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Personal Finance

Financial Planning

10 Steps to Financial Recovery After a Divorce

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Working as a financial planner for the past 13 years, I have learned that financial freedom often means many different things to different people.

For some, it means having no debt. For others, it means being able to live comfortably off the income generated by a nest egg.

For a new client of mine—recently divorced and facing the task of managing her finances for the first time in a decade—it means taking control. After years of deferring financial responsibilities to her now-ex-husband, financial independence is at the top of her list.

Let’s examine her step-by-step journey towards financial freedom. It’s a process that could easily apply to others who find themselves in a similar position:

1. Start Today.
No more procrastinating and no more excuses. By starting sooner rather than later, my client is able to take advantage of time and compound returns — a powerful combination for building wealth. This first step is sometimes the most difficult to take. It requires making a personal commitment to take action, but once it’s done the rest can come together more easily.

2. List Your Goals.
My client and I discussed her three top goals: (1) preparing for her retirement, (2) paying off the mortgage on her house, and (3) creating a substantial travel fund that will allow her to see the world. We ranked each of her goals in the context of her needs, wants and wishes. Identifying goals helps an individual better understand how realistic they are, and what is needed to achieve them.

3. Have a Plan.
Next, we created a formal, written financial plan that includes each of her stated objectives and an investing program, based on her income, specific to achieving each goal. After all, a goal without a plan is just a wish.

4. Automate Savings.
It’s important to pay yourself first when you save. One of the easiest ways to do this is through an automated program that helps you to save and invest consistently during both good times and bad. For my client, we set up automated withdrawals from her checking account to be directed into her investment accounts immediately following paydays, thereby minimizing the behavioral barriers and inertia often associated with manually monitoring a budget.

5. Focus on What Can Be Controlled.
Don’t get caught up in the hype of the moment or what the financial cable news programs are reporting each day. That's a recipe for making emotional, reactionary decisions. Instead of worrying about all the things outside of her control, my client decided to focus on her goals and the plan we created to help her get there.

6. Invest in Yourself.
My client saw this new chapter in her life as the perfect opportunity to invest in herself. After delaying her own education for years, she enrolled in evening courses at a local university to improve her skills, her career prospects and, ultimately, her earning potential and future savings. One of the positive outcomes of this step is that it can build up greater self-esteem and confidence. In fact, attending her first class “was such an empowering experience," my client told me.

7. Live Within Your Means.
As my client’s living situation and routines were changing drastically, so were her expenses. We took the opportunity to review and manage her budget so that her monthly expenses remained below her take-home pay. With lingering legal fees, credit cards, education expenses, and a mortgage, paying off debt requires spending less than you earn. While this was quite a lifestyle shock at first, creating responsible new spending habits and accepting how to live within her means was a priority.

8. Manage Risk.
An emergency fund that offers accessible cash reserves along with sufficient insurance coverage can protect you and your loved ones against loss or an unexpected event. For my client’s specific situation, we determined that maintaining a cash reserve to cover six months of expenses in a conservative investment account would offer her the cushion she needed for peace of mind.

9. Monitor Your Portfolio.
Given her divorce, my client’s investment portfolio and overall asset allocation needed to be updated. Other major events that could trigger review and adjustment of a financial plan include getting married, switching jobs, buying a home, dealing with a health crisis, and entering retirement. Together, we committed to regularly reviewing and updating my client’s portfolio to keep it aligned with her objectives, risk tolerance, and time horizon.

10. Get a Fresh Perspective.
Find ways to recharge your batteries. My client, for example, plans to take a monthlong trip overseas and use that break to think about what matters most. After all, that’s what financial freedom is all about.

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Joe O’Boyle is a financial adviser and retirement coach with Voya Financial Advisors. Based in Beverly Hills, Calif., O’Boyle provides personalized, full service financial and retirement planning to individual and corporate clients. O'Boyle focuses on the entertainment, legal and medical industries, with a particular interest in educating Gen Xers and Millennials about the benefits of early retirement planning.