Let’s get it out of the way, divorces can be expensive. With additional expenses and a fluctuating financial future, your finances can become overwhelming. While a divorce can be highly emotional, you need to approach finances with a level head. You may also want to explore engaging a Certified Divorce Financial Analyst to give you a full analysis of your finances. A financial analyst can be instrumental in building a budget, keeping your financial goals on track, and weathering the financial impact of a divorce. Additionally, consulting with an attorney in your jurisdiction will ease your understanding of the financial implications of your divorce. This will help you start the process off with information that can keep your expectations in line with reality. When it comes to finances, think of divorce in two parts: before and after your divorce is finalized. This helps you understand what needs to be done while not overwhelming you with too many considerations at one time.
Before Your Divorce is Finalized
Now that you know you are going through with a divorce, it is time to think about what you need to do before the divorce is finalized to protect yourself. This step is all about preparing for the short term to ensure you are on better footing for the long-term plan. When you are ready to dig into your finances, consider the following.
- Current Financial Picture: When it comes to the finances of a divorce, a great place to start is taking an inventory of how your household finances currently look. It helps to create two financial documents during this step that reflect your finances before the divorce.
- Personal financial statement: A personal financial statement includes all assets and liabilities of your household. Assets are anything you own that have value including your home, cars, boats, personal property, financial assets, bank accounts, retirement accounts, investments, ownership interest in businesses, and insurance policies. Liabilities are anything that represents debts owed to others including mortgages, personal loans, car loans, credit card balances, and lines of credit.
- Monthly budget: The monthly budget, on the other hand, should start with your monthly household earnings and subtract out your monthly expenses. Think of your sources of income as a starting point, then subtract out monthly savings, insurance, debt payments, housing costs, education costs, childcare costs, utilities, food, gas, and discretionary spending.
Now that you have a fundamental understanding of what you own and what you owe, think about who has access over each account. For example, do you and your spouse share one bank account? If so, either party would be able to walk into the bank and drain the account leaving the other person without access to liquidity in the short term. Did you sign on your spouse’s car note which they routinely pay? If so, could your spouse stop making payments at the detriment of your credit scores? These are all things to consider when you review your financial accounts and understand what you consume and how you pay for those items. This exercise would allow you to see where your monthly income is being spent and allow you to make necessary cuts in light of a changing financial picture.
- Cost of a Divorce: If you are early on in the process, you might be thinking, “how much is this going to cost me?” According to Forbes, the median cost of a divorce in 2023 was $7,000, while the average cost of a divorce was between $15,000 and $20,000. However, this amount can vary drastically depending on the complexity of your situation and if there are additional issues relating to child custody and the division of assets. A contentious divorce can quickly drive up legal bills. It is best to try to remain amicable with your spouse during divorce proceedings as that can allow for a smoother division of assets. When you meet with your attorney, make sure you understand their fee structure and budget appropriately for the added expense of legal counsel.
- Expectations: Each divorce is unique, but most states divide assets in two ways.
- Equitable Property Division: In a state that recognizes equitable property division, a judge will be responsible for reviewing the details of your case to fairly divide assets. “Fair” can mean something different to anyone reviewing the case, but this process relies heavily on the judge to make decisions. Don’t fret, guidance exists to support judges when making their decisions. A judge will review the following details of the case while making decisions: assets and liabilities of the couple, education support from one spouse to another, if one spouse did not complete education to care for children, economic circumstances, age, and health to name a few. All factors of the case can be used to influence the judgement.
- Community Property: In states that recognize community property rules, assets and debts acquired during the marriage are considered joint property and divided evenly. It should be noted that this excludes assets that were acquired before the marriage and even some community property states do not stick strictly to a 50/50 split.
This is a simple explanation of complex legal processes. It is best to engage your attorney and have them explain what you can reasonably expect as a result of your divorce. It is important to manage expectations and go into these conversations with an open mind. You can work with your attorney to build a strong case that balances your desires with the realities of the legal system in which your state operates.
