If you let emotions
rule when your marriage breaks up, the financial fallout could
last for years. These pointers can help you focus on what's
best for your future.
When you're going
through the pain and emotional battles of a divorce, it's
easy to overlook financial issues that can hurt you long after
any hard feelings have healed. Here are 15 critical financial
mistakes that you can't afford during a
a financial victim.
If you suspect your spouse is planning a divorce, now's the
time to make copies of all important financial papers, from
property and investment records to bank statements, credit
card bills and tax returns. Worried that your estranged spouse
may liquidate or retitle marital assets? Notify the holder
in writing and get a court restraining order. Watch out for
cash in joint checking or brokerage accounts, and protect
the cash value of your life insurance.
If assets are moderate, joint custody is workable and your
spouse is agreeable to a fair settlement, mediation will save
thousands of dollars in legal fees and emotional aggravation,
and provide more flexibility than an adversarial legal process.
Mediation won't work if one spouse is hiding assets or income,
or is unwilling to consider the needs of the other.
a combative lawyer as punishment.
This is a bad idea for two reasons. First, except in extremely
egregious cases, divorce settlements are determined by equitable-distribution
laws, and courts will not punish your ex-spouse financially
for being a bad person. Second, your attorney assumes carte
blanche to increase hours spent on your case. High divorce
costs mean less money left over for living. Treat divorce
as a business arrangement, and get your revenge by living
to recognize your enemy:
the Internal Revenue Service. Work with a divorce financial
planner or tax accountant to minimize the total taxes you
and your ex will pay during separation and after divorce,
and share the money you save. Don't forget that both parties
are liable for taxes due as a result of audits on joint returns.
Don't count on the innocent-spouse rule to protect you.
producing an accurate budget.
Invariably, clients underestimate or omit expenses when they
produce their initial budget for temporary maintenance, and
then later on in the divorce process they complain about being
unable to pay bills. Use a financial professional to help
you produce an accurate and complete budget.
evaluating a divorce settlement on an after-tax basis.
The bottom line is the share of marital assets you get after
the tax man gets his. Say your spouse handles all the investments
and offers to split them 50/50. Sound fair? I suggest you
look at the value of your assets relative to your spouse's
on an after-tax basis. Then decide if you like the deal.
to use computer models to evaluate settlements.
If you are trying to decide whether a divorce settlement is
equitable and workable, you certainly want to know how you
will be doing financially three, five or 10 years down the
road. There are many interactive factors you must consider,
including assets, incomes, budgets, maintenance and child
support, taxes, retirement plans, investments and educational
expenses. Specialized divorce computer models can produce
comprehensive and realistic analyses of your post-divorce
an emotional attachment to assets.
The marital residence, the pension you earned, a painting
purchased during your marriage -- these assets bring an emotionally
charged debate to divorce negotiations. The fact is many women
can't afford the family home on their own. A house is an asset
that has a low return on investment -- actually losing ground
over the last couple of years -- and is a major cash expense
(mortgage payments, taxes, maintenance and repairs, heat and
your lawyer as a financial planner, therapist or messenger.
One woman I spoke with ran up $35,000 in legal fees in just
two months. Arrangements for her husband's parental visitations
were made through their matrimonial lawyers. Attorneys generally
charge $200 to $300 per hour ($450 for partners in well-known
New York City and Los Angeles matrimonial firms) and are not
skilled therapists or certified financial planners. If you
need emotional support, career counseling or financial analysis,
utilize qualified professionals and save big money in fees.
a settlement that isn't as good as it seems.
Both spouses and children must all make compromises in their
lifestyles after a divorce. A settlement that does not give
one spouse enough money to live on is likely to go into default.
Be fair, but verify the numbers. Get payments upfront whenever
possible, even if you get less in total. Secure all payments
with assets and insurance.
the impact of inflation.
The effects of inflation on the cost of a child's college
education 15 years in the future, or retirement 20 years hence,
can be dramatic. The rule of 72 is a simple way to judge the
impact of inflation. If the inflation rate is 3%, the rule
of 72 states that prices will double in 24 years (72/3=24).
College costs at 5% inflation will double in 14.5 years (72/5=14.5).
waiting until a wife is eligible for her husband's Social
If a couple is married for 10 years or more, a wife is entitled
to receive half of her ex-husband's Social Security at retirement.
The husband's Social Security payments are unaffected. It's
ironic that the average length of marriage for people who
get divorced is 9.6 years. Waiting just six months longer
will increase retirement options for a wife with no reduction
in her husband's payments.
to update estate documents.
After heavily contested divorces, many people forget to change
the beneficiaries on their life insurance policies, individual
retirement accounts and wills. The result is that ex-spouses
end up inheriting estates the decedent may have intended to
pass along to children, a new partner or a favorite charity.
to adequately insure the divorce settlement.
Premature death or disability of your ex-spouse can result
in loss of maintenance, child support, college tuition or
property settlement. Life and disability insurance can guarantee
your payments and your family's security. Also, don't ignore
the high cost of purchasing individual health insurance.
to develop a financial plan.
One indisputable fact of divorce is that two households cost
more to operate than one but income is unchanged. Many people
start their post-divorce lives not fully understanding that
their settlement must last a significant amount of time --
perhaps the rest of their lives. Financial planning can help
people transition from married to single life by prioritizing
financial goals, developing realistic expectations and producing
written plans for allocation of financial resources.