Divorce and Money: How to Regain Financial Control and Confidence
If you are thinking about getting divorced or in the middle of one, one of the biggest challenges you will face is figuring out what your post divorce financial future looks like and ensuring you have financial stability for you and your children.
While divorce can provide a wonderful financial reset, it can also feel overwhelming and scary to make these important financial decisions on your own.
Key components to navigating this significant life change are:
Getting super clear on what you want for your finances in your next chapter, and
Obtaining professional guidance from trusted advisors, so you can make informed decisions, get strategic financial planning, and feel good about your future financial security.
A divorce coach can help you through this process, so you can focus on getting the best divorce settlement possible and rebuilding financial confidence.
The financial picture of a married couple is much different from the financial life of a divorced person.
The biggest shift post divorce is that you will go from a single household to two households, which increases overall living expenses. And if the family only has a single income source, then the financial reality of divorce can hit that much harder.
So, it’s critical that you determine your overall goals, priorities, and ideal post divorce financial future before you start the process. This helps you have clarity and peace of mind during the divorce, and when we feel less stressed, we are able to make better decisions. It’s a win-win.
A divorce coach can help, by asking you questions that are designed to help you reflect deeply and seriously about your ideal future, such as:
–What do you envision for your life, big picture and on a day-to-day basis?
–What does “financial independence” look like for you?
–What does “financial well being” mean to you?
–What is your level of risk tolerance?
–Dollars and cents aside, how do you want to feel when it comes to your finances?
These are questions only you can answer and should be the starting point to rebuilding financial confidence, because no matter what choices you make, if they don’t align with your true desires and essence, then ultimately, you will not feel happy, fulfilled, or at-peace with your post divorce life.
In order to make informed decisions in your divorce, you must fully understand your current financial situation.
Here are some important things to consider:
(1) What are the sources of your family income? Do each of you work outside the home, or only one of you? Do you receive income solely from employment, or do you also get investment income from brokerage accounts, trusts, or real estate?
(2) What assets and debts do you have, both individually and jointly? Assets to consider are bank accounts, retirement accounts, brokerage accounts, vehicles, life insurance policies, business interests, and/or real estate. Debts to consider are mortgages, student loans, personal loans, credit cards, and any other financial obligations.
(3) How much does your current lifestyle cost? From household expenses, to the children’s schooling and activities, to lifestyle expenses like travel, dining out, shopping, and entertainment, we tend to underestimate how much we actually spend, especially if we put everything on different credit cards. Analyze the total spending for at least the last 12 months, to get as accurate a financial picture as possible.
Before you even meet with an attorney or financial advisor, gather as many of the following documents about your financial landscape as you can, and store them in a secure, digital format (like DropBox):
–Tax returns, statements, and forms (last 3-5 years)
–Year-end paystubs and earnings statements (last 3-5 years)
–Bank and credit card statements for individual and joint accounts (last 24 months)
–Current statement reflecting the existence and value of any investments, retirement accounts, business interests, deferred compensation, insurance coverage (life, disability, home, auto, etc.), and any other assets, as well as any education funding for your children, such as 529 Plans
–Current statement reflecting the outstanding balance owed on any debts or liabilities
–Your current estate plan – wills, trusts, powers of attorney, and any other related documents
–Prenuptial and/or Postnuptial Agreements, if applicable
These documents contain necessary information to evaluate your rights and options when it comes to the asset division, seeking financial support or child support from your former spouse, setting realistic financial goals, and coming up with a post divorce budget.
Gathering this information upfront will prove helpful, because it allows you to utilize your time with your attorney and financial professionals as strategically and efficiently as possible. If you don’t have access to all of this information, gather whatever is available to you, and your attorney can request it from your spouse or issue subpoenas.
Most people think the only professional they need to hire for divorce is an attorney. But if you want the best investment advice, tax efficiency tips, financially advantageous options to divide assets, and more, you need a bigger team.
