A client came to me in the very beginning stages of her divorce. Mid-30s, with three children, and devastated. If she let it, the emotion of what she was about to face was most assuredly going to blind her vision from the practical. So I gave her some “Divorce Mistakes” to avoid. The following are mistakes I’ve seen that can have devastating effects on your financial well-being after divorce. If you find yourself in this situation, make sure to take some notes.
1. Underestimating your expenses. Let’s face it, we often know exactly how much we make – but it is a lot harder to explain where all that money goes. Take some time to record all of your expenses and develop a realistic monthly budget. Don’t forget holiday spending, vacations, auto repair, and bills that only come quarterly or annually. Also consider the cost of future expenses, taking inflation into account.
2. Holding on to the family home at all costs. Especially when children are involved – it can be ideal to be able to keep the family home, keep everyone comfortable, and avoid the hassles of moving. But no matter how attached you are to your home, it is crucial that you have a realistic understanding of whether or not you can afford it. Like nearly everything else, this decision is a practical one that relies on a solid understanding of your post-divorce finances – and an open mind.
3. Not taking a holistic view of your finances. If you examine each asset or source of income separately, you lose the opportunity to understand the interaction of taxes, capital gains, investment losses, inflation, and more. Fair settlements take into account a comprehensive picture of all of your finances. In doing that, you will better understand how each financial decision you make may affect other areas.
4. Don’t divide your assets without first creating an inventory. It’s important to know what you have before you can divide it. Your inventory should include details (including a description, year acquired, price paid, and current value) of all your possessions, and whether you want to keep it, let your ex have it, or sell it and divide the proceeds. It’s important to consider your car(s), life insurance policies, and especially pension plans, 401k, and other retirement accounts. Also consider your debt – dividing things up includes both assets and liabilities.
5. Failing to insure spousal and child support payments. Your ability to collect alimony and child support is only as good as your spouse’s ability to pay. Consider life and disability insurance policies to ensure that these payments will continue in the event of your spouse’s inability to pay. Even better – be the owner of these policies to assure that they stay current and in force and you remain the beneficiary.
6. Having unrealistic financial expectations. Divorce means splitting one household into two. Stretching your income to cover two households means that finances are going to have to tighten. Expect it and plan ahead so you don’t find yourself in the hole financially.
7. Failing to consider your long-term financial security. If you simply focus on the immediate task of dividing assets and receiving alimony and child support, without understanding how things might look when that support terminates or you’re near retirement, you’re doing yourself a great disservice. Having a Certified Divorce Financial Analyst (CDFA) review your proposed settlement agreement (before you sign it) and discuss with you the long-term financial consequences can protect you and your family.
Securities offered through Cadaret, Grant & Co. Inc. Member FINRA/SIPC. Davis Financial and Cadaret, Grant are separate entities.