Not Your Father’s Advisor: Getting Your Financial House in Order before You Divorce
By Jessica Weaver, CFP®, CDFA™, CFS®
The average person keeps their finances on the back burner, and when it comes to divorce, the trend continues. There are a few things you can do to better prepare yourself financially for a divorce that will propel you toward your goals after its final. Wouldn’t it be nice to start the new chapter of your life with the right foundation for your money? Well you came to the right place, here are 5 critical steps to take when going through your divorce:
- Cash Flow Statement: The first thing I tell my clients is put their cash flow statements together. It’s a good time to look at their spending habits to see where all the money is going. The cash flow statement is comprised of your net money coming in to the household versus going out with your expenses. Don’t forget to include your salary, any rental income, investment interest, and any other income when completing this. Think about all your fixed expenses such as mortgage payments, rent, utility payments, and food bills. Then put together an estimate for your variable expenses, and always include savings as part of your expenses. Are you spending more money than you make? You will know immediately if you have a deficit every month, are even each month, or have a surplus after you tally everything up. Now after your divorce, how will your expenses change, and how will you make up for the shortfall of living on one income? What areas can you cut back on with your expenses without jeopardizing your retirement savings or other savings goals?
- Credit Score: Another crucial area of finance is your credit score. It is essential to get a credit card in your own name and to start building a credit history. Try to pay off your credit card bills on time as credit card interest can be your worst enemy if it builds up. After the divorce, make sure to take your ex-spouse off your credit cards even if they are just an authorized user. Doing this can easily be overlooked, but it is very important to do. Unless you’d like your ex-spouse to rack up your credit card bills, but probably not.
- Net Worth Statement: Before you start your settlement negotiations, put together a list of all your investment and retirement accounts. Everything should be accounted for, and think about the tax implications of selling a certain asset versus another. How much of a taxable event will the sale make, and will there be a penalty for liquidating it now? You don’t want to receive all pre-tax money in your divorce settlement because you will be left with a lot less after paying the tax bill. Having some money set aside in your savings account will be a big help. You don’t want to incur credit card debt or have to sell something with a big taxable gain to cover your expenses. When in doubt speak with an accountant or financial advisor, because a small mistake with money can be a very costly And the IRS isn’t very forgiving even if you had a rough divorce.
- Estate Planning: Lastly, you should start thinking about your estate plan, and what you will need to change once the divorce is over. You will most likely have to update your will, power of attorney, and living will after the divorce is final. Another disregarded area, is your beneficiary designations for your life insurance and retirement plans. Make sure to consult with an estate attorney on how best to leave your estate to your loved ones after you’ve moved on from the divorce.
- Your Plan: It is time to start getting your plan in place for after your divorce. A plan begins when you start to really think about what you want for your new life. What would you love to discard from your current life and what do you want? Once you’ve gained clarity over what you want and deserve for your new life, what are the strategies to get you there? And what behaviors do we need to adjust or modify to get you there and to keep you there? Take some time to meet with an advisor to put your plan in place. It can be one of the best decisions of your life.
Getting a grasp of your finances, will make you feel more comfortable with your divorce and the settlement. It will give you confidence to move on with your life, and toward your new goals. Being proactive can be one of the best things to do. My mission is spreading the word to more people, who are confused and overwhelmed by their money and help them identify their options and the impacts of their choices. So what do you say, can we concur your money and get you to financial freedom?
Jessica Weaver, CFP®, CDFA™, CFS®
Any opinions are those of the author.