10 Financial Mistakes To Avoid In A Divorce

1. Not Using a Financial Planner (preferably a CDFA or Fee Only)  to negotiate a non-emotional property settlement.  The Property Settlement Agreement is what determines the assets, child support,  and  the maintenance (if any) you will receive. Using a 3rd party will help keep this process as objective and equitable as possible. In addition to asset values is considering tax implications, for example if assets are post tax (e.g. Roth and the principal in taxable accounts) or pre tax (Traditional IRAs and Traditional 401k).

2. Living Beyond Your Means. You will be emotionally exhausted, even if you were the one that initiated the divorce.  You are looking at the total upheaval of your life and will feel that this is the time to ‘treat’ yourself.  It is the time to treat yourself.  But not necessarily by impulsively spending money.  A divorce is expensive.  Even a ‘good’ one has many costs involved.  You will lose some of your standard of living, and your cost of living will increase.  Don’t make it worse by spending money before you know how your financial life will look on the other side.  Exceptions?  Trips to see friends or family.  Or trips to remove yourself from the situation for awhile to get perspective.

3. Having an emotional attachment to the marital home.  One of the most painful parts of a divorce is ‘losing’ the house.  Even under the best of circumstances, in which you sell it for a profit, you are still having to move to a new place that likely is not going to be as nice as the marital home.  This will be a time of adjustment, but eventually you will anchor around your new place vs. your marital home.  It may take awhile. But holding onto the marital home rarely makes sense, unless there’s a very low mortgage that is equitable to the cost of renting, or if children are involved, there’s no place local to move to, and it’s low overhead.  If it’s not, the children are going to sense your stress over the house, and they will get stressed too. Children are pretty resilient around this part.  They don’t care too much where they live.  They just care about where their parents are now.

4. Not identifying what you must have from what you would like to have.  You are going to be tempted to treat yourself. It’s perfectly understandable.  But until you know what your recurring expenses are in your post divorce life, this is jeopardizing your financial future.  There are exceptions, and if you feel they apply to you, ask friends and family for advice.  NOTE: Only ask those who are fiscally responsible with their own money.

5. Minimizing the value of retirement assets.  You must now place retirement planning as your #1 goal. No, there is no other goal here.  You need to absolutely make sure you can take care of your future self.  This right here is how you ‘treat’ yourself is by ensuring you are paying attention to the distribution of retirement assets in the Property Settlement Agreement.  Don’t discount the importance of discounting the pre tax accounts, if post tax accounts exist,  so they are reflecting the actual value for when you will start withdrawing from them.

6. Not having enough liquidity. Not getting copies of all financial documents.  There will be costs. At a minimum there will be costs to set up your new household.  So keep money in cash for the first 6 months (instead of investing it right away) so that you are not having to sell any assets to cover any costs. Close accounts that are joint, especially checking accounts.

7. Not Becoming Debt Free. Not Remaining Debt Free : (#1 priority!)  Is there ever an exception to this rule? NO. OK, maybe one: Health related expenses.

8.  Not Transitioning From An Emotional Relationship to A Business Relationship.    This is no longer an emotional relationship. It is purely a business relationship with assets that now need to be unwound and distributed.  You can deal with the emotional fall out after the settlement.  But not now.  In order to have a clear head about this process, you must remove your emotions from the whole process.

9. Minimizing the value of physical assets (e.g. vehicles, household items).  It is very expensive to set up a new household.  Everything will be needed to furnish a new household, from cleaning supplies to forks to towels to gardening tools to perhaps new furnishings. So when you are dividing up the physical assets, keep in mind every single thing you use to manage and live in your home.  Be fair and choose your battles: CDs can be replaced via a Spotify account.  Home accents can be replaced.  You don’t want to make it worse by trying to get an asset that you know your soon to be ex-spouse is emotionally attached to.

10. DIY. Not hiring a mediator, a financial planner, and a therapist.  Not minimizing attorney involvement to a review of the final Property Settlement Agreement.  You need a team to help you through this.  This is where you should be spending your money and where the focus of your energy and time should go.  Your ex-spouse is now just a former business partner.  Do not put your emotional energy into trying to ‘get even’ or trying to cheat them out of their fair share of what the two of you have built.

Do these things. You won’t regret it.

It is time to get to the next place in your life.

That is where you can process your emotions and start to grieve.

Having an equitable Property Settlement Agreement is a significant part of having the peace of mind to do the work you need to to start to heal.

Source: Divorce Magazine

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