Divorce may be common these days, but it is still a traumatic event. During this time, it is easy to make a financial mistake that can haunt you for years – either from impulsive emotional decisions, bad advice, ignorance, or just plain enmity.
Here are five financial mistakes to avoid as you prepare for your new, single life.
- Not Understanding Financial Obligations – If one spouse took care of all financial matters, the other spouse may not know where to begin to protect their own interests – and a divorce is not the best time to expect cooperation and clarification.
For example, you need your own copies of the previous year's tax returns (assuming you filed jointly) and other important co-signed documents such as mortgage papers. Make sure you also know of all joint unsecured debt (such as credit cards) that you could be liable for.
It is important to know every last thing that you could be financially responsible for. If it takes a lawyer, forensic accountant, or Tony Soprano to extract this from your soon-to-be ex, so be it. (Well, maybe not Tony Soprano.)
You need to have a comprehensive picture of your finances, including how taxes will be handled for the year of your divorce, and it is essential to get a handle on what your new expenses are likely to be.
A visit to a financial planner or similar professional can give you a clear and objective opinion at a time when you need it most. Do not agree to anything in a knee-jerk fashion without understanding the financial ramifications.
- Liquidity and Worth – You may get the house, but are you going to be able to make payments on it and maintain it? If you need it for cash purposes, can you sell an expensive asset? If so, will you have to sell at a loss?
Just because something shows a given book value does not mean it has the same worth to you. If you ended up with the house, car, and various investments while your spouse took mostly cash, you may not have enough liquidity to pay your bills. Again, this is a good reason to review your upcoming expenses.
- Not Cutting Losses – "I will burn in hell before I let my ex have ____!" – you fill in the blank. Unfortunately, fighting tooth and nail over every item is counterproductive – all it does is drive up the collective costs of the divorce while making the atmosphere more toxic. There is no reason at the end of your divorce for your lawyers to have more of your assets than you do.
Fight for the important things – but do not fight about every little thing, and especially avoid the situation where you want something only because your spouse wants it even more. Be the grown-up.
- Failure to Update Paperwork – Change the information any estate planning and financial documents you have – wills, life insurance and investment account beneficiaries, bank accounts and credit cards as soon as possible. For example, any portion of a spouse's 401(k) plan that will be due to you cannot be paid without a Qualified Domestic Relations Order (QDRO).
- Failure to Separate Joint Assets – Separate everything you can before the divorce, not after. For example, if you are not keeping the house, your spouse should refinance it under his or her name to avoid potential liability if your spouse cannot or will not pay the mortgage.
We hope that avoiding these mistakes will help you get through your divorce with as little pain as possible and help you toward a fresh start in working toward financial security and relative peace of mind. One other piece of advice: no future date wants to hear the gory details of your financial break-up!
This information is not intended to be a substitute for individualized legal advice. Please consult your legal or divorce advisor regarding your specific situation.
Winnie Sun is a registered representative with, and securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Sun Group Wealth Partners, a registered investment advisor and a separate entity from LPL Financial.