According to research undertaken by psychiatrists Thomas Holmes and Richard Rahe in 1967, divorce is the second most stressful life event after death of a spouse. With divorces on the increase as a result of mounting financial pressure following the national lockdown, more and more couples are facing the reality of having to rebuild their financial futures on their own. The financial devastation caused by divorce should never be under-estimated, and every recently divorced person should take decisive steps to begin rebuilding their finances as soon as possible following the finalisation of the divorce.
Recent statistics from Stats SA reveal that the median age for divorce amongst males and females is 44 years and 40 years respectively, with 26.9% of divorces being in respect of marriages that lasted between five and nine years. As such, many divorces involve minor children which in itself can have massive financial implications for both spouses. Maintenance obligations, additional childcare and after-care costs, as well as the need to run two separate households that can accommodate children are all significant post-divorce cost drivers. If you’ve recently been divorced and are intent on rebuilding your finances, here’s what to consider:
Develop a post-divorce budget
As a matter of priority, develop a post-divorce budget – preferably before committing to any long-term rentals or making any major decisions such as relocating or changing schools. Attack your budget and be ready to be ruthless with your cost-cutting, keeping in mind that it is unlikely you will be able to enjoy the same standard of living over the short- to medium-term. However, don’t lose sight of the fact that by taking steps early on to rebuild your finances, you stand a greater chance of achieving the lifestyle you envisage for yourself and your children.
Downscale your accommodation
Once you have a clear idea of what you can realistically afford in terms of accommodation, think carefully about where you choose to live. Consider the location of your children’s school and extra-mural facilities, where you work, how long your commute will be, transport access for your domestic worker, as well as safety and security. If you are undecided, consider a short-term rental until you have a clearer idea of what the future holds. Where you choose to live in relation to your work and child’s school can have financial implications such as childcare and after-care costs, transport and fuel, babysitters, au pairs and tutors, so be intentional when making decisions.
Flexibility and work-from-home options
If there is a silver lining to be found in the coronavirus pandemic, it’s that employers have been forced to embrace work-from-home options for their employees. As a newly single person, working fixed office hours can present enormous challenges especially where you have young children. It also adds layers of costs such as aftercare, child transport and au pairs. If you’ve proved your mettle by working successfully from home during lockdown, approach your employer about flexible work options going forward.
Once you’ve moved into your own accommodation, remember to let your short-term insurer know about your change of address. Generally speaking, it is advisable that you and your ex-spouse retain separate short-term insurance policies. Having divided your assets between yourselves, you will need to provide your insurer with an updated inventory of household contents so that they can quote you accordingly.
Set up accounts and debit orders
Having separated your finances, make a point of structuring your accounts and debit orders to align with your new financial responsibilities and commitments. If your cell phone contract was in your ex-spouse’s name, be sure to move it into your name so that you are able to make changes to your contract and perform future upgrades.
Reinvest retirement funds
Divorce generally sets both parties back when it comes to retirement planning and it is likely that you will need to completely reimagine your retirement. Being single, you will need to save significantly more for your retirement than when you and your spouse were saving for a joint retirement. If you’ve been granted a cash pay-out or a share of your ex-spouse’s pension interest as part of the divorce settlement, avoid any temptation to touch this capital. If possible, transfer any pension interest into a retirement fund of your own and start building your retirement nest egg. If you’ve received any cash or investments as part of the settlement, be sure to seek independent financial advice so that you fully understand your options as well as the tax implications.
Be sure to check the beneficiary nominations on your various policies and investments, including any group benefits you have in place. Keep in mind that minor children cannot directly inherit which means that, if you’ve nominated your minor children as beneficiaries to any policy, their legal guardian – which could be your ex-spouse – will administer any money left to them in the event of your death.
Review your estate plan
You will no doubt want to update your Will and estate plan following your divorce, but ensure that you do this within 3 months of your divorce been granted – with this essentially being the ‘grace period’ provided by Section 2B of the Wills Act. If you have minor children, consider setting up a testamentary trust in your Will for the safe custody of any assets intended for them in the event of your death. This also means that the proceeds of any life policies intended for your minor children can be bequeathed to the testamentary trust and managed on their behalf by your trustees.
Life insurance for maintenance obligations
If your ex-spouse has maintenance obligations towards your children, it is advisable to protect these payments by ensuring that the maintenance payer has sufficient life cover and that your minor children are named as beneficiaries. Your advisor will be able to help you quantify the correct level of cover required to ensure that your children can continue to receive their maintenance if your ex-spouse should pass away, taking inflation into account. Keep in mind that without life insurance, your minor children would have to claim against your ex-spouse’s estate for their maintenance, and this could take a long time to resolve.
Attend to your emergency funding
If Covid-19 has taught us anything it’s the importance of having an emergency fund. While holding three-to-six months’ worth of income in cash or near-cash might sound impossible to achieve, take small incremental steps towards building your emergency fund. If your ex-spouse is unreliable when it comes to paying maintenance, fortify your position by building three months’ worth of maintenance payments into your reserve funding.
Build your credit score
Having a good credit score is essential if you want to apply for credit, buy a home or car, or increase your credit limit. A good credit score gives business and financial institutions comfort that you can manage your finances responsibly, so take a proactive approach to managing your credit score. In terms of legislation, South Africans are entitled to one free credit score per year which can be obtained from bureaus such as TransUnion, Compuscan, Experian and XDS.
Protect your income
As a single person, it is important that you protect your income in the event of a disability by taking out a disability income protection benefit. If you are employed, check whether you have an income protector through your group life cover paying attention to any waiting periods and/or exclusions that apply. Further, ensure that the benefit keeps pace with annual inflation. Disability insurance is a highly technical area of financial planning, and it is always advisable to seek the advice of an independent planner.
Secure your medical aid membership
If you were a dependent on your ex-spouse’s open medical scheme, you can stay on the same scheme and register as a member in your own name, regardless of who is responsible for paying the premiums. If your ex-spouse is a member of a private or restricted medical aid, you will need to move off the scheme and apply for membership on an open scheme. Ensure that you do not allow your medical aid membership to lapse for a period of 90 days or longer, as this can result in late joiner penalties and waiting periods at a later stage.
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