Divorce - how to bounce back financially - Episode 8

Financial Autonomy is about managing and planning for major transitions in life.  A transition that many of us face unfortunately is divorce.  I understand researchers have found that going through a divorce can be one of the most stressful things you can experience in life. As a financial planner, I often work with clients who have been through or are going through a divorce, and assist them in the planning necessary to get them back on their feet financially. In this post I’ve broken down the things you need to be thinking about into 4 key strategy elements.  If you can work through these, you’ll be in a position to get your financial life back on track, and with this stress removed, hopefully your life back on track too. Divorce is certainly no fun.  But it does offer the opportunity to hit the reset button in your life.  With some good financial planning, this next chapter in your life can be the best yet.   Fortunately the days of couples sticking together in relationships that no longer work are behind us.  Divorce provides the opportunity for a fresh start.  But of course beyond the very significant emotional pain of getting through a divorce, the financial consequences are also very significant.  There may be many reasons for getting divorced, but improving your financial position is rarely one of them. Whereas you and your partner once shared a roof over your head, there is now a need for separate housing.  Often children are involved, so considerations of being local and having enough room for the kids can be a big challenge.  It’s not an option to move half an hour or more away to find more affordable housing when you don’t want to turn the kids’ lives upside down. You typically also go from two incomes and sharing expenses as a couple, down to one income with little change in expenses, so budgeting becomes a real challenge.  Often one of you will keep the family home so as to minimise disruption for the kids, but this may mean borrowing a significant amount so that your partner is able to move on with their life and get a new house of their own.  How will you service this new debt?  You may be required to pay child support, which, on top of new housing costs can be a real strain. And thinking longer term, retirement plans are often significantly disrupted.  Often one member of the couple took time out of the paid workforce to help raise the children.  This means their superannuation balance is typically considerably less than their former spouse who worked through.  This difference is allowed for in your financial settlement, but the result is that you are both now facing a less generous retirement outlook than was once the case. So divorce has big financial impacts.  But as I mentioned at the start, divorce also provides an opportunity for a fresh start.  It provides you with an opportunity to steer your life in the direction that you want to head, possibly without the compromises that you needed to make when you were in your former relationship.  You can set goals and work hard towards them without the potential for your former partner to decide they need a new car, or some other distraction.  Financial Autonomy is about giving you choices, and managing key transitions in your life.  Divorce is quite clearly a significant transition, and also an opportunity to gain choice.  So let’s look at a few strategies that might help you get back on your feet. 1. Budgeting The starting point must be gaining clarity around how much you have coming in and how much you have going out.  Following the divorce your household arrangements have changed, and possibly there is child support obligations and spousal maintenance to meet.  Or perhaps in reverse, you have these support payments coming in and need to ensure they are used wisely and appropriately. You can create your budget in a spreadsheet.  We also have a sample budget template in the toolkit for this post.  There are also budgeting apps available. Gain a clear understanding of how much you have coming in and how much you have going out.  Allow for the fact that bills are lumpy, and large expenses such as car servicing and council rates come up.  I suggest having a separate bills account with your bank.  If you determine that over the year your bills, including things like getting the car serviced, will be say $20,000, divide that by 26 (assuming you get paid fortnightly), and then arrange that amount, $769 in this instance, to be automatically transferred from the account that gets your income, across to your bills account each pay day.  Ideally you would kick your bills account off with a few thousand dollars to allow for the fact that a big bill could come up 3 weeks after you started.  You might even wish to put your mortgage or rent payments in here too. With this set-up, you know that all the bare necessities are covered, and what is left in your account is what you have to live off.  You can start to move forward with confidence.   2. A roof over your head In Australia there is no tax on gains in the value of your home (primary residence).  Also, given our growing population, historically the value of houses has risen over the medium to long term.  For both these reasons, for most people, becoming a home owner as soon as possible will be an important element of recovering financially from a divorce.  You may need to start smaller or less comfortable than what you once owned, but getting back into home ownership is likely to be a very important step. I recognise in this step that post-divorce there is usually a period where you are in limbo awaiting finalisation of the financial settlement.  That can’t be avoided and buying a home will need to wait until this is concluded. Once again having a good understanding of your budget is crucial so you can be clear on what you can afford to pay in loan repayments.  Run your numbers allowing for interest rates to increase by 2-3%.  Ideally budget on making repayments of a little more than the banks minimum so that you get ahead on your loan and thus create a bit of a buffer for the future. If you simply can’t make the numbers stack up to buy a home, and it looks like that won’t be a reality in the medium term, consider increasing your contributions to superannuation instead.  That way you’re still building your personal balance sheet and long term wealth, whilst also providing for some additional income in retirement that could be used to cover rent.  Just keep in mind that the money you put into super is “preserved”.  That means you can’t access it until you retire. 3. Review your insurances There are two elements here.  The low hanging fruit is updating the beneficiaries on any policies to ensure any payout would be directed where you would want it to go post-divorce. The larger item is thinking through how you will establish a financial safety net to ensure you are totally self-reliant.  Things like Income Protection and Trauma cover may become far more important than perhaps they were when you were part of a couple.  Seek specialist advice here to get a customised package that fits your needs and budget.   4. Retirement planning I typically see two scenario’s after the divorce.  One member of the couple keeps the house, most often the wife, and then has very little in superannuation savings.  Or the person gives up the house, but retains their far larger superannuation balance – most often the husband.  Whichever side you fall on, there are quite clearly long term retirement planning issues. If you have kept the house but now have minimal super, you need to plan for how you will support yourself in your later years.  Perhaps downsizing the home will be possible (it’s certainly very tax effective).  At some point though, increased contributions into super will be required, and the sooner this is affordable the better, due to the benefits of compounding. If you’re the partner who gave up the family home as part of the settlement, you may have a reasonable superannuation balance, but now you need to get a roof over your head.  Mortgage repayments or rent will limit how much extra you can contribute to super.  Compulsory employer contributions are not likely to be fully adequate to provide the quality of retirement that you would hope for. In whichever camp you are in, you need to develop a retirement plan, and the sooner you get onto it the better. Some other things to think about are whether your existing superannuation and wealth creation structures continue to make sense.  For instance is an SMSF still a cost effective and appropriate vehicle for you?  Do the numbers still work on that negatively geared property? Also, as with your insurance, check the beneficiary details on your super fund to ensure these are as you would want them to be.  A new Will may also be relevant and should be discussed with your solicitor.   Hopefully these 4 items get you thinking about bouncing back financially from divorce.  It’s a tough time but many before you have done it, and you can succeed too. Finally, don’t procrastinate.  The sooner you get your finances in order, the sooner you will start to move forward with your life.   Need help in planning for your life post-divorce?  Visit the “Work with me” page.   Important Information: This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.