Seven steps to put your financial house in order
Tips on managing your financial life alone after the marital breakup
Set up new accounts and a new budget.
Update life insurance and health coverage.
Protect yourself against the unexpected.
Having navigated the legal obstacle course known as divorce, separating spouses must launch new lives as single people. Key to your success is getting the help of experts to put your financial house in order.
Often in a marriage, one spouse takes responsibility for the couple’s financial affairs and planning, including bank accounts, credit cards, loans and mortgages and investments. While that division of labour might work well while the couple is together, when the relationship ends one side can be left at a distinct disadvantage in understanding financial matters. In the event of a divorce, it’s important to protect yourself financially.
Here are some steps you should take:
1. Establish your own financial identity.
After the split, you need to close joint bank accounts and set up new separate accounts, get separate credit cards and investment accounts and establish distinct relationships with current advisors or find new advisors. For some of those changes, financial institutions will require documentation.
2. Create a new budget, financial plan and retirement savings plan.
The divorce could have resulted in a reduction in your income that will require some adjustments. You can start by listing the essential expenses (housing, food, insurance, transportation) and discretionary expenses such as entertainment, vacations, clothing, etc. Those expenses need to be compared against your new income and, if necessary, some discretionary spending should be trimmed. Talk to your advisor about helping you set up your new budget and update your retirement savings plan.
3. Take out insurance to guard against unexpected events.
If you are caring for children, you may wish to either purchase or increase your life insurance coverage to make sure that the children will be protected if a parent passes away. You will want to change your beneficiary if your ex-spouse is still listed. You may also wish to discuss disability insurance with your financial advisor, to protect your family if you become injured or ill.
4. Protect your credit record.
As a newly single person, credit can become a valuable asset – and should be protected. Both you and your ex-spouse should have an established personal credit history. In Canada, there are two credit reporting agencies, TransUnion Canada (www.transunion.ca) and Equifax Canada (www.consumer.equifax.ca), and consumers can ask for a free copy of their credit report. You should check carefully and take an inventory of all accounts that are open in your name or jointly with your former spouse. After a divorce, you will want to close joint credit accounts and shift to single accounts, so that any change in your former spouse’s credit score does not adversely affect yours.
5. See if you’re eligible for CPP/QPP credit splitting.
There can be a financial upside to your new independent life through benefits that may be forthcoming from the former marriage through the Canada Pension Plan (CPP) (or Quebec Pension Plan/QPP). The CPP/QPP was amended in 1978 to allow for the sharing of pension credits during the years the couple were married. That means credits can be divided even if one spouse didn’t make contributions to the CPP. Your financial advisor can help you discover if you are eligible.
6. Tend to health coverage.
Family lawyers strongly advise that if one spouse has had health coverage through an employer that the other spouse insist on maintaining it during the process of dividing family assets, if that is permissible. In Canada, another reason for extending the coverage is that some carriers insist there be no break in coverage when the spouse without a plan is seeking his or her own health insurance through an employer or a private plan.
7. Protect yourself in case your ex-spouse dies.
Finally, even though the parties are going their own way, the death of one spouse can dramatically affect the financial fortunes of the other.
Any liabilities for spousal support or other settlement issues could be registered as a charge or lien against the estate of the deceased spouse. To provide for that possibility, some spouses will take out sufficient life insurance, the tax-free proceeds of which can satisfy the amount owed by the estate. It is also very important to review wills, powers of attorney and beneficiary designations and make all necessary adjustments after your divorce.
The process of untangling a marriage is a complicated one, and as you begin your new life post-divorce, you’ll want to start off on the right foot to ensure you’re financially protected now and in the future.