Divorce is a tough time for any couple. About 43% of first-time marriages in the U.S. end in divorce, according to Forbes. It is a period of resentment and emotional stress for many people. Adding to the pain are the financial consequences of divorce that take their toll as well.
As your buddy in all things finance, we are here to offer wisdom and support to help you through these troubled times. Let’s look at what money problems you can have after divorce.
Key Takeaways
It’s estimated that divorced individuals need around a 30% increase in income to maintain the same lifestyle. Think about it – most lose roughly half of their household income streams, as they will now be a one-person household.
Divorce affects men and women differently, often leading to significant financial problems Research shows that men’s household income falls by about 23% after divorcing, while women typically experience a harder financial hit with a 41% decline.
One of the most significant changes in monthly budgeting concerns housing costs. After a divorce, usually one or both spouses move to another home, and living expenses naturally increase. Whether it’s mortgage, rent, or housekeeping, all these housing expenses now fall on the shoulders of one individual instead of two.
Next, expenses like child care become more pronounced as you transition to a single-parent household. Additionally, suppose you previously had access to your spouse’s health insurance plan, or you had a joint plan. In that case, you will usually lose access and must pay for your coverage separately, adding to your monthly expenses.
In general, an overview of your finances becomes necessary as priorities usually shift. In most cases, essential expenses like groceries or rent take precedence, while discretionary spending becomes a luxury.
Your relationship status doesn’t directly affect your credit score. However, if you have joint accounts, these can impact your credit. Unless you close your accounts or remove your ex-spouse’s name from them, they will continue to appear on your credit report, and you will both continue being legally responsible for them.
Many people remain authorized users on their spouse’s credit cards. If your ex-spouse revokes your access to the card, your credit utilization ratio will increase as your credit limit decreases. High credit utilization can hurt your credit report.
Deciding what to do with the marital home after the divorce is one of the main financial decisions you must make. Let’s break down the options to see what might look best for you:
Child support and alimony are other payments that you’ll need to sort out if you have children. If one of the parents becomes the child’s custodian, the other parent may need to pay child support to cover the child’s expenses. The amount usually depends on each parent’s income, the number of children, and the custody arrangement. If you fail to do so, you may face legal consequences.
On the other hand, if you are receiving alimony or child support, this income should be incorporated into your budget. Conversely, if you make these payments, you should account for them as fixed expenses.
As of 2019, alimony payments are no longer tax-deductible, while child support continues to be non-taxable.
Finally, divorce’s financial consequences also imply reconsidering your retirement accounts and long-term financial planning. Typically, retirement savings accumulated throughout marriage are considered part of the marital estate and subject to division.
The division depends on whether you reside in a community property estate, where retirement savings are split equally, or an equitable distribution state, where assets are divided fairly but not necessarily equally.
For those who were married for more than 10 years and have not remarried, you have the ability to access up to 50% of your ex-spouse’s Social Security benefit when you reach retirement age. Remember that this doesn’t affect your ex-spouse’s right to their amount, as the government covers any difference.
After the divorce, it might be necessary to reassess your retirement strategy. Many people find that the assets they’ve counted on for retirement are now reduced or reallocated. Professional help from licensed financial experts and tools like Betterment or Wealthfront can help you tailor your investment portfolio to your changed personal and financial situation.
Going through a divorce is definitely not the easiest, but just like everything in life, it will pass. While it does leave its emotional and financial mark for years to come, being prepared and knowing what to expect can make the transition to this new chapter in life less stressful.