Every divorce has unique characteristics making the experience different for each person. That said, there are a handful of mistakes we find are common occurrences in a divorce. If you’re contemplating divorce, or in the middle of negotiations, this may serve as a good checklist to help you avoid these more common mistakes
1. Settlements that assume status quo
One of the main objectives in a divorce is to determine an “equitable split” of marital assets requiring an understanding of your present situation and valuation of all your assets. My observation is that, at times, this need to focus on the present can result in analysis that ignores potential future events. Unfortunate events can occur at any point post-divorce and may include things like job loss, disability, changes in the health of your children or the substantial depreciation of an asset.
I’ve seen complications arise in paying for college when a settlement agreement relies too heavily on the continuation of the status quo. For example, if college costs are to be split based on salary, what happens if you or your spouse becomes unemployed? Unforeseen events can put you immediately on the hook for a large expense you hadn’t planned for.
When you’re negotiating your settlement, remember to consider what could change in the future. Confirm that your attorney or financial adviser is considering these potential changes and suggesting ways to shield you from risks posed by unexpected circumstances. Oftentimes, sharing your risk through insurance or adding additional language in the settlement outlining how situations like these should be addressed may reduce the chance you’ll end up back in court or having to work through attorneys to revise the agreement.
2. Unrealistic lifestyle expectations
Decisions about who should keep the home, or if it should be sold, have very real, emotional, practical and often significant financial implications for both parties. Housing is just one of many lifestyle decisions faced when separation and divorce occurs. Unfortunately, too many divorcees expect to live a similar lifestyle in divorce. In doing so they may be ignoring the financial implications or trade-offs required to afford their lifestyle expenses.
Another common challenge is parents wanting to maintain the same lifestyle for their children. Understandably, you may want to provide your children with their annual beach vacation, or lavish birthday celebration or may want to buy a car for your teenager. When parents compete through spending rather than co-parenting, one or both may find themselves busting their spending budget. Unfortunately, this cycle of guilt spending can last a lifetime.
When you’re tempted to spend to keep up with your predivorce life, or to outdo your ex-spouse, stop and ask yourself three simple questions:
- How does this choice meet the needs of my family now and in the next five years?
- If I make this choice, what might I be giving up in my other financial goals?
- How might this behavior affect my kids’ views about money?
3. Disengaging from the details
Dealing with the details of a divorce can be exhausting, especially if it’s a complicated situation. Lengthy legal proceedings may require you to open up the details of your life. At the same time, you’re required to gather a massive amount of data to support negotiations, and the need to gather and provide data often doesn’t end when the divorce is final.
For example, this situation is common if you are sharing costs for your children, like doctors’ visits and extracurricular activities. Even when one parent is 100 percent responsible for such costs, it may be the other parent who attends the doctors’ appointment or transports the children to their activities. Whoever is paying the bills will need to keep an accurate record of the costs and request proper reimbursement from their ex-spouse. If interactions between ex-spouses are uncomfortable, sometimes one parent will decide to simply cover the costs on their own in order to avoid unpleasant confrontations. If this goes on over the course of many years, the financial outlay for costs that should have been shared could be significant.
In our post-divorce checklist, we recommend several steps to help track child support or other payments:
- Set up all support payments on an automatic payment plan.
- Only accept support payments in a form that is documented and tracked (i.e., not cash or services).
- Notify your employer if you owe any payroll deduction related support payments.
- Establish a record-keeping system to track all shared costs.
- Document any issues that arise with respect to payments.
4. Reckless remarriages
Many new divorcees are surprised to learn that the divorce rate in second marriages is higher than in first marriages! With more complicated financial and life situations, it’s no wonder that couples marrying for the second time can run into trouble. Unfortunately, this dynamic may strike later in life when partners are even closer to retirement and have less time to recover from the negative financial impacts of divorce.
It may come as a surprise that prenuptial agreements are not just for wealthy parties but can be of benefit to you and your soon-to-be-spouse. These documents help couples consider what could or should happen if the marriage breaks up. Prenups certainly handle asset division but may also articulate rules for how long one party could remain in the marital house if they are asked to leave, or how long-term care expenses would be covered. With second marriage divorce rates topping 60 percent, we suggest that anyone contemplating remarriage consult with an attorney to discuss potential prenuptial agreements, as well as consider making changes to their existing estate plan.
5. Lack of financial education
One of the reasons these common mistakes occur during a divorce is that many women and men lack even a fundamental financial education. Basic financial literacy is normally learned through experience (often mistakes) rather than in an educational setting, like high school or college. If you do attempt to gain financial education through the vast number of internet resources, the sheer volume of data can result in confusion on exactly where to start.
Another challenge is that some financial advice assumes traditional gender roles. Many retirement strategies assume a couple is married and aging together which may make the advice inappropriate for a divorcee who ages alone. Advice also may ignore the very real challenges that women breadwinners face, particularly those posed by the wage gap.
Our suggestion to counteract these barriers to financial education is to start with one important task — create your personal balance sheet. This task can be as simple as handwriting a list of all your assets and liabilities or a more sophisticated project that uses electronic resources to link all your accounts to analyze your asset allocation and other metrics for insight into your finances. Once that’s complete, you can move on to understanding your tax return — ideally both before your divorce — and how that may change once you become a single taxpayer.
Those who take these steps while they are still happily married will have a big advantage if they ever find themselves in divorce negotiations. While attorneys, CPAs and advisers are helpful for handling the technical aspects of your divorce, there’s really no replacement for being your own advocate.
Having a solid understanding of your present financial situation and a reasonable outlook and goals for your future is the best way to avoid financial mistakes now and to be prepared should your circumstances change.
Dawn Doebler, CPA, CFP®, CDFA® is a senior wealth adviser at The Colony Group. She is also a co-founder of Her Wealth®.