A Few Common Money Mistakes in Divorce
For most people, the divorce process is emotionally draining and mentally exhausting. It can be a time of feeling frozen, numb, or moving in circles. But despite those feelings, you will be expected to go through your finances with a fine-tooth comb to ensure that your settlement agreement is fair and equitable. With “divorce brain”, that’s easier said than done!
You may feel like you are thinking with a clear head, but be on the lookout for some common money mistakes, such as:
1. Underestimating post-divorce expenses.
You may be asked to complete a financial affidavit that reflects your expenses AFTER the divorce. It is critical that you are realistic and don’t leave anything out. This information will be used to determine if spousal support is needed or not. Make sure to include everything from your health care deductibles to anticipated home repair charges.
If you underestimate your expenses by $200 per month, that’s $2,400 a year. Where are you going to get that money from? And, if you’re the primary breadwinner, a mistake could lead you to agree to pay dollars that you ultimately can’t afford. A Certified Divorce Financial Analyst™ (CDFA™) can help review your affidavit for errors.
2. Leaving it up to your attorney to handle everything, including the finances.
Your attorney is an expert in the law, not finances. Would you ask your doctor for advice about your car? Of course not, so why would you expect your attorney to be an expert in finances? They may ask you to fill out a financial affidavit and take your word for it that it’s all correct. A good attorney will glance over it looking for any glaring errors, but that’s about it.
3. Misunderstanding asset values.
A commonly overlooked miss-valued asset is a pension and perhaps is the most valuable asset in a marriage. A present value statement from a pension may be accepted as the correct value to consider in marital property division calculations. But tax ramifications should be considered, so it’s smart to involve a CDFA™ in this process as well.
4. Not considering taxes.
Is $50,000 in a bank account and $50,000 in a tax-deferred 401k worth the same? Well, one will be taxed on withdrawals and the other one won’t … so … are they really equal in value?
What about cost basis and possible capital gains tax on liquidating holdings in a taxable brokerage account? A CDFA™ can assist you when dealing with these issues too.
5. Leaving it up to attorneys to do the talking.
The more you and your spouse can come to an agreement by simply communicating, the more money you both will save. You may not bear to be in the same room with your spouse, but consider the potential cost savings and other ways those dollars could better be used in the future.
If Attorney’s are relaying information back and forth between themselves, you may be racking up bills upwards of $600 an hour just because you refuse to talk to each other. Does this make sense for either of you?
6. Letting your emotions make your decisions.
So many people going through divorce just want to “get it over with.” This is not the time to throw your hands up and agree to a settlement just to be done with it. This kind of thinking is why divorce often leads to bankruptcy!
A 50/50 split of assets is almost NEVER a truly equitable settlement. So put the emotions aside and talk to your spouse. Take your time and make sure you thoroughly understand what your financial future will look like after your divorce, and be sure to hire the right experts - financial and otherwise - to help.