Why women need to be proactive about their finances after divorce

Divorce is definitely not easy, but sometimes it is necessary and it can have a huge impact on women and their finances. 

Even though women are the ones who initiate divorce 69% of the time (according to Stanford University), there are high emotions and a lot of uncertainty. How will your life change? Your kid’s lives? Your financial situation? 

The U.S. Census Bureau has some startling statistics on divorce in the United States. Approximately every 42 seconds, there is one divorce in America. You are not alone.  With women typically living longer than men, there’s more years to plan for.  Coupled with the financial toll that divorce has, it is critical to prepare as much as possible to soften the blow.

How to financially prepare for a divorce

When you’ve decided to file for divorce, it’s time to gather as much information as possible and figure out a plan.

When it comes to your new financial future, here are a few things to consider:

Take inventory of your finances

Taking time to get organized and educated is a key factor  if you’re planning to leave your marriage.

Here’s a short list of items to start with:

– pay stubs

– bills

– credit card statements

– bank statements

– mortgage statements

– investment statements

– income tax forms

– contents of your safe or safety deposit box

– any other pertinent financial documents

The more information you can give your financial planner and lawyer, the better.

Your monthly income

Perhaps you have your own income at the time of divorce and earn more than your spouse, or maybe you have a lower income than your spouse because you have been out of the workforce for years. 

Either way, you should work with your attorney and financial planner to try to calculate how much income you’ll require after your divorce. Once you have this information, then you can start planning.  There are a variety of sources that may or may not be available to support your income needs–current and/or future jobs, savings/investment accounts and spousal support.

Unfortunately, the reality is that many mothers are supposed to get alimony or child support but don’t. According to the U.S. Census Bureau, only 45.6% of custodial parents who were due child support in 2013 received full payments. This loss of income can be a significant financial blow. That’s why women must prepare for divorce financially and figure out their budget once finalized.

 

No more joint accounts

If you have a credit card or loan that is in your name and your spouse’s name, you are both responsible for it. It’s best to avoid any negative situations like your spouse running up a large balance on a joint credit card and refusing to pay. This drags down your credit. So be sure to take your name off all joint accounts. 

Have at least one credit card that is in your name only. This will help you start to establish your own financial independence. Next, get a separate checking and savings account and save enough money for a couple of months worth of living expenses.

What are your next steps?

With this new independent life, there are countless things you should consider in your financial planning.

  • will you stay at the family home
  • how will you pay for it
  • do you need to get a job

How to pay your legal fees

When it comes to divorce, most people require a lawyer. If you can’t afford one or your spouse has removed your access to funds, there are a few things you can do. 

  • Ask about a payment plan. Divorce is expensive! Many lawyers offer payment plan options. You might have to pay an initial retainer, and then you would proceed to pay in monthly installments.
  • Apply for a personal loan. If you have good credit, you can consider taking out a personal loan to cover legal costs. 
  • Ask family or friends to help. No one wants to ask friends or family for help, but they may be able to help you at this difficult time. 
  • Look for pro bono services. The American Bar Association states that lawyers should try to contribute at least 50 hours of pro bono legal services per year to help those in need. With that in mind, it wouldn’t hurt to ask the attorney if they can provide pro bono legal aid.
  • Contact the family court in your area. If none of the above options are viable, reach out to your family court. They can refer you to low-cost civil legal services agencies and other resources in your area.

Getting your financial life back in order after a divorce

Once your divorce is final, it’s time to heal your emotions and recover your finances.

As you’re adjusting to your new budget, living independently and paying off debt that you’ve accrued due to your divorce, you might have to tighten your wallet and cut some expenses. 

A nice vacation may be just what you’re looking for, but now is the time to save. Work with a financial planner to track your income and expenses, so you know what kind of budget you’re working with. 

Pay off Debt

As you’re paying off debt, don’t forget to check your credit periodically. It’s not uncommon for credit to take a hit after divorce. If yours is looking less than great, you should work on rebuilding it, as your credit score affects so many things in your financial life. 

To pay off your debt faster, it might be good to look into a side-hustle. There are a lot of options, and with so many jobs going remote, it may be a great choice to freelance. 

Save for Retirement

It’s important to not only pay off debt but also save for retirement. With life expectancy for women at 81.2 years (and growing every day with modern medicine), planning for your future is critical. A great way to save for retirement when you’re focused on getting through each day is to make it automatic. If you have a company 401(k), have them automatically deduct it from your paycheck. And if that’s not an option, set aside a fixed amount each week to save in an IRA or other retirement plan that may be appropriate for your situation (always check the rules).

 Gaining financial independence may be challenging, especially if your former spouse took care of all the finances in the relationship. However, with a plan in place and sticking to a budget, you will get to a place where you will have financial freedom and be able to grow your net worth.

Life beyond challenges

Divorce can significantly impact a woman’s financial and mental health. It may be challenging, but creating stability during this season of life is doable with enough planning and a strategic approach. 

