Starting Fresh: Post-Divorce Budgeting Essentials

The decision to separate from one’s spouse is never easy. It’s natural for both parties to experience some levels of emotional turmoil. A total of 689,308 divorces took place across 45 US states in 2021(the remaining five do not report these statistics).

This means double the number of people have had to figure out how to do life alone after the settlement. Thousands would have also had children and this brings an additional set of responsibilities. Before the emotional repercussions set in, financial worries begin to rear their head.

Whatever the reason, the post-divorce period is all about learning to accept and adjust to the changes. In this article, we will discuss one of the most important aspects of after-divorce adjustments – finances. Learn all about budgeting basics that will help you maintain a good lifestyle even as you save for the future.

Common Problems That Weigh People Down Post-Divorce

Once the ink on their divorce settlement has dried out, some folks find themselves with additional resources. However, this is only the best-case scenario. More often than not, financial positions change drastically in the opposite direction. Listed below are three usual issues that couples face post-divorce –

• Divorce-Related Debt

In some cases, either or both parties may have taken a loan to pay for divorce-related legal proceedings. Some end up splurging more on their credit card than usual. Studies show that couples pay an average of $7,000 to seal their separation. 

After the settlement, it’s time to pay off such debts by arranging extra cash flow or cutting down unnecessary expenses.

• Reduced Income

This is the most concerning and common problem, as a two-income household converts into one with a single income. Reduced resources will naturally alter the standard of living. Matters can be much more challenging for women from a male-breadwinning household.

One study found that the median income of divorced women from households with a male breadwinner reduced by 72% two years after separation. In such cases, it’s time to look for good opportunities for earning. 

Then, one needs to prepare a fresh budget that adjusts well with the new income. This includes controlling expenses, changing spending habits, etc.

• Fresh Expenses

It’s not uncommon to find people purchasing a vehicle on loan post-divorce or renting a new apartment. Besides monthly obligations like utility bills, groceries, and health insurance, it’s important to make room for such new expenses.  

Before You Begin

To forge ahead with post-divorce budgeting, you must put aside two things (at least for the time being) – your past and any volatile emotions. Consider this opportunity to create a fresh budget as an encouragement to focus on the present and the future.

You can use a spreadsheet to create the budget or ‘spending plan.’ The aim is to figure out what financial reserves are available to meet your monthly needs. Once all necessary expenses are taken care of, you are free to direct your attention to wants and luxuries.

Essential Elements of a Post-Divorce Budget

Did you know that marriage dissolution reduces the personal wealth of men and women by 82% and 76%, respectively? The most severe blow is experienced by couples over the age of 50. This is why it is crucial to prepare a budget that makes it easier to adjust to a new life.

Let’s look at the essential elements (or steps) involved in creating an effective post-divorce budget.

Factoring in the Current Income

Your starting place is to jot down all the current sources of income. For this, it’s best to have at least the previous two or three years’ tax returns at hand. Look closely at all the income sources flowing into the household.

Out of these, write down the sources of personal income on the spreadsheet. These may include salary, home-based business, child support, and more. Also, know when you’re most likely to receive your paycheck.

For instance – if income is received every Monday, you can determine how much of it will go towards bill payments. In case you were not earning previously, start by looking for relevant jobs or earning opportunities.

Listing down Expenses

From this step onwards, the real homework begins. You need to create a list of possible expenses you incur every month. This framework is important to understand the bare minimum you need to maintain your lifestyle post-divorce.

Under this list, include everything – needs and wants. Here’s a sample list –

• Monthly rent
• Mortgage payments
• Groceries
• Insurance
• Childcare
• Lawn service
• Trash or snow removal
• Purchase of personal and household items
• Payments towards spousal support
• Debt payments
• Monthly entertainment like movies, kids’ gaming, etc.
• Utility bills
• Phone and internet bills
• Gym membership
• Subscriptions
• And more

Take your time to list down every possible expense that comes to mind. Getting this part right will help you prevent overspending and enhance financial well-being in the long run.

Prioritizing Necessities (Needs)

In this step, it’s time to ‘sharpen your pencil.’ Meaning, start evaluating each expense and determine whether it’s a need or a want. It is impossible to live a life with only needs and no wants. However, one can fulfill their wants once their needs are taken care of.

Needs are monthly expenses that are non-negotiable because they are necessitated by life. These would include groceries, rent, loan EMIs, utility bills, etc. According to MyStages, the ideal is to not allocate more than 50% of your monthly income towards needs. But, if that’s not the current case, do not panic.

Also, don’t rush into hasty decisions like trimming retirement savings for current income. This is a precarious step since you may not have enough time later to replace such funds. The better alternative is to think about additional income sources, including a side gig, reselling, and pet grooming, among others.

Considering the Extras (Wants)

After the needs are settled, you are free to spend money on wants. These will include items or services that are not necessary for living but make life more comfortable. Some examples would include entertainment, dining out, fashion accessories, etc.

Even while preparing this list, think about areas you may be splurging on. For instance – perhaps you’ve been dining out only in expensive restaurants. Enjoying meals from outside is not a problem, but you may have to look for more affordable options.

The key to creating an effective budget is to stay brutally honest with yourself. If you feel like cooking more often at home would cut down expenses further, consider doing so. There could be other such items that you’re used to but don’t need. 

Also, remember that it’s for the time being; you can always enjoy them in the future once things have stabilized.

Making Adjustments

After identifying your monthly income and expenses, it’s time to assess if you’re overspending. Simply deduct the total expenses from the total income. Ideally, the results should be positive. This means you have some money left over each month after all expenses are taken care of.

However, if the resulting figure is negative, it means you’re overspending and need to make some adjustments. These adjustments can take several forms –

• Looking for extra income sources
• Eliminating unnecessary expenses
• Canceling unused subscriptions
• Clearing debt as soon as possible
• Putting a spending limit on your card

If you find this process challenging or overwhelming, consult an experienced financial advisor to get your finances back on track.

Monitoring Transactions to Meet Goals

If creating a post-divorce budget that works is tough, staying on the right lane is tougher. Many people fail to maintain their budget months after they first created it. This is essentially because they did not monitor their transactions and tweak the budget based on changes in income or expenses.

Get into the practice of reviewing your budget periodically to see if any updates or changes are needed. For example – you may notice that there are cheaper alternatives available for monthly subscriptions. Switching to a new service would cut down expenses going forward.

Another example would be too many dinner outings with friends. A more affordable option would be inviting everyone over to your place for dinner. You can also ask each friend to cook their specialty dish and that makes for an exciting platter. Staying on track is crucial to gaining a strong financial footing in the future.

Final Thoughts

As per financial experts, uncoupling can change personal finances in more ways than one. Besides the budget, the effect spans across one’s credit score, retirement portfolio, tax payments, housing, and insurance coverage. 

This is a massive transition and may stir up insecurities or fears. It’s all the more difficult if you must start by looking for an income source. Nonetheless, you need not be overcome by anxiety. 

Accepting and adjusting to changes whilst preparing a realistic budget are the concrete steps needed to face the unknown. With time and patience, your financial standing will become stable and more predictable.