So you made it to the finish line. You are officially divorced and ready to start your new life. Welcome to your new chapter! If you are like many people, you may feel as if you've been put through the emotional wringer. It's likely been a long haul that left you feeling raw and vulnerable. Besides your feelings about your now ex-partner and concerns over your children, you may be grappling with navigating your new financial life all by yourself.
The good news is you are sole master/mistress of this financial domain. One great reframe is that this is a chance to get a fresh start and create a healthy relationship to money — a relationship that allows you to create a new lifestyle in balance with your resources. And, no one can interfere or tell you what you can or can't do.
So, with an eye to getting a fresh start, let's talk about debt. We all know that many Americans are struggling with debt. Regardless of how debt and credit was handled in your marriage, now is the time to create a life where debt does not plague you.
1. Consider Using Your Assets to Start Your New Life Debt-Free
Debts as well as assets are divided in divorce. So, even though you are divorced, you may be carrying debt left over from your marriage and assigned to you in the divorce agreement. Ideally, debt is paid off during a divorce so both parties can start fresh, but if you exited your marriage with debt, this may be one time when it makes sense to use your assets to pay it off.
Let me explain. I met my husband in graduate school – a private graduate school (cha-ching!). When we married, we combined our student loan debt. After ten years, this debt still wasn't paid off. In our divorce, it was divided up equally so I exited the marriage with a big financial burden.
In my new life, I had a lot to balance: my expenses were suddenly all my own and I was trying to create a new life for my son and I. Frankly, I could not afford this debt. So, after talking with my accountant and financial planner, I liquidated some of my retirement assets to pay it off. This allowed me to start my new life debt-free. Using retirement assets was a painful choice, but it is not one I have ever regretted and it could be the right move for you depending on your circumstances.
By the way, you are liable for any debt that has your name on it, even if this debt was assigned to your spouse in the divorce. That means, if he/she doesn't pay, you are responsible and it could impact your credit. (You can monitor your free credit report card from Credit.com to see how any divorce debts many be affecting your credit score.) These potential consequences are another reason why it can be nice to minimize the burden of debt if you can.
2. Start a 'Periodic Expenses' Savings Account
Periodic expenses are simply those large, non-monthly expenses that everyone has — holiday gifts, car repair, kids' summer camps, dental work, yearly yard cleanup, property taxes, airplane tickets. Sound familiar? Just because you are now single doesn't mean life stops happening. And these expenses often end up on credit cards.
If you're newly single, you could experience a lot of stress the first time one of these expenses hits. In order to avoid creating new credit card debt in your bright, shiny, new life, open up a savings account and deem it "periodic expense savings." I recommend that you get in the habit of transferring in about 5% of your net income each month. When these expenses come up and you need to use a credit card to cover the total, transfer the money back to your standard checking account and pay the card off. (The money in your Periodic Expenses Savings Account is literally meant to be spent.) This simple move could be the best thing you ever do to avoid new debt.
3. Avoid Using Credit Cards to Buy Luxury Items
When people use credit cards for discretionary spending, they tend to spend more. Why? Because the pleasure of buying things – eating out or buying new clothes – become totally "divorced" (sorry) from the pain of paying for them. I can bask in the pleasure of new, blue suede shoes and not really feel the cost until I go to pay off my credit card in a couple of weeks. Because of this, we are prone to spending a lot more.
After a recent divorce, we can be even more prone to spending to make ourselves feel better. Getting divorced is hard. And we often spend to prove to ourselves that we can maintain our same standard of living, even though in reality we may have less money. To help avoid this common trap, do not use credit cards for discretionary spending like clothes, hobby supplies or eating out. You can use a debit card so you really "feel" the purchases. Voila! Way less likely to incur credit card debt.
4. Limit the Number of Cards You Have
Remember, it's time to start fresh. When you were married, you may have had multiple accounts. It's common. But the more cards you have, the more of a money fog you may be in. Too many accounts make it almost impossible to see what you are spending and many people simply zone out. Keep it simple. I suggest using one primary checking account and one primary credit card.
There is so much to balance in your new life. But, honestly, once the shock is over, it can be exciting to forge a new path. Avoiding debt is critical to creating a life that you love, so now is the time to make a fresh financial start.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.
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