Nothing is permanent, and this chapter is merely an obstacle. You will find a way to navigate it and will once again thrive.

You are independent and free. Set goals, live simply, and before you know it, you will be living the life you desire.

If you’re not sure where to start on your own financial journey, I encourage you to download our FREE Financial Empowerment Guide Exclusively for Women. 

If you are looking for a trusted partner to help you navigate financial decisions, we are here to help.  Schedule a meeting with us today to see how we can help you with your own financial journey. 

 

Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted. Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.

Tax Time!

We are now in January of 2022, which means you have to start thinking about completing your taxes for 2021. Your W-2’s and 1099’s are required to be sent to you by the 31st of January, but other forms have more time to be issued and may have multiple versions due to corrections.

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What are Deductions?

I get this question a lot: “Can’t I just deduct that expense on my taxes?”  My answer to this question, 9 times out of 10, is that it depends.  Let us look at some basic concepts on your personal income taxes and your self-employed income below.

Standard vs. Itemized Deductions

You have your standard deduction or itemized deductions—you get to pick the higher of the two (unless Married Filing Separately-but that is beyond the scope of this article).  Your standard deduction is set by the IRS each year and it is based on your tax filing status.  Itemized deductions come from Schedule A.  The 4 most common entries on a Schedule A are:

  • Medical Expenses—this does NOT include your insurance premiums that were taken out of your paycheck.  It does include money you paid for medical expenses with any after-tax money.  The caveat here is that there is a threshold you must meet before these expenses become a number on the Schedule A.  That magic number is 7.5% of your Adjusted Gross Income (AGI).  For example, if your AGI is $100K, then the first $7500 of your medical expenses are not part of your Itemized Deductions.  If your medical expenses are $8000, then $500 will be the medical expense number in your Itemized Deductions.
  • Taxes you Paid—Think taxes paid to your State and Local government.  State Income Tax, Personal Property Tax and Real Estate Taxes paid to your state and county are the most common in this section.  There is a cap on this number which is $10K (less if Married Filing Separate), so that means that this number will not be more than $10K in your Itemized Deductions.
  • Interest you Paid—this is mortgage interest for your primary home.  It can include interest from your home equity loan IF that money from the loan was used to buy, build, or improve your primary residence.  If that money on your home equity line of credit is used to pay off other debts, then that interest does not count towards your Itemized Deductions.
  • Gifts to Charity—these are donations you make to charities—both cash and other items.
  • There are some other deductions that are less common that can go into the ‘other’ category as well.  

To get your Itemized Deductions you add all these numbers up and compare it to your standard deduction.  For a taxpayer filing as Single on their 2020 taxes, the standard deduction is $12,400.  Your Itemized Deductions should exceed the $12,400 for you use those deductions on your tax return.

Above the Line & Below the Line 

Before we talk about above or below the line, it is important to know what the line is.  ‘The line’ is your AGI—specifically Line 11 on your 1040.  Above the line deductions come off your income before calculating your AGI.  Most of these above the line deductions come from Part II of your Schedule 1 of the 1040.  Capital losses are also above the line and can only offset your income by $3K per year, but you can carry those losses forward or use them to offset any capital gains.  Below the line are credits like credits for taxes already paid, credits for self-employment taxes, child tax credits, earned income credit, education credits, etc.  

Self-Employed Deductions & Credits

If you are self-employed, most likely you will be filing a Schedule C.   What expenses offset your income?  The best starting point for this to look at the Schedule C and see the categories listed directly on the form.  There are many things that fall into each category and of course there is also the catch all ‘Other’ category.  Some of the broad categories include:

  • Advertising
  • Fees paid to Contractors
  • Depreciation
  • Employee Benefits
  • Insurance (not health)
  • Legal & Professional Services
  • Office Expenses
  • Supplies
  • Pension & Profit-Sharing Plans
  • Taxes and Licenses
  • Wages to Employees
  • Utilities 
  • Travel and meals (there are some caps here)

All the above get you to your net income for your business.

Potential credits on your 1040

  • Self Employed Health Insurance—if the plan is established under your business, you could deduct premiums paid for your health insurance for you, your spouse and dependent.  You also must have net income from your business to be able to do this.  Check out the Self-Employed Health Insurance Deductions worksheet in the Form 1040 instructions.
  • Qualified Long-Term Care Insurance—you can deduct a portion of your premium based on your age.  
  • Self-Employment Tax—when you are self-employed, you must pay both the employEE and employER part of payroll taxes.   Uncle Sam gives you a little bit of break and allows you to deduct ½ of your Self Employment Tax on your 1040.
  • Don’t forget you have to pay your Self Employment Taxes quarterly (3/15, 6/15, 9/15 and 1/15 for the previous quarter).
  • Self-Employed Retirement Plan Contributions—note that this depends on the type of plan you have.  This will only be a deduction if you are NOT contributing to a ROTH plan.

WOW, that was a lot of information and only a high-level overview of some deductions!  Click here to get more information on common tax forms.

Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted.  Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.