Beyond Divorce – how Women can Rebuild Financially

Women divorce rebuild financially

Divorce is no fun, and certainly not something anyone would choose as a way to improve their financial life. But people get through it, and you will too.

As a financial planner, I often work with clients who have been through or are going through a divorce, and assist them in the planning necessary to get them back on their feet financially.

In this post I’ve broken down the things you need to be thinking about to rebuild financially following your divorce into 4 key strategy elements. If you can work through these, you’ll be in a position to get your financial life back on track, and with this stress removed, hopefully your life back on track too.

 

1. Budgeting

The starting point must be gaining clarity around how much you have coming in and how much you have going out.

You can create your budget in a spread-sheet, or there’s a great budgeting tool on the Money Smart web site.

A proven structure is to have a separate bills account with your bank. If you determine that over the year your bills, including things like getting the car serviced, will be say $20,000, divide that by 26 (assuming you get paid fortnightly), and then arrange that amount, $769 in this instance, to be automatically transferred from the account that gets your income, across to your bills account each pay day. Ideally you would kick your bills account off with a few thousand dollars to allow for the fact that a big bill could come up 3 weeks after you started. You might even wish to put your mortgage or rent payments in here too.

With this set-up, you know that all the bare necessities are covered, and what is left in your account is what you have to live off. You can start to move forward with confidence. Control of your cash-flow also removes the need to make quick, potentially rash decisions when you are under pressure. Periods of pressure and stress are not ideal times to be making really important long term decisions. 

2. A roof over your head

In Australia there is no tax on gains in the value of your home (primary residence). Also, given our growing population, historically the value of houses has risen over the medium to long term. For both these reasons, being a home owner will usually be an important element of rebuilding financially from a divorce. You may need to move to something smaller or less comfortable than what you once owned, but home ownership is a great financial foundation for your future.

You may need to take on a mortgage to either pay out your ex and retain the current home, or buy a new home. Having a good understanding of your budget, developed in the previous step, is crucial so you can be clear on what you can afford to pay in loan repayments. Run your numbers allowing for interest rates to increase by 2-3%. Ideally budget on making repayments of a little more than the banks minimum so that you get ahead on your loan and thus create a bit of a buffer for the future.

Often in divorce settlements, women keep the family home on the basis that it’s less disruptive to the children. The trade-off with this approach is that women have less in super for retirement. So give some thought to whether the family home remains the best housing solution for you. Perhaps your plan entails retaining it for the next 5 or 10 years, and then downsizing, using the surplus proceeds from the change-over to top up your retirement savings.

If you simply can’t make the numbers stack up to buy a home, and it looks like that won’t be a reality in the medium term, consider increasing your contributions to superannuation instead. That way you’re still building your personal balance sheet and long term wealth, whilst also providing for some additional income in retirement that could be used to cover rent. Just keep in mind that the money you put into super is “preserved”. That means you can’t access it until you retire.

3. Review your insurances

There are two elements here. The low hanging fruit is updating the beneficiaries on any policies to ensure any payout would be directed where you would want it to go post-divorce.

The larger item is thinking through how you will establish a financial safety net to ensure you are totally self-reliant. Things like Income Protection and Trauma cover may become far more important than perhaps they were when you were part of a couple. Seek specialist advice here to get a customised package that fits your needs and budget.

4. Retirement planning

I typically see two scenario’s after the divorce. One member of the couple keeps the house, most often the wife, and then has very little in superannuation savings. Or the person gives up the house, but retains their far larger superannuation balance – most often the husband. Whichever side you fall on, there are quite clearly long term retirement planning issues.

If you have kept the house but now have minimal super, you need to plan for how you will support yourself in your later years. Perhaps downsizing the home will be possible (it’s certainly very tax effective). At some point though, increased contributions into super will be required, and the sooner this is affordable the better, due to the benefits of compounding.

You need to develop a retirement plan, and the sooner you get onto it the better.

Some other things to think about are whether your existing superannuation and wealth creation structures continue to make sense. For instance is an SMSF still a cost effective and appropriate vehicle for you? Do the numbers still work on that negatively geared property?

Also, as with your insurance, check the beneficiary details on your super fund to ensure these are as you would want them to be. A new Will may also be relevant and should be discussed with your solicitor.

 

Hopefully these 4 items provide a roadmap for you to rebuild financially from divorce.

 

As reported in the Fairfax press, Research conducted at ANU by Professor Matthew Gray found:  

“Women, on average, have a substantial drop in income post divorce but then start to recover as they get a job, increase their hours of work or get a more senior job and particularly if they re-partner,” Professor Gray says.

“We find that after five or six years, even if there are some lingering income consequences, they substantially recover their pre-divorce position.”

 

Divorce offers the opportunity to hit the reset button in your life. With some good financial planning, this next chapter in your life can be the best yet.

 

There’s a great checklist here that you might also find helpful: https://www.moneysmart.gov.au/life-events-and-you/life-events/divorce-and-separation