- Budgeting: When you are going through a divorce, your budget needs to be adjusted to reflect additional expenses. You’ve already reviewed your personal financial statement and budget as one household, now it’s time to think about what you need to do in the short term to stay afloat until your divorce is finalized. You may need to get a job, find housing, hire an attorney, and make lifestyle adjustments until you are on steady footing. In addition to normal expected living expenses, consider the following items you may need to tweak in your original household budget:
- New housing costs
- Debt payments
- Legal fees
- Mediation fees
- Court fees
- Childcare costs
Depending on how you and your partner managed expenses, this process may sound cumbersome. Nonetheless, you need to take a wholistic approach to the budgeting process to ensure you are not letting anything slip through the cracks. Stick to your budget and be reasonable when spending money. It is not unheard of for spouses to be held liable for making wasteful spending decisions to deplete assets during divorce proceedings.
- Beneficiaries: It is likely that your spouse is set up to receive all of your financial assets upon your death including proceeds from life insurance policies. Beneficiaries on financial accounts often supersede a will and surpass the probate process. Suffice to say, if you are going through a divorce, and you pass away before it is finalized, you may have wished assets were distributed differently than you originally planned. Review your financial accounts and ensure beneficiary designations are updated to reflect your wishes in case of an untimely death before your divorce is finalized. Likewise, a divorce decree does not usually automatically change a beneficiary designation. Remembering to change this designation in a timely way can save your heirs a headache that you don’t want them to have. This is especially important if you have children with a partner that is not the person you are currently divorcing.
After Your Divorce is Finalized
Now that your divorce is finalized, you have a better idea of what the road ahead will look like. Regardless of your feelings regarding the judgement, it is time to face the music and move on with your life. A great first step is understanding your finances and balancing your goals with your new reality.
- Account Clean-Up: It is time to review those accounts you listed when making your personal financial statement. Start by closing any joint accounts you have with your ex-spouse. Your finances no longer need to be combined and it is best to ensure you are removed from any account your ex still has access to.
- Financial Planning: It’s time to re-engage your financial advisor. You now have a clear picture of your assets and liabilities moving forward; bring this information to a trusted financial advisor to start building a path to your future goals. Consider the following questions when preparing to meet with an advisor:
- What assets are you expected to retain?
- What types of accounts do you need to hold those assets (bank account, retirement account, brokerage account, etc.)
- What is your housing situation and do you need to buy a new home?
- What is your monthly income?
- What are your monthly expenses?
- What are your retirement expectations?
Answering these key questions can help you understand where you are and what changes you may need to make to ensure you are living a financially sound lifestyle. Ask your advisor to help you create a monthly budget that considers any new income and expenses as a result of your divorce. They can also help create retirement projections based on your current assets and expected monthly budget. You may need to make adjustments to your lifestyle to ensure a bright future. Keep in mind that this is a starting point and you can improve your picture with a sound plan of action.
- Estate Planning: Once you’ve taken the steps to open your accounts and secure your portion of the assets from the divorce, it is appropriate to update your will. This will ensure that your wishes are honored in the event of your passing. Find an attorney in your jurisdiction to set up a new will as prior versions likely included your ex-spouse. When planning your estate, it is also appropriate to do an additional review of your financial accounts to ensure your beneficiary designations are correct.
- Implementing Changes: Now that you know what you will retain ownership over in the divorce and how your budget will operate moving forward, it is time to implement those changes. You may need to consider getting a job, finding health insurance, paying alimony, or paying for childcare expenses. The terms of your divorce mixed with your new budget will inform what you need to do to make your life work. All of these changes can cause stress and you should keep a close eye on your mental health. Consider working with a life coach or counselor to help manage all of the changes. With a clear plan in place and tools to manage your stress, you will be on strong footing to manifest a wonderful new beginning.