For those who are recently divorced, recovering financially starts with acceptance of the situation. While it can be tough, the starting point is to accept the situation and commit to moving on to create a solid financial future for yourself. Especially if you have children that rely on your financial well-being, it is imperative to get back on your feet and do what it takes to be financially stable for your family, with or without your spouse’s help. Check these dos and don’ts to get off on the right foot.
- check credit reports
- contact creditors
- set goals
- start considering savings as a “bill” that must be paid
- develop new habits
- neglect to take care of any tax debt
- go overboard with credit cards
- use that credit card too much
- skip over cliché questions
- hope you remember to pay bills
Every person (single, married, divorced, widowed) should be monitoring credit reports at least annually at all times, but it is critical in the case of a divorce for each of the people to do so – and in many cases, more frequently than once a year for at least a few years. Pull a “tri-merge” credit report (summary from all three major reporting bureaus). Consumers can access credit reports once each year for free at Annualcreditreport.com. Check reports carefully for errors. If you find anything, follow the directions on the bureaus’ websites to correct.
Sometimes, in the case of divorce, a report may contain negative information that is factually accurate. It may be appropriate in those cases to send a letter explaining the cause of the derogatory mark (e.g., divorce made it impossible to pay credit card payments two years ago). Ask the reporting agency to append the explanatory letter to your profile.
For jointly held credit cards, and for any other debts incurred during the marriage in community property states, there is shared liability. This means that if a spouse does not make payments after the divorce, it could come back to haunt the other spouse and his/her credit rating. Call all creditors for shared accounts (credit cards, gas cards, department store cards, phone cards, etc.). Close the accounts – if there are no outstanding balances – or remove your name from jointly held accounts.
Sit down – with your family as applicable – and set both long- and short-term personal goals. Whether you want to take a vacation, buy a home in three years, plan for retirement or have time to train for a 10K, write down the goals. Then – and only then – create and use a simple budget based on the personal goals you wrote down. Software not required; pencil and paper, or an Excel spreadsheet, work just as well.
Some financial institutions let you arrange automatic withdrawal from your checking account to a savings account. Also, check with your employer for automatic deposit into your savings accounts. Record this expense like a bill every month to painlessly accumulate savings. If necessary, start with a small amount like $25 or $50 per month and increase it whenever possible – when you pay off a credit card with a $50 monthly payment, for instance, increase your savings by that $50.
Make it a habit to deposit any cash or checks as they are received. Open all mail – including every bill – as soon as it arrives, and then pay each bill immediately upon opening – or use a bill-paying filing system. That “system” may be a folder that resides on a certain spot of your desk, a basket on the kitchen counter or an online calendar. Choose what works best for you and then use it consistently.
If there an IRS debt (i.e., back taxes owed), be aware that the IRS does not have to honor a decision from a divorce judgment. Each spouse has a responsibility to make sure that the other does not create a tax liability the other is unaware of. Individuals may need to consult a tax expert or tax debt resolution specialist.
To manage personal business, most adults need to own at least one credit card. Responsible use of credit will help build your credit score as you rebuild your financial life, too. Multiple credit cards are not necessary, and no one should ever carry a credit card balance.
Charging a small amount each month, and paying it off on time and in full, will indeed help build credit profiles. But as you learn to navigate new financial waters, get a real handle on finances by using cash more often. Research shows that people who do not use debit or credit cards are less likely to throw that extra item into the shopping cart or make an extra purchase, and typically spend 15-20 percent less than when using a credit or debit card.
Once you have a simple budget in place, improve it by taking a close look to see where you can cut back. It may appear cliché to ask if the question, “Can I do without that expensive cup of coffee as I head into work, and replace it with the free coffee at work?” But this is just the type of disciplined act that will get someone on track to saving and spending smartly.
With divorce come many lifestyle changes. It can be easy to overlook or forget a bill. Don’t take the chance. Instead, look into auto-pay options. For monthly bills such as phone, utility or rent, check into automatic-pay options including online bill payment, often offered free today at consumers’ banks or credit unions, and automated deduction plans. Many utility, mortgage and other companies now permit these arrangements where they will withdraw funds directly from your bank account; this way, you can’t pay late, and budgeting for these items can become more streamlined. Some lenders and utility companies will provide a reduced interest rate or other rebate for use of their automated payment services.
The good news is that you can take charge of your own financial future after a divorce. By setting up simple systems, following a budget and paying close attention to how you spend and save, you can – and will – recover well.