Divorce is undoubtedly one of the most emotionally challenging life events anyone can experience.
Beyond the emotional toll, it also brings a host of financial complexities that require careful consideration and planning. As a child of now two divorces and a practicing CPA and CFP who's helped clients through this nightmare, I can attest to both the emotional and financial pain a divorce can inflict upon those involved.
Whether you're considering getting a divorce or have already begun the process, establishing a sound financial plan is crucial to safeguarding your future.
Here are 9 financial planning tips to help you navigate the divorce process and protect your financial well-being.
1. Organize Your Financial Life
In the beginning, it's essential to organize and collect all relevant financial information so that you have a comprehensive view of the household finances. This can include gathering bank statements, tax returns, credit card statements, investment statements, property deeds, retirement plan statements, mortgage statements and any other assets or liabilities you and your spouse own.
Once you have everything gathered and organized, you'll want to take this data and create a personal balance sheet for your household that itemizes the value of your assets and liabilities. This will provide you with a clear picture of your current financial situation, help in assessing your overall financial health and lay the groundwork for future financial decisions.
2. Understand the Costs Involved
The costs of a financial settlement can be substantial and will vary depending on how you choose to proceed. Engaging legal counsel will obviously cost more than moving forward amicably without attorneys involved.
Be certain you're clear on the professional fees involved in your divorce. Even if you don't elect to hire a lawyer, you may still incur costs down the road should you, for example, hire a realtor to sell a piece of real estate.
3. Consult Qualified Professionals
Divorce lawyers spend a great deal of time helping their clients navigate the legal side of the divorce proceedings which may leave your personal finances unattended.
In addition to selecting a qualified divorce attorney (should you go this route), you should also consider seeking advice from a financial professional such as a Certified Financial Planner (CFP) with experience in planning divorces.
To help narrow your search for a CFP specializing in divorce, the CFP Board has a "Find a CFP Professional" search tool that allows you to specify planning services offered by the professional.
A CFP can help you identify what-if scenarios for your settlement options, evaluate the tax implications, and create a post-divorce budget. They can also assist in simplifying complex financial matters and ensuring you make well-informed decisions that protect your financial interests.
4. Assess Your Financial Needs and Goals
It's likely your lifestyle and financial goals will change post-divorce. As such, you'll want to review any major changes that will likely occur as a result of your divorce. This could include significant changes for you, both personally and financially, including changes in housing, employment, alimony, child support along with your spending habits.
This may be difficult to put pen to paper when emotions are involved, but thinking through all the financial implications will only help prepare you for what lies ahead. Here are additional factors you may want to consider:
Additional Income and Expenses
First and foremost, you'll want to account for changes to your budget as a result of the divorce. Alimony and child support payments can have a major impact on your financial future and it's important to assess how these payments will affect your budget.
Next is building a comfortable cash cushion for emergencies and other unexpected costs. A good rule of thumb is to maintain anywhere between three and six months' worth of living expenses in cash.
Spending and Savings
With child support and alimony accounted for, you'll now be able to create a financial budget. Here's a simple rule of thumb to help get you started: 50/30/20. That is, 50% of your net income set aside for base living expenses (i.e. housing, utilities, child support, insurance, etc.), 30% towards savings and the remaining 20% for discretionary spending.
It's also a good idea to have a firm grasp on your investments, specifically how your money is allocated among stocks, bonds and other asset classes. This will help ensure your investment strategy aligns with your financial goals and risk tolerance.
5. Protect Your Credit Score
A divorce can have a detrimental impact on your credit score, especially if shared debts aren't managed appropriately. As such, you'll want to pay close attention to your credit score and monitor it regularly.
Sites like Credit Karma allow you to access your credit score for free and view open credit accounts in your name.
With a comprehensive view of your outstanding debts, you can then work with your financial professional and/or attorney to determine how to address joint credit accounts and avoid being held responsible for your ex-partner's financial decisions.
6. Analyze and Divide Assets Strategically
The division of assets can be one of the more complicated and contentious steps within the divorce process.
Work with your attorney and financial professional to determine the true value of your assets such as retirement accounts, pensions and real estate while paying close attention to illiquid holdings such as a privately held business. Assets such as these are harder to value than publicly-traded stocks that are marked-to-market every second and may require an independent valuation.
You'll also want to consider the tax consequences of owning your assets now and going forward. In some cases, it may be better to exchange one asset for another (i.e., brokerage account instead of a vacation home) if it's a better fit for your financial plan.
7. Plan for Retirement
A divorce can disrupt your plans for retirement and leave you with significantly less than anticipated.
Evaluate the impact of the divorce on your savings and retirement assets and lean on your financial professional to build a successful retirement plan that encompasses post-divorce changes to your finances.
8. Protect Your Financial Future
If alimony or child support are mandated as a result of the divorce decree, life insurance policies may be required to satisfy those support payments should something happen to you.
Work with your financial professional to help you find an insurance policy that's best suited to meet your family's needs at a reasonable cost.
9. Update Estate Planning Documents
It's easy to overlook your estate plan when going through a divorce as other financial matters tend to take precedence over updating beneficiary designations or re-drafting a will.
Make sure to review and revise your estate planning documents, such as wills, trusts, and powers of attorney, to reflect your new wishes and beneficiaries.
Navigating through the divorce process can be challenging and stressful.
Having a well-thought-out financial plan can help you secure your financial future and embrace a fresh start.
Collaborate with financial professionals, be open to compromises, and stay focused on your long-term financial well-being.
While a divorce marks the end of one chapter, it also opens the opportunity to build a brighter and more financially stable future.