Whether you face the possibility or the reality of divorce, you have to take stock of the world around you. Breaking up is hard to do and you face many multi-dimensional issues – emotional, legal and financial. How can you focus your energies to maximize your divorce outcome?
Put financial planning for a divorce at the top of your priority list.
Divorce is a personal transition, but it is also a financial transaction; making your financial concerns, challenges, and priorities the essential core of your divorce can help you set yourself up for success after divorce. How you address your finances will have a far-reaching impact on every aspect of the aftermath of your divorce.
Almost 30 years ago, I zealously believed that women were at high risk during divorce. To this day, much to my surprise, my perspective has not changed all that much. Women may be just as skillful as men at earning, saving and investing money, but so many women are totally in the dark about how financial planning for a divorce can make a difference when it comes to their financial situation, during and more importantly after divorce.
Women admit, more often than not, that they lack of confidence, experience and capability for solving financial problems. They have had years of practice of delegating long-term financial decisions to their spouse and they become very, very good at hiding money troubles from themselves.
Emotions run high in divorce and easily sidetrack clear thinking, making divorce more costly and time consuming. Divorce is no place to begin apologizing for not grasping that the day of financial reckoning has arrived. It doesn’t matter if you are a business executive or a stay at home mom, the single biggest regret I hear from divorced women is that they were rushed into making financial decisions before they were ready.
Avoid the biggest mistake you could ever make in divorce.
Three magic words: Prepare, prepare, prepare.
To quote Benjamin Franklin: “By failing to prepare, you are preparing to fail”. Financial planning for a divorce can provide you a reprieve from the emotional toll of your separation by asking you to focus on cold, hard data:
- Know the divorce laws in your state; understand the legal process.
- Separate your emotions from money. Think strategically and laser-like about finances.
- Plan to rewrite your future: value yourself, know your priorities, and start financially planning.
There are three types of divorce that apply in the U.S.: no-fault divorce, at-fault divorce, and summary divorce. Facts about the divorce procedures must be clear to you so you can meet certain requirements before taking appropriate legal action. Some states require mandatory orientation prior to legal action; others require “reconciliation counseling”, others mandate mediation first.
Divorce is not a cheap procedure. The average cost for a typical divorce in the U.S. runs between $15 – 20,000. Divorce is not fast; on average, it can take up to one year. Divorce is a marathon and not a sprint – pace yourself and control your costs.
A common cliché you hear in divorce is that there are no winners in a divorce.
This is especially true when it comes to the emotional and financial toll exerted on you and your children. There is no satisfactory “justice” for wronged emotions. Address your emotions outside the legal process and redirect your energies exclusively toward financial negotiations.
Financial planning for a divorce can be focused around four major areas.
These are where divorce and money can hit you hard. The areas are:
- the things you own (assets, including retirement funds)
- the things you owe money on (debts)
- your credit
- your standard of living
Let’s take a look at how to protect yourself, starting with things you own first, because those will likely be one of the earliest areas dealt with in divorce.
Assets are everything you own that is worth anything, including those with sentimental value.
You need to know exactly what and where they are as well as how to value them. Make a list (example below). Place a note next to each to show how they are titled legally (individual name, joint names, custodial, business, trust, etc.). Financial planning for a divorce can be tedious as you need a comprehensive list, but this is how you can protect yourself.
Debt also gets divided and it’s important to list in whose name they are.
Get a copy of credit reports for you and your ex-spouse (if you can) and monitor your credit access and rating. Courts can assign certain debts to one spouse or another, even if they are taken out jointly or not even held in your name. A rule of thumb is to plan during divorce for how to assign, refinance or pay off debts as part of your divorce agreement so it becomes a legally binding order. Nevertheless, your credit agreements are not with the courts, but with the lenders. And make no mistake, a credit agreement is a contract for which you remain liable. Your credit score can sink like a rock because of divorce – late payments, defaults, and other arbitrary credit damages inflicted by your ex-spouse.
The good news is that you can rebuild your credit and get a fresh start. Establish your own credit identity as quickly as possible. Don’t ignore any financial obligations because they will have a lasting impact and stay with you long after your marriage is over. However, protecting your credit isn’t the most important thing; providing for yourself and your kids is.
Protecting your standard of living is where it all begins for your future.
If you want to own the power to control your destiny, you have to know the foundation of what you have, what you need and what you want.
It comes with determination and courage to stay involved with your money. This means planning ahead even while you are going through a divorce. Make a commitment to yourself that you will take care of yourself and your kids.
Start with a “living budget” – a plan with the goal for you to spend less than you earn. The purpose of a budget is to determine if you will have enough money to do all the things you have to do and want to do.
Whatever your goals are, there are simple steps to create a budget that works for you.
- Outline your income (all sources and when you receive it)
- Determine your expenses (fixed and variable; when you have to pay)
- Set your priorities (what is most / least important)
- Establish your timeline (test the budget; when should you re-evaluate)
Tricks to staying on budget:
- Track all spending
- Avoid unnecessary splurges
- Keep it honest
- Learn to say no
- Save for yourself as a priority
- Consolidate any spending to cash or one credit card
- Have some wiggle room for unanticipated emergencies that pop up
Decide on the kind of budget that “fits” you best; three popular methods are:
- Zero based budget – one where every income dollar is assigned to a specific expense category, like rent or health insurance.
- 50/30/20 budget – 50% of income goes to essentials (fixed costs or necessities like rent, groceries), 30% goes toward personal expenses (dining, travel), and 20% is dedicated to savings (emergency, retirement)
- Envelope budget – the old school way for budgeting where you assign a sum of money for each category of spending, and put the assigned amount in an envelope, and once gone, you are done spending.
Make a budget worksheet. This is your tool.
There are many free worksheets available online, e.g. Microsoft Excel monthly budget template. Remember, a budget is just a plan – subject to changes, adjustments and trials.
Budgeting is the roadmap for every financial plan.
The easiest thing to do in life is to forget, and the hardest thing to do is to remember. Blame will render you powerless. Shame will hold you back. Ignorance will sabotage your future.
Make tracking your net worth a desirable habit.
Know that you will feel incredible with a sense of accomplishment as you forge your path forward and become too powerful to ever go back.
Lili is co-president of the national Association of Divorce Financial Planners (ADFP). Her awards include the prestigious 2013 Pioneering Award for outstanding public advocacy and leadership in the field of divorce financial planning, the Women’s Choice Award as a highly recommended Financial Advisor by Women for Women; CEO Today 2019 Business Woman of the Year Award; Five Star Wealth Manager Award for last 10 years, the Best Wealth Protection Manager 2019 – Northeast USA and Recognized Leader in Divorce Finance 2019 by Wealth & Money Management, and Marquis Who’s Who Albert Nelson Lifetime Achievement Award. Her website is www.wealthprotectionmanagement.com.
DISCLAIMER: The commentary, advice, and opinions from Gabrielle Hartley are for informational purposes only and not for the purpose of providing legal advice or mental health services. You should contact an attorney and/or mental health professional in your state to obtain advice with respect to any particular issue or problem.