- \ Gerard Gruber
- December 13, 2021
Divorce is one of those life events no one wants to consider as a possibility, let alone plan for, yet more than forty percent of all first marriages end in divorce. So, the first thing to recognize if you are going through a divorce is you...
Prepare for a drop in income
Many divorces end with one or both spouses experiencing a drop in income, which may force some lifestyle changes. In anticipation of that, create a spending plan based on your post-divorce expenses, focusing first on your essential expenses (i.e., housing, food, utilities, insurance), including an amount to set aside for savings each month. You will want to ensure you have enough money set aside for emergencies. Then add non-essential expenses, prioritizing and cutting back if needed. Using a free personal finance app, such as Mint, can make the job of listing, categorizing, and tracking your expenses much more manageable.
Determine if you can or want to keep the house
For many divorcing couples, the disposition of the house is one of the most significant issues. You need to consider whether it makes financial sense to keep and live in the house if that’s an option. Many times, it doesn’t. Keep in mind that, though a house is a significant asset, it can’t necessarily help you pay the bills. In fact, it can often be a financial drain.
In most cases, the spouse who wants to keep the house must be able to qualify for a mortgage on their own, which may be difficult without sufficient income or credit standing. If the divorce settlement requires one spouse to buy out the other’s share in the house, it typically requires a cash-out refinance or swapping one spouse’s share with another asset of similar value. You also have to consider the costs of maintenance, insurance, and property taxes.
The alternative is to agree to sell the house and use the proceeds to find a more suitable living arrangement. If that is the more likely case, it would be important to search for options ahead of the divorce settlement to have something lined up.
Take inventory
The moment you start contemplating divorce, gather all your financial statements, including bank accounts, brokerage accounts, life insurance cash values, retirement accounts (both individual and company-sponsored plans), real estate deeds, business valuations, and trusts. List all assets, how they’re owned (individually or joint), and assign a value to each. If one spouse has a pension benefit through work, it will be important to know the benefits’ present and future value to determine an equitable split. A pension evaluator can help you with that.
You will also need to gather information on wages, investment income, and other income sources. That can best be obtained with past tax returns covering at least three years.
Finally, create a list of all debts, including credit cards, bank loans, car loans, student loans, life insurance, or retirement plan loans, and who originated them. Typically, all debt created during a marriage accrues equally to both spouses, but you should know what you’re dealing with ahead of time.
You will go through a similar exercise during the divorce proceedings, but it’s essential to have this done ahead of time if you have any questions or need any clarifications.
Factor in tax liabilities
As part of the inventory exercise, it’s important to determine the after-tax value of each asset. For example, if one of the assets is a 401(k) plan worth $100,000, it will have considerably less value than a $100,000 bank CD. For each asset, you need to know the equivalent after-tax value before you start a split negotiation. A CPA or tax professional can help with that.
Obtain Separate Credit
If all your credit accounts are held jointly, it would be important to establish separate credit immediately. It’s not unusual for credit access to become more difficult following a divorce as one of the spouses may not have well-established credit. If your credit score is not the best, you can start building your credit by charging monthly expenses, such as groceries, and paying the balance in full each month. By all means, don’t start accumulating a debt balance.
Create a Financial Plan
Even though all your finances have yet to be settled in the divorce, it’s never too early to start planning for the future. It is strongly recommended that you consult with an independent, objective financial planner who can guide you through the process of establishing clearly defined financial goals and then mapping out a plan for achieving them – both in the short term and the long term. This is especially important to help you stay focused as all the emotional aspects of divorce begin to cascade around you. When it comes to your personal finances, it is vital to keep your emotions out of your decision-making.
My name is Gerard Gruber and I am a Certified Divorce Financial Analyst (DFA®) serving clients locally in Westport, CT and virtually across the country. If you’re looking for a financial advisor you can trust to help you navigate this next chapter, I encourage you to reach out to me today by calling the office directly. I look forward to helping you move smoothly through this journey.
This information is for general purposes and is not intended to provide specific investment advice or recommendations. Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. Individuals should always consult their own financial or tax advisor regarding their specific situation before acting on any information provided. Harbor West and Geneos Wealth Management, Inc. do not provide tax or legal advice.
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