Divorce is About Making Good Financial Decisions
By Sam Hubbard
Principal, Coastal Divorce Advisors
While you’re in the midst of a divorce, you’re going to have to weigh a lot of financial choices while dealing with the weight of strong emotions. You can minimize emotional stress by anticipating what decisions you have to make and understanding what’s involved in making them.
Below are common hurdles that people who are divorcing need to be aware of and the factors they need to consider to make confident, constructive decisions.
Can you afford to keep your home?
While you may have a personal attachment to your house, especially since your kids call it “home,” it is ultimately a huge expense to maintain year after year. All too often, the spouse who wants to keep the house only analyzes whether he or she can cover the mortgage and the property taxes, but fails to consider the “oh no’s”: “Oh no, the built-in refrigerator broke,” “Oh no, the HVAC system needs to be replaced, “Oh no, we have termites.”
Unforeseen expenses can cost thousands of dollars and could cause you to lose your house, or worse, push you toward bankruptcy. While a house is an asset, it is ultimately an expense. Make sure to take all homeownership costs – anticipated and unexpected – into account and try to remove emotion when deciding whether you can afford to keep the house.
Should you divide your property down the middle?
When you begin a divorce, it’s only natural to think “all our assets should be split right down the middle.” But since no two assets are created equal, this type of thinking may put you at the short end of the stick.
In a divorce, it’s common for spouses to divide property by what they see as equivalent value. For example, if one spouse gets the house, the other spouse may get the investment accounts, both valued around the same amount.
But tread carefully. Some assets, like certain pensions, may be completely illiquid and cannot be sold or transferred to a spouse. Others assets may have significant tax implications from a low-cost basis or may have large transaction fees (like the sale of a house). Make sure you initiate a complete analysis of the assets before making any decisions.
Do you want to tackle debt before your divorce?
If your spouse ran up balances on your credit cards during your marriage, in the bank’s eyes, it’s a shared responsibility, no matter who did the spending — even if the court decides your ex-spouse is responsible for it all.
Banks can still come after you for payments your ex-spouse didn’t make, jeopardizing your finances and damaging your credit score for years. Making the choice to pay off as much debt as possible before you finalize the divorce is often a good one.
Should you protect yourself from unanticipated events?
If you will be receiving alimony and child support, what happens if your ex-spouse passes away or becomes seriously disabled? Would you be able to support yourself and your kids if you no longer receive these payments? Consider purchasing life and disability insurance specifically tailored for divorce so support payments continue if something unforeseen happens to your ex-spouse.
Should you evaluate your settlement agreement from a current perspective?
When looking at a settlement proposal, what may seem like a great deal now could quickly turn into financial ruin down the road. You need to make sure you don’t evaluate your proposed settlement by your current costs or budget but by how your finances will look in 5 or 10 years.
Projecting your cost of living will help you determine the long-term consequences of a settlement option and whether you’ll be financially well-positioned years after the divorce. Make sure you have accurate projections on-hand and do not rush into signing a proposal just to be done with it.
Can you be disciplined to make financial decisions in unison, not one by one?
When going through a divorce, looking at any single financial aspect in a vacuum and not seeing how it relates to others could cost you. The division of assets and liabilities, tax consequences, inflation, alimony, and child support are all pieces of the settlement puzzle that need to work together to help ensure the most favorable settlement agreement. For example, if you have income from your job and agree to take a large alimony payment, you may be pushed into a higher tax bracket than if you were to increase the amount you receive in non-taxable child support.
Take a careful, comprehensive approach to your finances to have a better chance of coming out ahead.
Sam Hubbard, MBA, CFA, CDFA is the principal of Coastal Divorce Advisors, LLC, (CDA), a firm specializing in helping clients understand their financial situation and options throughout the divorce process. CDA is an affiliate of Coastal Capital Management, LLC. For additional information, e-mail Sam@CoastalDivorceAdvisors.com, call 912-234-3657 or visit www.CoastalDivorceAdvisors.com. This article is for informational purposes only and does not constitute legal advice. The opinions expressed are solely those of the author, who is not an attorney. If you require legal advice, please seek appropriate legal representation.