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Smart Cookies

Getting divorced? Five steps to get your finances back on track Add to ...

Rhonda Cochrane’s world was blown apart when her partner ended their relationship. “I was devastated,” says the forty-something Abbotsford, B.C. woman.

Despite having a decent salary with a pension, she was suddenly afraid of ending up homeless. “I had been planning my life thinking it would be with him so our finances would be fine.”

Like Ms. Cochrane, many people who have been through a separation or divorce suffer not only from emotional devastation but also major financial upheaval.

Although it can take years, here are five steps people can take to start rebuilding their finances:

1) Stick to the numbers Knowing her numbers was the first step for Ms. Cochrane. Putting a plan in place was the second. She set up an account with Mint.com for an overall financial snapshot and to monitor incoming and outgoing expenses. She then ran payment plan options for her credit card debts at WhatsTheCost.com and set up automatic payments. A balance transfer allowed her to consolidate high-interest debts to one low-interest card (0 per cent for one year with MBNA). After all that, she discovered her situation was not as grim as she thought. Two years later and with a plan in place, she is on solid ground with more financial stability.

2) Tweak your financial plan Jason Abbott, a certified financial planner and president of WEALTHdesigns.ca Inc. in Toronto, says there are certain steps that should be taken immediately upon severing a relationship and removing your name from all joint credit is at the top of the list. When your settlement is sorted, you will want to request a credit report to ensure the bureau is aware of all changes and you are indeed clear of any joint liabilities, he added.

“During a separation we need to be more proactive and batten down the hatches. It’s not like [your ex]is the enemy, but let’s face it, sometimes people act uncharacteristically,” he says.

If you shared a common computer or passwords to banking or other sensitive information you’ll want to change them.

You’ll also need to adjust your financial plan for the short and long term. If you don’t have one, now is the time to get one, Mr. Abbott says. It is also a good time to get your head around the fact that in the short term you are likely going to take a financial step backwards.

3) Review your insurance policies An important thing to consider after separation is what life or health insurance policies are already in place, says Dave Minor, vice president of TD Insurance. Most people don’t know the specifics, he says, especially if they were previously covered through their spouse’s employer.

After an inventory of life and health insurance, consider if there are any add-ons that improve coverage, such as critical illness. “At the end of the day insurance costs money and we all have limits to our income and to how much we can spend on insurance,” says Mr. Minor.

He suggests looking at your situation and evaluating existing safety nets. So if you’re a single parent but you’ve got a good plan at work that covers you in case of an accident or illness, you might not need critical illness insurance. If you don’t have a safety net then disability and critical illness are very important. If you’re self-employed it becomes even more important. If you are set to receive child support payments, make sure your ex is also covered in case of disability or death. A good advisor will walk you through these scenarios.

Another important thing to do is review beneficiaries to make sure the right people are listed on all policies, including home and auto insurance, Mr. Minor says. Updating beneficiaries is at times overlooked and can be a time-consuming and costly oversight.

4) Consider the tax implications “Breaking the news to the Canada Revenue Agency may not be high on your list of priorities, but it should be done,” says Cleo Hamel, senior tax analyst with H&R Block.

For example, as a married couple your household income may be above the threshold to collect GST but as a single person it might apply and the additional money would be helpful, she says. “It’s not a lot, but it is a quarterly payment and why wouldn’t you want to receive it?” You can use Form RC65 Marital Status Change to advise CRA, or call them to have them walk you through the next steps and future changes.

5) Build an entourage Locating professionals who can help you navigate your new status as early as possible will help. Adjusting to lower income and the higher costs of running a household solo, as well as restructuring investments, can be overwhelming. A financial advisor, tax accountant and lawyer, are among the people who should be on your team. A friend or family member should also be a part of your financial decision making to advocate on your behalf and avoid letting emotion get in the way of making the right choices.

Divorce is a personal - and financial - setback. But taking care of yourself and your finances ensures you’ll be in a better position to provide stability for those around you and move slowly but confidently towards financial independence.



Angela Self is one of the founders of the Smart Cookies money group. Read her weekly column on managing debt and saving money at the Globe's personal finance site.

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