Getting ahold of your finances during divorce.
Now that you and your spouse have decided that you are getting a divorce, your next decision should be how to handle the finances not only during the divorce, but after. This can be a difficult and daunting task, especially if you are the spouse that did not pay the bills or handle the money in your marriage. If you are the spouse that paid bills and handled the money issues, this concept can cause you stress as well. You are looking at the family finances and wondering how you can support two (2) households with the same income, and thinking it is unfair to ask you to support two (2) households with the same income. Discussing finances will help ensure you have a financial life after the divorce.
Paying your bills during the divorce: Understanding your spending is the first task. You and your spouse should sit down and discuss how regular household bills will be paid while the divorce is pending. You both should discuss your finances, daily and weekly spending, and agree together on what bills should be paid by whom. This may seem like an impossible task, but it is a task worth undertaking. Imagine for a moment that you and your spouse refuse to discuss how the regular household expenses will be paid while the divorce is pending. He thinks she is paying the mortgage because she is residing in the home and he moved out. She thinks he is paying the mortgage because he paid the mortgage during the marriage. Meanwhile, no one pays the mortgage. Not only will this hurt your credit score, which you will want to maintain in good condition after the divorce, but now you have the added uncertainty of whether you could lose your home to foreclosure or have to sell it in a short sale to avoid foreclosure, all because you and your spouse did not sit down and discuss the finances.
A great idea for paying household expenses is for the joint account to be used exclusively for regular household bills, and each spouse contributes a portion of his or her paycheck to that account. The remainder can be for the spouse to spend without questions from the other. This ensures bills will be paid and that some measure of privacy is achieved between you and your spouse while divorcing. If a joint account is not agreeable, then divide up the regular household bills, taking into consideration whether one spouse is moving out and will be paying separate expenses. After assigning the bills and expenses, each must hold up their end of the bargain. If after a month or two, you determine that the split does not work, then meet again with your spouse to re-assign the bills and expenses. Keeping an open line of communication and a common goal of paying all expenses will get and keep you on track during your divorce.
Credit report: You might consider obtaining your credit report to make sure it is accurate and that all bills are paid on time and reported as paid on time. This will help you obtain car insurance, favorable interest rates and help you rebuild after the divorce process is over and you are on your own. This may also notify you if your spouse has taken out additional credit cards or loans without your knowledge or consent.
Track your spending: Tracking your spending will help you determine where you may need to cut back your spending during the divorce process. Hiring an attorney is expensive, and your attorney will want to be paid. Many families cannot afford to pay a retainer or subsequent attorney fees out of their monthly income and will have to dip into savings or investments to pay their attorney. You and your spouse should discuss this. Is there a savings account you both agree to use to pay attorney fees and costs? Earmarking funds is a very smart way to control the costs of a divorce and a great way to reduce the stress that comes with receiving a bill from your attorney. Planning for the attorneys’ fees will ensure a successful resolution. You have heard the expression, “failing to plan is planning to fail”. If you and your spouse agree beforehand what you are willing to spend on attorneys, and you convey that plan to your attorneys, everyone can work together to carry out that plan.
Know your assets and liabilities: Take a look at what all of the assets and liabilities are. Not just yours, your spouse’s as well. Even if your name is not on a liability, it will still impact your divorce. Knowing every asset or liability in your name, your spouse’s name and any that are titled jointly will help you figure out what you are splitting in the divorce, and how a fair split can be attained. You also need to understand that not all assets are equal. For example, if you have a 401(k) valued at $150,000.00, and an investment account valued at $150,000.00, they are not assets of equal value. The monies in the 401(k) are pre-tax dollars, therefore the actual value of the account is reduced by your effective tax rate at the time in which you are liquidating or drawing down that asset.
During the divorce, and before you have negotiated a settlement, is a great time to discuss your finances with a financial planner. Most financial planners will meet with you at least one (1) time free of charge to help you understand your assets and explain to you why you might want to keep or give up certain assets in a divorce. For example, many times, one spouse wants to retain the marital residence and will give up retirement assets to keep that residence. This may not be an equal or even a good trade-off. Houses generally are not liquid, and owning your house does not help pay the monthly bills and expenses. It also will not provide you an income during your retirement, if you are living in your home when you are retired. A more beneficial financial plan may be to agree to sell the home, split the net sale proceeds and equally share the retirement assets. In addition, your financial planner can help you figure out a monthly budget and what you need to maintain that budget and to achieve your financial goals. A financial planner can also help you understand how your assets will perform in 5 years and 10 years, so you can make smarter decisions about which assets you may want to keep.
Keeping ahold of your finances
Re-evaluate your budget. Re-evaluate your budget before you settle your case. Is it working for you? Are you spending more in certain areas and less in others? Are there things you can do without in order to get other things of greater value? You should be meeting with your lawyer before engaging in settlement negotiations or attending mediation. That meeting is a great time to discuss with your lawyer your goals, budget and your expectations. Your lawyer will tell you whether your goals, budget and expectations are reasonable or unattainable. If you hear that they are not reasonable or not attainable – you need to go back to the drawing board and re-vamp your budget. In most divorces, there is not enough money to go around after the split of assets and liabilities. This could mean you are receiving less alimony than you need or want because your spouse has less income available to give to you. Conversely, if you are the spouse that will be paying alimony, you will have less money each month to contribute towards your retirement or other financial goals, and you will want to evaluate that before attending mediation or negotiating a settlement.
After you have negotiated the settlement of your case, you should again re-evaluate your budget and make sure that you have positive cash flow. That means you have more money coming in than going out each month. You want to make sure that you can afford how you are living. If you cannot, and you are using credit cards or a line of credit to make regular monthly expenses or to pay for entertainment and meals out, you need to cut back on your spending.
Emergency fund: After your divorce is finalized, you will want to begin saving for and establishing an emergency fund. This will help ease the stress of a broken air conditioner unit in your house or needing to replace a car that is no longer running. A sensible emergency fund amount is six (6) months of expenses. For example, if you spend $5,000.00 per month on regular living expenses, then $30,000.00 is a sensible emergency fund amount.
Retirement: Once the dust has settled and several months have passed after your divorce, you should consider saving for retirement. It is likely that you split the retirement assets during your divorce and now do not have enough funds in your retirement to maintain your current lifestyle or to even support your current lifestyle upon your retirement. You can never save too much for retirement. Part of your retirement plan could be paying off the mortgage on your residence so you do not have that expense during your retirement. You will want to meet with your financial planner to help determine what you will have in retirement based upon your current retirement assets, and to figure out what you need to start saving to achieve your goals for retirement.
Check your documents: You may have prepared a will or assigned your ex-spouse as the beneficiary of a life insurance plan or a retirement plan. You will want to amend your documents to reflect a new beneficiary. You will also want to make sure your name is correct on all of your assets and documents if you restored your maiden name during the divorce. You may also find that you were carrying insurance, but no longer need to and can use those funds in another area of your budget.
Your divorce does not need to throw you into financial chaos. Keeping open lines of communication, keeping your word and re-evaluating your budget every step of the way will help keep chaos at bay.