For most people, the divorce process is emotionally draining and mentally exhausting. Many people describe it as a time of being frozen, numb, being in a mental fog, or moving in slow motion. Despite that emotional and mental trauma, 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, even for the financially educated!
Even if you feel like you are clear headed, here are a few of the most common money mistakes to look out for when getting divorced.
- Underestimating post-divorce expenses.
You will be asked to do a financial disclosure 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 maintenance is necessary or not. You must be sure to include everything from your health care deductibles to anticipated home repair charges for the roof you need to replace next year. If you underestimate your expenses by $200 per month, that’s $2400 per year. Where are you going to get that extra money? When you’re the primary breadwinner this mistake could lead you to agree to pay maintenance that you ultimately can’t afford. A Certified Divorce Financial Analyst™ will help you scrub your affidavit for errors and make sure that you don’t leave anything out.
- Believing that your attorney will handle everything.
Your attorney is an expert in the law, not finances. Would you ask your doctor for advice about your car? No, so why would you expect your attorney to be an expert in finances? The attorney’s job is to ask you to fill out your financial disclosure and take your word for it that it is correct. A good attorney will glance over it looking for any glaring errors but that’s about it. The most commonly miss-valued asset is a pension. In some situations, the value has been left out all together and just assumed as a 50/50 split. There is so much wrong with that solution, but most people don’t find out until it’s too late. This is crucial when in some cases the pension is the most valuable asset in a marriage. I often see attorneys accept a present value statement from a pension as the correct value to include as marital property. It’s not. Not by a long shot. A CDFA® can value it properly and make sure that tax ramifications are considered as well.
- Not Understanding Tax Implications
Not all assets are created equal. This is at least a common understanding however I still regular see houses be trades for equity in a 401k. Not only do you need to understand the tax ramifications of that decision, that taxation on a home is different than taxation on a 401k, but also what quick cash you will need to get back on your feet and how you will access it. Getting cash out of a home is not easy and requires equity and the ability to refinance. Getting cash out of a 401k may be easier than the home BUT there are tax ramifications and it also takes time, in some cases months, through the Qualified Domestic Relations Order (QDRO) to access the funds. You need to at least have a basic understanding of the after-tax settlement division.
- Letting attorneys do the talking for you.
The more you and your spouse can work out by just communicating, the more money you’ll save. I’ve seen many couples that could not bear to be in the same room, but consider the cost. If you have your attorney relay information to the other spouse’s attorney, you’re racking up bills upwards of $600 an hour because you refuse to talk. This makes sense to no one. Get over any anger and talk about what will work.
- 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 just throw your hands up and agree to a settlement just to be done with it. This kind of thinking is why divorce so often leads to bankruptcy! A 50/50 split of assets is almost NEVER a truly equitable settlement. So, put the emotions aside, talk to your spouse. Take your time and make sure you thoroughly understand what your future will look like after your divorce and be sure to hire the right experts to help you.
To avoid making financial mistakes in your divorce contact Next Step Divorce Solutions today to speak with a Certified Divorce Financial Analyst®.
-Tessa Elrod, CFP®, CDFA®