Divorce is not only an emotional upheaval but also a significant financial restructuring as a divorce lawyer can explain. The decisions you make during this time can have long-lasting consequences on your financial well-being. Unfortunately, the stress and emotional turmoil of divorce can often lead to costly financial missteps. Being aware of these common pitfalls and taking proactive steps to avoid them is essential for securing your financial future as you work through this challenging transition.
As our friend Amanda at Flat Fee Divorce Solutions often advises, approaching the financial aspects of divorce with a clear and informed mindset is just as important as addressing the legal and emotional components. Here are nine financial mistakes to steer clear of during divorce proceedings:
1. Letting Emotions Drive Financial Decisions: Divorce is inherently emotional, but allowing anger, resentment, or a desire for revenge to dictate your financial choices can be detrimental. Fighting over every single asset, even if it has little monetary value, can quickly deplete your resources and prolong the process. Focus on your long-term financial security rather than short-term emotional gratification.
2. Failing To Get A Clear Picture Of Marital Assets: It’s surprising how often one spouse is less informed about the couple’s complete financial picture than the other. Before agreeing to any settlement, ensure you have a thorough understanding of all marital assets, including bank accounts, investment portfolios, retirement funds, real estate, and even less obvious assets like stock options or valuable collections. Don’t hesitate to ask for documentation and seek professional help, such as a forensic accountant, if you suspect hidden assets.
3. Overlooking Tax Implications: The division of assets and debts in a divorce can have significant tax consequences that are often overlooked. For instance, withdrawing funds from retirement accounts prematurely can trigger substantial penalties and taxes. Similarly, the tax treatment of spousal support has changed. Understand the tax implications of each financial decision before finalizing your settlement. Consulting with a tax advisor or financial planner who has experience with divorce is highly recommended.
4. Underestimating Post-Divorce Living Expenses: Transitioning from a two-income household to a single-income one often comes with increased expenses. Many people underestimate the true cost of maintaining their lifestyle independently, including housing, utilities, insurance, and childcare. Create a realistic post-divorce budget that accounts for all your anticipated expenses to avoid future financial strain.
5. Not Considering The Long-Term Value Of Assets: When dividing assets, it’s easy to focus solely on the immediate monetary value. However, consider the potential for future growth and income generation. For example, keeping a smaller, but more stable retirement account might be more beneficial in the long run than fighting for a larger share of a depreciating asset, such as a car.
6. Mishandling Retirement Accounts: Retirement accounts often represent a significant portion of marital assets. Dividing these assets often requires specific legal procedures, such as a Qualified Domestic Relations Order (QDRO), to avoid significant tax penalties. Simply agreeing to split the balance without the proper legal paperwork can lead to costly mistakes.
7. Failing To Update Beneficiary Designations And Estate Plans After Divorce: After a divorce, it’s essential to update your beneficiary designations on life insurance policies, retirement accounts, and other financial assets. Similarly, review and revise your will, trusts, and powers of attorney to reflect your new circumstances and ensure your assets are distributed according to your wishes.
8. Taking On Debt You Can’t Manage: Be cautious about agreeing to take on a disproportionate share of marital debt, especially if you are unsure of your ability to manage the payments on your own. Consider your income, expenses, and future financial stability before assuming responsibility for significant debt.
9. Isolating Yourself Financially: While it’s important to establish financial independence after divorce, don’t hesitate to seek professional financial advice. A qualified financial planner can help you create a post-divorce budget, develop investment strategies, and plan for your long-term financial security.
Working through the financial aspects of divorce can feel like walking through a minefield. By being aware of these common mistakes and seeking guidance from experienced legal and financial professionals, you can protect your financial future and build a solid foundation for your new beginning. Contact a lawyer near you for help today.