Divorce is a life-changing experience. Beyond altering family ties, friendships, and living arrangements, there’s also a financial consequence. Understanding the financial impact of divorce can help you better prepare for and recover from it. Below are a few examples of what may occur as a result of divorce.
Lower Credit Score
A lower credit score is a common result of divorce. This happens for several reasons. First, you and your ex-spouse may close joint accounts such as credit cards. 30% of your credit score is determined by the percentage of credit card balances compared to credit limits. By closing accounts, you reduce the amount of credit available, making any balances relatively higher.
For example, if you have $30,000 in total available credit and a $5,000 balance, you’re using 16.67% of your available credit. If you close joint accounts with $20,000 in limits, your remaining credit limit is $10,000. Assuming you still carry a balance of $5,000, you’re now using 50% of your available credit. This will naturally reduce your credit score.
You can offset some of these negative changes by maintaining good payment history, paying down balances, and not opening too many new accounts.
Reduced Household Income
One of the biggest adjustments after divorce is living on a single income. Divorce will prompt you to re-evaluate your overall expenses, spending habits, and lifestyle. Taking smart steps during and after divorce can help you quickly adapt and thrive, despite the drastic change. Sit down with a financial planner to evaluate your income, expenses, assets, debts, and investment strategies. By creating a plan and making necessary adjustments, you can maintain a healthy financial balance.
Alimony and/or child support is another major financial impact of divorce. It may seem like a double hit since your household income was reduced and you’re adding new debt obligations on top of that. Working with a good attorney to negotiate alimony and child support is extremely important to establishing an amount that is fair to both you and your ex-spouse. Also, if your circumstances change, your attorney can assist with renegotiating court ordered payments.
Less Retirement Savings
In many cases, divorcees find themselves contributing less to retirement savings. Funds are often diverted to alimony, child support, or living expenses. Meet with your investment advisor to discuss how you can offset reduced contributions while still adequately planning for future retirement. Changes in your investment portfolio may be helpful to achieving those future goals.
Other Tips on Minimizing the Financial Impact of Divorce
Mitigating the financial impact of divorce starts long before your divorce is completed. Everything from the moment you decide to get divorced will play a role in the eventual outcome. Working with a Massachusetts divorce attorney from the start can be extremely beneficial. Your attorney will guide you through making important decisions and understanding how each will affect your life after divorce. If you do not already have a divorce attorney, contact our team to schedule a consultation.