How to Achieve Financial Independence After a Divorce

By Alexandria | Hightower on December 13, 2022

It’s rare that someone enters a marriage thinking they’ll get a divorce, but this is nonetheless the fate of roughly half of Americans. It’s an event that is life-changing in more ways than one, and it’s not something that can be anticipated and fully prepared for. From a financial perspective, divorce presents a mountain of problems for both parties–but it doesn’t always affect both parties equally. How can you prepare yourself to weather the financial storm of divorce and ensure you aren’t taken advantage of in the process?

While there are systems in place to lessen the financial impact of divorce, these aren’t sufficient to secure long-term financial stability. Spousal support is intended to help the lower-earning divorcee land on their feet, at which point the goal is to transition to a more sustainable lifestyle or source of income.

Those over the age of 50 have it even worse, as ‘gray divorce’ rates are rising and retirement introduces a whole new set of challenges to the situation. Even if spouses own separate retirement accounts, the contents of those accounts might differ greatly.

Depending on each divorcee’s level of financial literacy, the process of dividing these assets could present an opportunity for one side to be taken advantage of. The same can be said for any type of investment account, but the stakes rise considerably when it comes to the money you intend to live off post-retirement.

A degree of financial literacy is essential to ensuring that you mitigate financial fallout in the event of divorce and position yourself favorably for a new beginning. Below are some steps you can take to prepare for the possibility of divorce.

Develop a Foundation of Financial Literacy

Growing your understanding of basic financial topics won’t just keep you from getting taken advantage of during and after a divorce, it’ll also pave the way for your future independence

and well-being. Financial literacy is about equipping yourself with the knowledge and skills to make informed, confident decisions on money matters, it’s not about becoming a financial expert. While it’s best to identify the areas most relevant to you and focus on those, there are a handful of financial concepts that everyone should know.

Gain familiarity with the different kinds of investment accounts that exist–specifically the ones you and your spouse or ex-spouse own. If you have children, they might have additional investment accounts that are managed on their behalf.

Investment accounts can be categorized as taxable, like a standard brokerage account, or tax-advantaged, like an IRA, 401(k), or other retirement savings account. Education accounts, like 529 college savings accounts, are also considered tax-advantaged. Generally speaking, tax-advantaged accounts provide exclusive tax benefits that encourage long-term saving but come with early withdrawal penalties, so it’s important to learn the differences between these accounts and the way they’re taxed.

Once you’ve got an understanding of how these different accounts work, you should take the time to teach yourself about some common investment assets and how they generate income for you. You’ve likely heard of assets like stocks, bonds, ETFs, and real estate, but each of these functions in its own distinct way. Finally, wrap your head around the concept of interest and compounding–how do investment accounts grow?

Build Your Own Credit History

Access to credit is crucial for making large purchases, whether it be a house, a car, a medical expense, or some kind of unforeseen circumstance. The better your credit score, the easier it will be to receive loans and the more favorable your interest rate will be. If you already have a strong credit rating that you established prior to your marriage, keep a few lines of credit rolling to ensure you maintain your credit health.

If you haven’t yet established credit, start early and start small—open a credit account and have a family member cosign for you, or ask to tag onto one of their existing accounts as an authorized user. If these options aren’t available to you, consider opening a ‘secure’ credit card. These are essentially prepaid cards that will help you build credit early on.

Most importantly: pay your bills on time, every time. Live within your means and don’t go overboard with spending. Using your credit card (and paying it down) each month will help you maintain your creditworthiness so that you’re prepared in the event of the unexpected.

Maintain a Professional Presence

The best way to gain financial independence and stability is to work and earn a salary of your own, but for those who haven’t worked in a number of years, this may prove easier said than done. The key to being able to reenter the workforce after a divorce is maintaining a professional presence, even while you’re not employed.

The job market is more competitive than ever, particularly for older Americans. Making yourself stand out from the competition will require you to keep an eye on the professional landscape and take steps to remain relevant. Staying active on social media sites like LinkedIn and even Facebook will go a long way towards keeping you informed of market movements, making you appear engaged, and putting you on the radars of hiring managers–all for free and with a minimal time commitment.

You can further improve your candidacy by learning marketable skills, earning certifications, and continuing to network wherever possible. If you’re not working, the goal is to make it seem like you could return to the workforce at the drop of a hat.

Make Lifestyle Changes

After a divorce, you may need to make some lifestyle adjustments to compensate for a lower income. Women over 50, specifically, saw their household incomes decline by an average of 41% following a separation. Think about your various sources of income (such as investments, spousal support, and social security, if applicable) and create a budget that reflects your new reality.

When it comes to cutting costs, relatively small measures can add up over time. Look at your extraneous expenses and ask yourself what you can easily live without. Online subscriptions and dining habits are typically good places to start. Practicing

cost-consciousness doesn’t mean lowering your standard of living, but rather considering the costs associated with your decisions and planning accordingly.

As you build your budget, prioritize paying down whatever debts you may own or may have inherited from the divorce. Interest payments on outstanding debt will eat away at your money and make a sizeable impact over time. Identify which debt accounts charge the highest interest–generally credit cards and personal loans–and focus on those.

Try to Avoid Divorce, if Possible

Much has been said about what happens in the wake of a divorce, but it’s important to note that divorce is a wealth destruction event for both parties and should be treated as a last resort. As far as your finances are concerned, marriage affords both spouses a number of unique benefits that can be difficult to part with. But just like your car, your home, and your body, relationships require regular maintenance to stay in good health.

If you decide to go through with a divorce, there are several measures you can take to position yourself for success as you step into your next life chapter. Incorporating some of the aforementioned tips into your plan will help empower you with the financial agency to advocate for yourself and protect your interests. But you should also consider enlisting the aid of a financial advisor or planner who can guide you through the complexities of divorce, ensure that you land on your feet, and keep you on track to meet your goals.

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