Here are the different professionals you should consider hiring to make the best possible financial decisions in your divorce: Certified Divorce Financial Analyst (CDFA), Certified Divorce Lending Professional (CDLP), Real Estate Broker, Certified Public Accountant (CPA), Certified Financial Planner (CFP), Life Insurance Broker, Health Insurance Broker, and Trusts & Estates Attorney.
This may feel like overkill, but divorce impacts every single aspect of your financial security – assets and debts, income and expenses, housing, taxes, retirement goals, health/life insurance, and more.
Your lawyer is not trained or experienced in all of these fields, nor is it reasonable to expect them to handle everything about your financial situation; their role is to provide legal advice, not financial advice.
So, in order to find the best path forward with your post divorce finances and rebuild your financial confidence, you should work with professionals who specialize in each of the these fields.
It’s possible that you and the other spouse already have relationships with these professionals or specific investors, but remember, that was based on you two building a life together as a married couple.
You are now leaving one chapter and starting a new one, so you should build a team who is 100% dedicated to your best interests. For that reason, if the husband in a heterosexual marriage primarily managed the finances, then many women usually find new professionals to work with during and after the divorce.
Work with financial consultants who are aligned with your financial goals. The investment strategy for your income and assets during the marriage and past performance of investments may not be aligned for you anymore. For example, it’s not uncommon for one spouse to have higher risk tolerance than the other; for your next chapter, what feels most true and aligned for you?
A financial advisor can help you define your new investment strategy so you can work towards financial independence without having to stress every day about how your portfolio is performing.
Based on your goals and input from your financial advisors, what’s a realistic budget for you after the divorce, including an emergency fund, contributions to retirement accounts, and the children’s future expenses?
Based on your new budget, how much income and assets do you need to have financial security? Some things to consider here:
–If you want to keep the house, does that match the financial reality of your situation? Or will it create more stress on your finances to pay for it?
–Will you be receiving income from employment, assets, and/or alimony or child support payments?
–Are you entitled to receive a share of your former spouse’s Social Security benefits in the future?
Based on the above analysis, your legal rights, and the actual financial landscape, what are your realistic options in the divorce process to get you as close as possible to your goals?
This is where a CDFA can be particularly helpful for making financial decisions, because they can analyze various settlement scenarios of your assets, debt, income and expenses into your age 90’s, which can provide clarity and peace of mind that you will not “run out of money” if you agree to a particular settlement offer.
Once you’ve completed the above analysis, it’s time to create your ABC Plan – what is your best, second best, and third best case scenario for purposes of settlement or litigation? If you know all of this before you start negotiations or trial, imagine how much more confident and at-ease you will feel!
Here are some additional things to keep in mind for purposes of financial planning in your divorce:
Not all assets are equivalent, even if they have a similar value on paper.
Cash, investments, retirement accounts, business interests, and real estate are all very different from each other. Some are liquid and immediately accessible, while others are not. Some are post-tax, while others you may have to pay taxes on the funds in the future.
Work with your financial advisors to determine what mix of assets makes the most sense based on your actual goals.
You will have different options available based on the divorce method you select.
If you are in litigation, then there is less room for creativity and more limited options, because the judge is required to apply the law as it is written.
Conversely, if you choose mediation or collaborative divorce, you and your spouse have more flexibility and can create a divorce settlement that works best for your unique financial situation, even if you don’t follow the law exactly. As long as it’s fair overall, a judge will likely approve it.
After the divorce is final, be sure to update the beneficiary designations on all of your accounts, insurance policies, and estate plan.
The last thing you want to happen after you get that amazing financial reset after the divorce, is for your spouse to still maintain legal rights to your assets due to a technicality. For retirement accounts specifically, you may need to complete a qualified domestic relations order to effectuate the terms of your divorce agreement; make sure you speak to your attorney about this.
As you can see, so much thought and planning goes into making financial decisions in your divorce. You don’t have to do this alone. By following the steps above and working with a strong team of professionals, you can enter your post divorce era feeling confident about your financial future and excited for your next chapter. You got this!
