10 Financial Mistakes to Avoid When Going Through a Divorce
When going through a divorce, you’re balancing a million different things at any given time. From working through new family and social dynamics to creating a gameplan for lifestyle shifts, you have a lot on your mind.
Unfortunately, one aspect of your life that often gets put on the backburner is your finances. It’s easy to understand why you might ignore your changing financial reality. Divorce is expensive, and it can be overwhelming to try and outline a financial plan for your future when it feels like everything is up in the air.
However, it’s critical to prioritize your finances during this season of your life. One step to help move you forward is to be cognizant of some common financial mistakes that divorcees make, and working to avoid them. Ready? Let’s dive in.
#1: Ignoring Your Expenses
If you don’t understand what your monthly financial obligations look like, you won’t be able to adequately create a plan for your income once the divorce is final. You also won’t be able to accurately judge whether or not your divorce settlement will cover all of the expenses you and your family require to live. A few things to think about are:
How much your family is currently spending each month—and where that money is going.
What you estimate your future expenses to be (including housing, car payments, and any ongoing expenses like gas for commuting, etc.).
Any unexpected expenses that may come up in the near future. This might include private education tuition for your kids or increased college savings.
#2: Failing to Stand Up For Yourself
Money is one of the last taboo topics in our country. Going through a divorce means you’re going to be talking about money a lot. Sometimes, when you feel overwhelmed during proceedings or negotiations, it can be easy to fall back and not speak up for what’s in your best interest.
This is a huge mistake!
Don’t “go with the flow” if the conversations aren’t in your favor/best interest, or if they’re not taking your wellbeing (or the wellbeing of your kids) into account. Now is the time to get vocal about what you need. If you’re uncertain how to navigate these conversations, a financial planner with experience in divorce can help.
#3: Splitting Property and Assets 50/50
Many people believe that a 50/50 split is truly “fair” in a divorce. However, there’s way more to consider here. Is one asset more liquid than another? Do you have an asset, like a rental property, that pays ongoing dividends? Are you dividing both retirement and non-retirement assets? How are the assets being taxed? Each asset carries a different value and it’s important that the split properly reflects those differences.
You want to ensure if you’re aiming for absolute fairness, that you don’t get the short end of the stick. Assets should be divided in a way where benefits, ongoing returns, and taxes are all evenly distributed between you and your ex-spouse.
#4: Not Considering the Long-Term Implications of Your Settlement
I’m not saying that people jump into divorce lightly. Choosing to go through a divorce is an emotionally challenging process, and you’ve likely spent weeks, months, and maybe even years thinking through the ups and downs of this decision. However, one thing that many divorcees miss is considering the long term impact of their settlement.
For example, if you only bring in 25% of your total household income, you may not be able to cover both your living expenses and still save toward your future retirement post-divorce. If this is the case, you’d want to consider giving up your house to look for a lower-cost housing option and take more retirement funds instead. This would move the needle toward your ultimate retirement savings goal, and minimize ongoing expenses as you build a new budget for yourself. Although it’s appealing to keep the house for emotional reasons, it may not make the most logical sense in the long run.
#5: Forgetting to Account for Taxes
Everything about your tax situation is about to change. From filing as single, to shifting tax brackets, to claiming dependents, to understanding how alimony impacts your tax situation—you’ve got a lot to consider here. You may also plan to cash out a portion of the assets you receive to free up cash flow or satisfy debts, which will also impact your tax situation. Regardless of how your current income is taxed, it’s wise to partner with a financial planner or accountant to project your future tax scenario to ensure you’re making wise decisions.
#6: Being Emotionally Attached to Assets
Often, women going through a divorce are attached to the idea of staying in their homes. This is completely understandable. You’ve often raised your kids in that house, and you have a lot of memories there - good and bad. Walking away from somewhere you feel safe and comfortable in a time where everything feels like it’s changing is overwhelming. However, staying put isn’t always your best option. Work to approach these conversations with an open mind. Be realistic about whether you can afford (or qualify for) the mortgage on your own, or if taking other assets in the settlement will have more of a financial and personal benefit in the long-term.
#7: Failure to Insure Alimony Payments
It’s easy to feel secure in your alimony payments, especially if your divorce is amicable. However, life happens - even after divorce. If your former spouse becomes disabled or passes away, child support and alimony may very well disappear. Set up an insurance policy to protect yourself against this unforeseen experience.
#8: Not Evaluating Multiple Settlement Options
If you’re worried your ex-spouse won’t agree to an alternative alimony agreement, you may be more inclined to jump on the first settlement option you see. Don’t fall into this trap!
You can get creative with property division along with other assets, and you should always ask for what you deserve. Don’t feel bad about negotiating. Instead, focus on keeping an open mind and considering all possible alternatives. This will make sure you reach the best possible outcome for all parties involved.
#9: Neglecting to Complete the Process
When you divide assets, the process doesn’t stop once the settlement is complete. Make sure you’re following through with additional paperwork. For example, you may need to file a qualified domestic relations order (QDRO) or refinance your home. By not following through on these actions, it only prolongs the emotional (and financial) stress. Make it a priority to knock out these housekeeping items early!
#10: Leaning Too Much On Your Divorce Lawyer
It’s true that your attorney should be helping you get the best possible settlement in your divorce. However, they aren’t going to go into as much detail to ensure the settlement meets your financial needs. After all, an attorney isn’t a financial professional or a tax expert. They can’t help you get what you want if you don’t know what it is that you want, especially when it comes to finances. It’s wise to build a team of professionals to help you evaluate your emotional and financial needs during this season of life, and act accordingly during negotiations.
Have questions? Partnering with a financial planner who specializes in divorce can help! Reach out to learn more.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
BRANDY BRANSTETTER, CFP®