Separation and divorce from a spouse are stressful, painful times for most people.
Many people want to get the proceedings over with and move on with their lives. Yet, making hasty decisions about financial matters can have a negative impact on their lives. It is important to work with a trusted attorney and financial advisor to help you make financial decisions.
Following are four financial tips to think about as you steer through this rocky time.
1. Don’t Underestimate Expenses
There is no getting around it: divorce is expensive, but you also have to think about your current costs and future costs of living on your own. The best way to start is to make a list of your current expenses, like:
● Legal fees: attorneys and court costs
● Mortgage or rent
● All things home related, such as insurance, property taxes, homeowner association fees, lawn care, home repair, and maintenance
● Utilities: electric, gas, water, phone, cable, satellite, streaming services
● Healthcare: insurance, prescriptions, medical and dental visits, counseling, labs
● Personal items: clothing, toiletries, gym membership, food, entertainment
● Children-related: school tuition, field trips, clothing, sports, extracurricular activities, tutoring, camps, allowances
● Transportation: car payment, insurance, gas, repair and maintenance, toll road fees, parking, train or bus pass
● Other monthly and yearly expenses that you incur
Having the expense list written out lets you see where your money is going each month. Now you can estimate what costs will change once you are living on your own. It’s important to factor in inflation and the overall rising costs of necessities. Your future living expenses will change, especially in these areas:
● Rent plus security deposit and rental insurance
● Utilities plus the initial set up fees
● Healthcare, if you were on your spouse’s plan
2. Set Realistic Expectations
Divorce changes a person’s life and lifestyle. Adjusting expectations of what will change, what won’t change, and how much it will all cost is key.
The Family Home
To paraphrase Shakespeare, to keep or not to keep the home, that is the question. There can be an emotional attachment to the home that you currently live in, especially if your children have grown up there. Not only is there a sentimental tie, but there is also the hassle of packing, moving, finding a new place to live, and changing school districts, among other concerns.
For most couples, there are three options when it comes to the home they own together:
Buy-out. One spouse will buy out the other for cash or future payment. The spouse who remains in the house must be sure they can make the mortgage payment, but also cover insurance, property taxes, and all the other costs that come with homeownership on their single income.
Co-own. Depending on the current real estate market, it may make more sense for the spouses to co-own the home and rent it out. This requires both parties to be in agreement about owning a rental property together and continuing a financial tie with each other.
Sell. Sometimes a home will have negative memories for both spouses and they both want out. Putting the home on the market for sale does incur extra expense, plus any potential repairs and closing costs. But once the home is sold, both parties will hopefully come away with some money to start their new lives.
However attractive it may seem, staying in your current home may not be the wisest decision. The family home is many times the biggest asset that a couple owns, so deciding what will happen with it sets the tone for other financial decisions.
Alimony and Child Support
If a spouse was dependent on the other during the marriage, they may be eligible for alimony payments from their former spouse. When there are minor children, the spouse will also receive child support disbursements. These may or may not be considered taxable income. But because the court has awarded a spouse alimony and/or child support, you cannot assume that those will be paid. If your former spouse becomes disabled or dies, those payments will not be made unless certain arrangements are in places like disability and life insurance with you designated as the beneficiary.
3. Take the Drone View
Now that you are having to separate and untangle a connected web of finances that can go back several decades, it’s easy to get caught up in looking at each aspect separately. What is important here is to keep the big financial picture in mind. The drone view of assets, taxes, capital gains, investments, and losses form a more comprehensive picture of how they all affect each other.
Some important things to pay attention to include:
● Credit Card Debt. Credit card companies want their money, regardless of how the court has settled the finances. If the debt happened during the marriage, both spouses are responsible. A good rule of thumb: pay off debt before the divorce is final.
● Defined Benefit Plan (DBP). A pension, paid at retirement, from your spouse’s employer has value today, and you are entitled to part of it.
● Qualified Domestic Relations Order (QDRO). This legal document defines how 401(k) and pension plans will be divided. Without it, you may not receive court-ordered payments due to you.
4. Think Long Term
With all that is going on during a divorce, you may be tempted to make quick decisions. The topsy-turvy emotions, family upheaval, and financial challenges may cause you to focus only on the short-term decisions that will ease the current pain. While the short-term decisions need to be made, it’s important to think about the long term. Take a look down the road ten or twenty years to what will affect your future financial situation. While frugal living and a side hustle for extra income will help with cash flow right now, consulting a financial planner can help you with the long view when it comes to budgeting, investments, and asset protection.
Divorce is not an easy thing to go through for anyone. The fact that you are thinking about future financial stability during this time shows that you are looking ahead for better days. JDH Wealth is here to help if you have any questions as you navigate this process.
Written by Matthew Delaney