Reader Q&A: How Can I Recover Financially After A Divorce? I Need To Get Back On Track This Year.
Liz, age 38, asks...
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Today's question is from "Liz age 38”:
How can I recover financially after a divorce? I need to get back on track this year.
Going through a divorce isn’t easy but you can and you will get through it.
With your eyes on the future, you can create a better life for yourself and rebuilding your finances is a great place to start. Here’s our advice”
1. Assess your financial situation
The first step is to know where you stand financially. Start by looking at your income, expenses, debts, and assets.
Income: Take a look at all your income sources. First, review your old pay stubs. Then, look at other means of income, such as side hustles, alimony, investments, etc. Add the amounts from all your income sources to understand your total income.
Assets: Assets are things that you own that have value. For instance, your assets can be cash you have stashed away, antique furniture, a car, investments, intellectual property, etc. Create a list of your assets so you know what’s available to you.
Expenses: Lastly, print or download your bank statements from the last 3 -6 months. Then, go through and identify all your expenses, including debts. Create categories for your expenses, such as groceries, rent/mortgage, utilities, medical expenses, car, insurance, eating out, etc.
This way, you will understand how much money you spend in different areas of your life.
Gaining a clear picture of your finances
Once you have your total income, debt, and assets, you can understand where you are financially and what you should prioritize.
You want to make sure you have enough income to cover your spending. If you notice any areas within your finances that need more attention, such as high debt, low savings, no assets, or impulse spending, then those are the areas you’ll want to focus on improving.
If you are breaking even, you may want to work on building your assets or increasing your income.
2. Create a new budget
Understanding your financial status allows you to create a new budget that works for you. A typical budget lists your income, expenses, and your spending. However, there are various types of budgets, so feel free to try out what works for you.
Structuring your budget
With a budget, you can ensure that your income covers essential expenses such as food, housing, utilities, medical care, debt payments, etc. If you’re able to cover these expenses, you can allocate extra money to emergencies or retirement savings.
Next, you can allocate money towards things such as eating out, getting your hair and nails done, etc.
But let’s say your income barely covers your essentials; consider cutting back on some areas. What are your money leaks? What areas of your life are you putting money towards that aren’t benefiting you? Examples include canceling a streaming service you don’t use, reducing personal shopping, etc.
Adjusting your budget
Additionally, find ways to costs on necessary expenses by reducing your grocery bills, switching phone companies for a better price, or reducing your electricity bill. Note that cutting costs on these items doesn’t mean lesser quality - start by looking for better deals!
Remember that a budget is meant to be a guide, not a strict teacher. You can always adjust your budget to fit your income or lifestyle changes.
3. Rebuild your credit
Once you have your budget, you want to consider your credit. Have you checked your credit score recently? While it may seem scary, those three numbers can influence your financial future, such as buying or renting a home or purchasing a new car.
You can start with a free credit report by visiting the Federal Trade and Commission website.
What does a credit score mean?
According to Equifax, a good credit score is between 670 and 739. A score within this range or higher means you’re doing pretty well. With a 670 score or above, you want to maintain or increase your score by keeping your debt ratio low, avoiding new debt, and making all your payments on time.
A score between 580 and 669 is considered fair. 570 and lower is considered poor. If your credit score is 669 or lower, it doesn’t mean you are a bad person or bad with money. These scores remind you to prioritize lowering your debt, which is possible with the right planning. Some ways to improve your credit score are:
Paying your bills on time
Lowering your debt utilization score
Keeping your credit card balance low
Pay down your debt
Avoid overspending on your credit card
Additionally, when reviewing your report, check for errors in your statement. If you find mistakes, you can call 1-844-USAGOV1 to have those errors corrected.
4. Build an emergency fund
As mentioned earlier, it’s important to save money for emergencies. It’s a good idea to have an emergency fund that covers 3-6 months of your essential expenses. By doing so, you’ll be prepared if your car breaks down, if you get sick unexpectedly and can’t work, if your washer breaks, etc.
How to set up your emergency fund
To know how much you need to save, calculate your bare minimum expenses such as food, shelter, gas, car payments, utilities, etc. Once you have that number, multiply it by three. Whatever the number comes out to be, that is your new savings goal.
Chances are that number is high, and it might feel intimidating. That’s okay. Start small; even if you save $10-$20 a week, that money will add up. You can also consider doing a savings challenge to help you save money faster.
