A divorce can be one of the most difficult things to go through in life. Financial mistakes after a divorce don’t have to be on that list.
Here are some money mistakes to stay away from so you can bounce back and move forward with your life:
With your income likely being cut in half after a divorce, it’s a good time to set up a budget and adjust your lifestyle.
Start a budget and keep track of how much money you’re spending and how much you’re bringing in. You may have to pay alimony, which should be included in your new budget. You may also want to go back to school so you can get a better job and earn more money, or switch to full-time work if you worked part-time while married.
Using Retirement Savings for Living Expenses
Divorce is expensive, costing $15,000 per person on a national average in 2019. Your expenses may also rise after a divorce. You’re now responsible for paying an entire mortgage or monthly rental, so your housing costs could double.
While these money problems won’t last forever, it can be tempting to pull money out of your retirement accounts to pay for them and other daily living expenses. Withdrawing money from most retirement accounts comes with a 10% tax penalty. Even if you pay the money back, you’re still losing interest during the time you take the money out.
Keeping Joint Accounts Open
Married couples often have all kinds of accounts open together. Bank accounts, credit cards, retirement accounts, loans and a home are some of the things they own jointly.
It’s best for both of you to decide who is now in charge of each debt and to remove the name of the ex-spouse no longer on the account. If your ex is an authorized user on your credit card, remove them so they don’t buy a lot of stuff without intending to pay for it.
For loans, you may have to refinance the loan in one person’s name only. Bank accounts can be easier to deal with. Divide the balance and close the account.
Not Dealing With Taxes
If you were married most of the year, each if you may have to file tax returns separately. Your tax status is based on your marital status on the last day of the year. So, if you’re legally divorced by Dec. 31, you’ll file as a single person or head of household.
Changing your filing status affects the capital gains you’ll pay on the sale of your house. As a married couple, you both avoid paying capital gains tax on the first $500,000 from the sale. If single, the exclusion drops in half to $250,000.