Jul 18, 2017
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.