. If your income alone does not provide you with the ability to support you and your children, you may want to consider alternate housing solutions. Many communities offer affordable dwelling units for purchase and/or rent. Also important to note is that spousal support can be considered taxable income to the recipient. A CERTIFIED DIVORCE FINANCIAL ANALYST® (CDFA®) may be helpful when assessing your housing needs, budget options, and tax implications.
Once upon a time many mothers assumed that being awarded custody of the minor children was a given. This is another major difference facing parents divorcing in 2017. Depending on the state you reside in, the age of your children, and the location of both parents, many courts now utilize alternative custody arrangements. Your divorce attorney can provide the best interpretation of the laws in your state concerning joint legal custody, primary physical custody, shared custody, visitation etc. When considering your monthly budget, consider adding a financial planner to your divorce team. For example, if both parents are awarded joint legal custody with shared physical custody, a child support payment is not guaranteed.
If you are awarded a monthly support payment, be sure to find out how that payment is calculated. Many states offer online calculators to help gauge what you might be likely to receive. These calculators are only estimates and cannot usually be used in a court of law. Check with your attorney on whether or not health insurance and childcare costs are factored into the support calculation. Some states provide a “credit” toward the obligation to the parent providing health insurance, and some states separate childcare costs and bill them independently.
As with a potential spousal support payment, be careful when factoring child support into your monthly cash flow. While many states have strict laws and penalties in place for noncompliant parents, it can take an extended period of time before legal action takes place or a payment is garnished. Unlike spousal support, child support is not considered taxable income. This may pose an opportunity to try to negotiate a higher child support payment in lieu of a higher spousal support payment.
While there are many more financial concerns and goals you still need to assess, we can all agree that figuring out how you will provide the basic housing necessities for you and your children is the first place to start. It is vital that you begin by assessing your new living options so that you and your children can begin healing and moving forward. We encourage you to work closely with your attorney and CDFA® to begin mapping out how spousal support and child support may factor in to your new monthly budget, and what steps to take to begin your financial journey as a single parent. Having a CDFA® on your divorce team can help you process your needs and potentially overcome some of the fears associated with this new stage of your life.
The material was created for educational and informational purposes only and is not intended to provide specific recommendations, tax, or legal advice.