How To Financially Recover from a Separation/Divorce

By Allison McAlpine

Going through a separation/divorce can wreak havoc on a person’s financial health.   From legal fees, to splitting up assets, to having the same amount of family income at separation now funding two separate households after separation.  It’s tough.  There are some steps you can take, though, to minimize the financial impact of separation/divorce.    These are our top tips:

  • Budget, live below your means, and cut costs:  It is imperative that you learn to live within the new normal in terms of your available income coming into your household.  It may take some time to adjust to this new financial situation.  Likely, you will not be able to have the same standard of living that you had prior to separation in your post-separation life.  This is just an economic reality.  You can track or analyze your spending for 3-6 months and determine exactly where you can cut unnecessary costs, budget and aim to live below your means.   Separating needs and wants can help with this.   Make sure to pay the minimum payments on your debt as well and factor those into your budget.

  • Separate Needs from Wants – Separating your necessary expenses from your unnecessary expenses is critical to building a budget that enables you to live below your means.   Needs include housing, transportation, food, and clothing.  However, even in those categories you can separate needs from wants.  For example, downsizing your house, renting instead of buying until you can afford to buy, buying a used car rather than an expensive luxury car, eating more at home rather than at restaurants/take out, and setting a reasonable budget for clothing. Also, waiting 72 hours before buying something can help with impulse buying.  You may find after 72 hours you don’t want the item any longer.

  • Build an Emergency Fund –   It is critical that you have an emergency fund.  This will help with unexpected expenses that pop up including car repairs, losing one’s job, getting sick, etc.  It is good to have between 3 months and a year’s worth of an emergency fund. That will take time to build.  Map out a plan to save as much as you can with the funds you have left over in your budget.  Pay yourself first – meaning, when you set up your budget and you get paid, pay your emergency fund first the amount you planned.  Make a commitment not to touch your emergency fund unless it is an absolute emergency.  Your emergency fund should be in a savings account, safe and available to get at, ideally in a separate savings account from your main chequing account.  I’d recommend having a month’s worth of living expenses in the emergency fund, go to step 4 to get out of debt, then once out of debt, come back and finish building up your emergency fund.

  • Get out of Consumer Debt – Other than your mortgage, you need to make a plan to get out of consumer debt.   Once you have a month’s worth of living expenses in an emergency fund, you need to tackle your debt.   This is a necessity and a priority.  Especially if you have a lot of debt.  Make a commitment not to incur more debt (living below your means in step 1 and sticking to your budget).   I like to use the method of paying the smallest to highest debt first, rather than the higher interest rate debt first to lowest interest rate, but use whatever method appeals to you that will keep you motivated.     Financially, it makes more sense to pay the highest rate debt first.   However, some people, like myself, feel more motivated paying the smallest debt first so that you have a win sooner (i.e., paying off each individual debt is the win).  Use whatever method works for you that’s going to keep you motivated and on your plan.

Once you have an emergency fund and are out of consumer debt, then start saving for retirement using the available amount in your budget that’s no longer going towards building an emergency fund and debt repayment (e.g., if you were putting $500 towards emergency fund/debt repayment, then once that step is finished, put $500 towards retirement savings).    Also, once you are out of debt and have a fully funded emergency fund, make sure to reward yourself occasionally with things that you want such as a vacation or other item.  However, make sure to save up for it separately from your emergency and retirement savings and don’t use debt to reward yourself. 

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