Statistics show that divorce directly affects over 4 million people each year – husbands, wives, children, parents, co-workers – every year! Some are taken by surprise, and some never fully recover financially. During the traumatic time of divorce, it can make it harder to make rational decisions and unfortunately, the stakes are even higher when the choices made will impact the rest of your life.
As a Certified Divorce Financial Analyst (CDFA®), the women that meet with my firm come to become more educated and get more involved in their finances. They want to understand how their finances would shape up during and mainly, after their divorce. We help our client tackle all of the questions and concerns, but we mainly focus on avoiding the financial pitfalls that come with divorce and here are some of the biggest mistakes I see made:
1. Not Understanding Spending
Most people know exactly what they earn each month but can’t pinpoint exactly where their money goes. It is impossible to be fully confident that a divorce settlement is financially feasible without knowing how much money is spent every month.
Even when a couple is just beginning to consider going through with a divorce, they should start diligently tracking their daily and long-term expenses. Anyone can do this by simply recording all of their expenses in an Excel document and organizing them by daily, monthly, and yearly expenses, but this is often time consuming and extreme diligence. An easy alternative is using a budgeting app like Mint, which you input all of your credit card and/or bank account information, and it monitors all of your spending and bill payments on your phone or online. The app also allows you to easily create monthly budgets and set savings goals, which is a great tool to utilize if you are adjusting to large financial changes.
2. Failing to Consider the Long-Term
Focusing only on the most immediate tasks of splitting assets, alimony and child support, without taking into consideration what life might look like in five or ten years is a mistake. Neither spouse would want to be left in a financial bind once the ink is dry on his or her divorce settlement, having said yes to an agreement that does not work later on.
In order to see the full future financial picture, men and women should consider meeting with a Certified Financial Planner (CFP®) or a Certified Divorce Financial Analyst (CDFA®). A CDFA® is a financial professional who helps clients navigate divorce-related money issues, such as those involving taxes, asset distribution and financial planning. These professionals help model out how a divorce settlement might impact their finances, offering a clear view of his or her financial future.
3. Taking the House
Understandably, many women want to stay in their home, either to not disrupt the lives of their children or for sentimental reasons. However, failure to consider what will happen when child support and alimony run out down the road can spell trouble. Homeowners also typically underestimate annual ongoing maintenance and repair costs, mortgage payments, property tax, insurance, and an array of other expenses. Many women don’t realize that keeping the house can become their biggest financial burden.
With the recent tax law changes capping state and local taxes and real estate tax deductibility at $10,000 a year, house ownership has never been more expensive. Large costs aside, selling the marital home prior to finalizing the divorce will also make dividing the assets much easier because it will liquidate one of the largest shared investments.
4. Not Knowing All of the Assets
Being in the dark about money can be costly! Spouses who handled all of the finances during their marriage have an advantage over those who did not. Being aware of everything about the assets owned as a couple is not merely an option – it is a necessity.
It is essential to understand the value, location and tax aspects of those assets and debts. Property can include retirement, non-retirement and bank accounts, as well as real estate, future pensions, and social security. Debts overlooked, at times, including mortgages; student loans; retirement plan debt such as 401(k) loans; credit lines; credit cards; business loans with a personal guarantee; payday loans and personal loans. A less obvious asset is a tax loss carryforward, which can be extremely valuable because the IRS allows you to carry over a tax loss to future years to offset a profit in your investment accounts. Another worthy, but an overlooked asset, is frequent flier or credit card miles. A CDFA® can help to make sure no stone goes unturned, but it is crucial to stay involved in the marital finances during both marriage and divorce by frequently monitoring bank accounts, 401(k)s, credit card statements and daily spending.
5. Understanding Tax Impact
Clearly understanding the tax impact of taking one asset over another is vital. While two assets or investment accounts may have equal dollar values, their post-tax value could be vastly different. The pre- and post-tax value is especially important when comparing a 401(k) taxed at ordinary income tax rates when withdrawn to a checking account that can be pulled out tax-free.
Selling the house can also create a hefty tax bite. The sale of the primary residence can cause a tax burden if the profit for each owner is over $250,000. Taxes, coupled with selling costs, can take a massive bite out of the post-sale house proceeds leaving each spouse with much less money than expected. In this case, working with a Certified Public Accountant (CPA®), can help them gain a fuller understanding of the tax implications of selling the house and ideally keep them as limited as possible.
Although to women, all of this information can seem overwhelming. We remind our divorce financial planning clients that they do not have to face their divorce alone. We encourage them to build a strong support system of financial advisors, attorneys, therapists and divorce coaches to act as their advocate and to surround themselves with trusted friends and family to support them emotionally through this journey. The team your clients work with will be the greatest asset to protecting them from these mistakes!
If you’re interested in learning more about the services offered by Francis Financial, contact us for a free consultation by calling 212-374-9008 or emailing clientrelations@francisfinancial.com.
