It’s easy to make financial mistakes when you’re in the midst of a divorce – and unfortunately, these mistakes can be costly. Here are 5 common pitfalls and how to avoid them.
Pitfall #1: Letting your emotions determine your path. Money is always emotional, but divorce amplifies this reality many times over. This is probably the time when you are least able to sort through the necessary decisions easily, but you need to make careful decisions now – your long-term-financial health depends on it. Do not, for example, be too anxious to get closure. Rushing to sign a divorce agreement because you “just want to get it over with” can spell the difference between a secure retirement and a strained one.
What to do: Reach out to a trusted friend for advice. A friend or family member with your best interests at heart can lend you the clarity and energy for the next steps you need to tackle. Share a glass of wine, talk, cry, and accept the support you need. If your friend has been through a divorce herself, she may even recommend a great divorce attorney or divorce financial planner. If so, listen up! With your emotions all over the map, you need trusted advisers to guide you toward decisions that honor your priorities and align with your long-term goals. It’s okay to let your support network carry you a little bit just now.
Pitfall #2: Failing to understand your financial picture. Many of us get into the habit of letting our spouses handle the family finances, or of compartmentalizing the family finances so that while we may be expert in one area (e.g., the household accounts) we are out of the loop in others (e.g., a family business.) This is normal – and often an efficient way to handling things. But if you decide to divorce, you need to understand that you can’t arrive at a fair settlement if you don’t have a clear and comprehensive picture of your financial situation.
What to do: Start getting up to speed on your financial picture right away. First, make sure you have access to all bank and investment account passwords and documents, and your recent tax returns. Check your credit reports for discrepancies. This may feel overwhelming at first. Fortunately, educating yourself about your finances doesn’t have to be something you tackle alone. Once you have gathered all your financial statements, your financial planner can help you organize and interpret this critical data.
Pitfall #3: Accepting your spouse’s word about family assets. You may be tempted to check out mentally, but you will get much closer to a fair settlement by staying attentive, engaged, and above all, skeptical throughout this process. Even if the negotiations are proceeding amicably, do not simply believe everything your spouse says about his finances. Verify the facts independently and document, document, document.
What to do: Demand financial documentation. Pay close attention to your spouse’s lifestyle and spending habits. If you suspect your spouse is being less than forthcoming about his income or assets, ask your lawyer for advice immediately. Your lawyer may recommend consulting a forensic accountant to uncover your spouse’s assets. You may also be able to force your spouse to produce financial documentation in court.
Pitfall #4. Clinging to the family home. It is easy to feel that you need to keep the house no matter what, because you’ve lived there for years and it represents home for the kids. This impulse is understandable, but now that your financial landscape it about to change (perhaps drastically), it is not necessarily wise.
What to do: Do the math, then be brutally honest with yourself. Will you have enough future income to maintain the house? Remember, maintaining the house means more than paying the mortgage; it means covering utilities, upkeep, and repairs as well. Once you set aside your emotional attachment to the family home, you may realize that moving to a small condo is best for your peace of mind.
Pitfall #5: Focusing on petty property battles rather than the big picture. As you take inventory and divide up assets, it’s easy to get caught up in battles over relatively minor possessions like furniture or memorabilia. This sucks up time and energy you and your lawyer should be spending on bigger questions like alimony, child support, or the house.
What to do: Be a savvy negotiator. Be willing to compromise on non-essentials, and save your legal and emotional resources for battles that will make a real difference in your long-term financial wellbeing.