When I was younger, I never thought of saving money for emergencies and would always rely on my credit card to buy new tires, pay for a dentist’s procedure, or anything else that came up. As a result, I racked up debt quickly. So, if I could return to my younger self, I would tell her to ditch the credit card and start saving.
5. Increase your income
So we talked about increasing your income, but how exactly do you do that? Well, there are a number of ways.
Ask for a raise or more hours at work
If your employee review is coming up or you’ve been working at your job for quite some time, then consider talking to your boss about a raise. If a raise isn’t possible, consider asking for increased hours.
Look into getting a part-time job
If you have some free time, consider getting a part-time or seasonal job. You can even look into part-time remote work.
Consider freelance work
Freelance work allows you to make extra money by utilizing your skills and setting your work hours. Are you good at writing, staying organized, or using social media? Whatever skill you have can offer those skills as a service. You can check out websites like Upwork of Fivver to get an idea of freelance opportunities or reach out to people in your network.
Try out gig work
Gigs are often short, often one-time job opportunities where people pay you to fulfill a specific task or complete a project. Some gigs to consider are petsitting, performing tasks for people in your neighborhood through apps such as Taskrabbit, online tutoring, becoming a delivery driver or social media manager, etc.
Start your own business/side hustle
Maybe you have a particular talent you’d like to offer the world and want to be your own boss. Starting your own side hustle is a great way to earn money doing something fulfilling.
6. Reevaluate your housing situation
If your post-divorce living situation is becoming harder to manage financially, here are some things to consider.
Downsizing. Perhaps you’re living in a three-bedroom apartment post-divorce, but do you need so much space? Downsizing to a smaller place can dramatically reduce your living costs.
Finding roommates. Maybe you don’t want to move, which is understandable. However, you still have to make rent every month, so consider finding roommates to split the cost. Alternatively, you can rent out your extra space for shorter periods to help with costs.
Relocating. Perhaps you need a fresh start and a way to save money. If this is the case, relocation to a new city, neighborhood, or state may be the best option.
7. Review legal and financial accounts
Divorce isn’t just signing a paper and saying your goodbyes. Often, many separated couples have to change certain policies and accounts they have had together.
Review and update legal documents such as your will, insurance policies, etc. If you have a joint account, make sure you can access your money and cancel any no longer-needed accounts.
Here are some documents to review
In case of emergency, contact cards at your doctor’s office, place of work, or school.
Your will and or trust.
Change passwords, especially to bank accounts or other sensitive information.
Check/close out any joint checking, savings, investing, or credit card accounts.
Transfer titles or deeds.
Update your mailing address.
Change your status on your tax documents.
8. Set new financial goals
Now that you have your financial foundation set keep your eyes on the future by setting new financial goals. Consider what you want your life to look like in three years. Do you want financial freedom, business ownership, debt-free, or wealth-building?
Whatever your big goal is, write it down and then break it down into smaller, manageable steps.
For instance, if your goal is to be debt-free within the next four years, break that goal down into yearly, quarterly, monthly, and even weekly goals.
Once you have broken down your goals, remember to give yourself small celebrations or rewards when you achieve each one.
9. Learn financial skills
Use free resources or workshops to boost your financial literacy, especially in budgeting, investing, or debt management.
Learning new financial skills is a great way to stay on top of your finances and achieve your goals. Learning how money works is the best way to make better financial decisions and plan for the future.
You can also read financial literacy books to help you stay on top of your game.
10. Take care of your mental health
Divorce is emotionally taxing. You may have some days where you feel on top of the world and others when it’s hard to get out of bed. Take care of yourself, reaching out to friends and family for support.
You can also look into therapy or support groups to help you process the stress and build a positive outlook as you move forward.
11. Celebrate small wins
In addition to celebrating when you achieve a goal, such as paying off a credit card or meeting your savings goal, take time to celebrate other aspects of your financial life.
Pat yourself on the back for meditating instead of impulse shopping. Put on your favorite album while you budget for the month. Share with your close friend that you made your first $100 from a side gig.
Anytime you do something to help yourself grow, take the opportunity to celebrate you.
Don’t forget to give yourself grace ❤️
Recovering after a divorce takes time, but every step forward brings you closer to a stable and independent future. You’ve got this!
Remember, if you need more help managing your money, you can check out our completely free courses or our one-on-one coaching offerings.