Divorce 101: Restoring your finances

According to Arnott, some things to consider when budgeting:

• Anticipate what you're going to spend at least on an annual basis. This includes the standard fixed expenses (housing costs, car payments) and variable ones (utility bills, groceries). Don't forget taxes.

• Look at what your net income will be from work, investments and any spousal support. Be sure to note when alimony or child support is scheduled to end.

• Determine whether your budget will cover a transition period. Perhaps you're going back to school or getting other career training. If so, your income will be reduced temporarily, and you'll need to budget for the increased costs.

• Once your added education helps you get a better-paying job, adjust your budget accordingly.

Financial planner Garrett also recommends getting the kids involved. "Keep it as positive as possible, but be truthful with them about expenses," she says. One good way is to get the youngsters' help in finding creative, cost-effective solutions for their entertainment.

"They'll learn priorities with money. It's a great life lesson," Garrett says. "And just as importantly, you need their help."

Make the difficult decisions

Children, however, can lead to other budgeting concerns. Women, especially when they are the primary caregivers, often want to maintain a semblance of the life their kids knew before divorce.

"They want as few changes as possible, especially with younger kids," says Garrett. That usually means the custodial parent, typically the mother, wants to stay in the family home with the kids.

"For many, many women, the marital residence is where she raised her children, where she put down her roots," Arnott says. "She can look around that living room and know she picked out that sofa, hung those drapes. There's a real emotional attachment."

And that attachment can be costly unless some difficult decisions are made. The ex-wife probably knows the mortgage payment but may not factor in the home's taxes and insurance, not to mention routine maintenance costs, such as lawn care, major repairs (a new roof) or minor annoyances (which plumber to call for a clogged sink).

Arnott says you've got to "separate the emotional attachment from strategic decisions. In the long term, does owning the house make sense? In a couple of years can you make the mortgage, the maintenance payments?"

Garrett says: "Unfortunately, I've seen too many occasions where keeping the family home is not financially possible. They can do it for a short time but not long term. Now it usually takes dual incomes to maintain a house. So think of keeping it only for a transition period. The stress of trying to keep the old lifestyle is more damaging (to the kids) than an adjustment into a new household."

Invest in your future

Once the budgeting and housing situations are resolved, it's time for some longer-term financial planning. The biggest financial hole that most divorced women must fill is retirement savings. When couples are married, Garrett says, it's not unusual for them to "load up" one party's -- typically the husband's -- retirement account more than the other's.

Compounding the retirement-savings gap: Often women take time out of the work force to care for children or elderly family members, so they don't have the same resources to build a retirement, Arnott says.

Further, when they do resume work, women tend to make less money, so they contribute less to retirement plans. And their investment choices for the accounts typically are more conservative. But that reduced risk also means reduced retirement earnings potential. Arnott works with her women clients to assess their risk tolerance. (See "4 ways women can be better investors.")

"There are two types of risk: risk to principal and risk to purchasing power," she says. "If you're investing too conservatively, inflation and taxes are eating away at every dollar you have. You've got to keep your money working for you."

Arnott recommends a systematic investment program, something as little as $25 a month going automatically into an investment that will start to accumulate for a sounder financial future.

"The old adage 'pay yourself first' is true," she says. "If you can do so directly, even to a simple savings account to get started, you'll be in better shape."

Tie up loose ends

Finally, to ensure your current and future finances are protected, don't forget to tie up post-divorce loose ends.

"Some couples have been divorced for months, and I know of one case a year, but were still sharing finances," Garrett says. That's not wise because if your ex-spouse runs into trouble with creditors or gets sued, it could come back to haunt you, she warns.

Make sure all assets awarded in the divorce are transferred to your name. If you're receiving alimony or child support payments, make sure the paying parent has a life insurance policy that will pay you and the kids in the event of his or her death.

• Talk back: How has divorce affected your finances?

Also, be sure to change your beneficiary designations. "No order of court is going to override that," Garrett says.

She recalls that "a man had remarried and presumed his new wife would get benefits." But that wouldn't happen unless he named her as his new beneficiary.

In that same regard, update your will and health-care directives after a divorce, and name a fiduciary for any assets you leave to your minor children. Review all insurance coverage. Make sure the home and auto policies are in your name, and review the policy limits. If you've been covered under your ex-spouse's health insurance, COBRA rules allow you to stay on that policy for up to three years.

Sources: Institute for Divorce Financial Analysts and Association of Divorce Financial Planners.

This article was reported by Kay Bell for divorce360.com.

Updated May 26, 2009

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