Ten Common Money Mistakes in Divorce

For anyone going through the divorce process, it is emotionally, physically, and mentally draining. Many people describe it as a time of being frozen or numb. While going through this time you will be expected to go through your finances with a fine-tooth comb to ensure your settlement agreement is fair and equitable.

Even if you feel as though you are clear-headed, there are a few things that you need to watch to avoid common money mistakes that are made during divorce.

Underestimating Post-Divorce Expenses

This is a common issue that can have significant financial implications. Here are some key points to consider:

1. Living Expenses:  Many people do not fully account for the increased cost of living alone, such as rent or mortgage, utilizes, groceries and transportation.

2. Childcare Costs:  If you have children, expenses like daycare, extracurricular activities and medical care can add up quickly. It is important to factor these costs comprehensively.

3. Health Insurance:  Losing coverage through a spouse can lead to higher premiums or out of pocket costs. Be sure to consider the cost of health insurance when budgeting.

4. Legal Fees:   Legal costs can continue even after the divorce is finalized, especially if there are disputes over custody or finances.

5. Debt and Liabilities: If debts were shared, you may still be responsible for a portion of them, which can affect your budget.

6. Savings and Retirement: After a divorce, it is crucial to revisit savings goals, including retirement contributions, which might have taken a back seat during the divorce.

7. Emotional Spending:  Emotional stress can lead to impulsive spending or lifestyle changes that can strain your finances.

8. Income Changes:  If one partner was the primary bread winner, the other may need to adjust to a lower income which can impact on all these areas.

To avoid underestimating these expenses, it is helpful to create a detailed spending plan, with the assistance of a Certified Divorce Financial Analyst to reassess regularly as circumstances change. Planning ahead can make the transition smoother and help ensure financial stability.

Believing that Your Attorney will Handle Everything

Attorneys specialize in legal matters, but they may not have the expertise to address financial issues. An attorney will ask you to fill out a financial affidavit and take your word that it is correct.

If you have the assistance of a CDFA they can help you understand your current financial situation and help you project future expenses, ensuring you do not underestimate your post-divorce needs.

They will be able to assist in identifying, valuing, and dividing marital assets and debts. This expertise will also help you understand what you are entitled to and how to fairly negotiate the division.

Not taking Tax Deductions

In divorce, not everyone realizes that portions of your tax and CDFA fees may be tax deductible. In limited cases, attorneys’ fees to secure business income that was impacted by the divorce may be deductible.

Let Attorneys do the Talking For You

The more you and your spouse can work out by just communicating, the more money you will save. You will also be able to develop a cooperative relationship with your ex, which is especially important if there are children involved. If your attorney does all the taking you will be racking up bills, that is why it is important to get over your anger and talk to your spouse about ways to work things out.

Letting Your Emotions Make Your Decisions

Put your emotions aside and talk to your spouse. So many people in divorce have been through so much emotionally that they just want to “get it over with.”  This is not the time to throw up your hands and agree to a settlement just to have it done. Striking a balance between acknowledging your emotions and making rational, informed decisions can lead to a more favorable and constructive outcome in the divorce process. A CDFA can help you manage emotions while focusing on what is best for your future.

Not Putting Enough Details in Your Divorce Agreement

A well-defined agreement allows both parties to plan for the future more effectively. When both parties know what to expect, it can foster a more cooperative relationship. Every action should have a “completed no later than” date. Every benefit should have a start and end date. If it is a lifetime payment, the agreement should state that. A detailed divorce agreement lays the groundwork for a smoother transition into post-divorce life, reduces the likelihood of future disputes and provides a framework for both parties to move forward confidentially.

Do Not Sign Anything Until you Have had a Chance to Review it Thoroughly

You need to fully understand the implications of what you are signing. Rushed decisions can lead to agreeing with unfavorable terms. Once you sign, it can be challenging to amend the agreement. Taking time to review any documents before signing can save you stress, time, and financial implications down the road.

Hire a CDFA to Verify the Numbers That the Attorney is Giving are Correct

A CFDA specializes in financial issues related to divorce and can provide an unbiased review of the financial information, ensuring it is accurate and comprehensive. They will be able to analyze financial documents to confirm that the relevant assets and liabilities are accounted for and will be able to identify hidden assets or income that may not have been disclosed, ensuring a fair division of property. By hiring a CDFA you gain an additional layer of financial oversight to ensure that the numbers are accurate and that you are making informed decisions throughout the divorce process.

If One Party is Supposed to Obtain Life Insurance, do it Before Finalizing the Divorce

Finalizing life insurance before the divorce is complete ensures that the policy is properly structured with the correct beneficiaries and ownership. This avoids complications later, as a spouse might not be able to obtain a new policy after the divorce or may have less control over an existing one. If either of the parties are uninsurable, an alternate plan will need to be made. Overall, life insurance is a safety need that ensures the financial security of both parties and any children after the divorce is final.

If Assets are to be Transferred, Find out the Procedure Before Finalizing

Knowing all the procedures of transferring assets is essential to avoid legal complications, penalties, or delays after the divorce is final. Knowing the transfer procedure allows you to structure the transfers to minimize or defer taxes. Make sure you understand a company’s transfer requirements, especially when it comes to 401K’s, stock options and RSU’s. This will protect the financial interests and long-term security of each party. It will also ensure that the transfers are executed smoothly, fairly and minimizes the potential risks of complications after the divorce is final.

Divorce can be a nightmare. Some cases drag on for years and some happen quickly, only to take years to execute everything that was dictated. A CDFA is essential in a divorce because they provide specialized expertise in the financial aspect of the process, ensuring both parties fully understand the long-term financial impact of decision making during the divorce.  They help with dividing assets, managing tax implications, and planning for future financial stability, all of which are complex, and emotionally charged. 

By working with a CDFA, individuals can make informed decisions, avoid costly mistakes, and achieve a fair and equitable financial settlement, providing peace of mind and security as they move forward with their lives.