Divorces are tough. From lawyer fees to settlements, a lot of money is on the line. Given how common divorce is, it shouldn’t be surprising that every year there are guys tripped up by the most common financial mistakes. Here’s the facts on the ten most common financial mistakes to avoid during divorce:
Anger Driven Financial Mistakes to Avoid
Your life is probably pretty rough right now. While it is perfectly normal (and healthy) to experience anger, sadness and despair, keep your logical hat on during the divorce settlement and avoid emotional decision making.
- Believing you should Keep the Home
Deciding whether or not to keep your family home is an emotional decision, especially if you raised your children in the house. It may seem ideal and comfortable to stay living in your home after going through a divorce, but it may not make financial sense to do so. Perhaps you and your spouse contributed to the mortgage before the divorce. Can you afford the mortgage payment, the taxes, and the monthly bills on your own? Will you be able to run the air conditioner on your salary? It doesn’t matter how attached you are to the family home; it is not worth going bankrupt over. You can take your memories with you to a new home. Becoming house poor is one of the most common financial mistakes to avoid.
- Sacrificing Financial Security for Luxuries
There are many aspects of divorce that are just no fun at all. The lives of your entire family are going to be uprooted and disturbed. There is no way around it. While you may want to keep as much as possible the same for the sake of your children, do not sacrifice your financial security to do so. Kids are surprisingly resilient. While they may not enjoy leaving the private school they currently attend or giving up the expensive horseback riding lessons, they will survive. It is not worth going into debt over, so be cautious about negotiating these items into a divorce settlement. The horseback riding lessons won’t do much for your child if you cannot afford the mortgage payment because of them.
- Becoming Exhausted During Settlement
We all want divorce to be in the rearview mirror as quickly as possible, but the truth is that it isn’t a quick process. It can take many months (or even years) to settle, especially if you are fighting with your wife. After all of the pain and heartache, you’re probably exhausted and ready to sign for whatever her lawyer puts in front of you.
Don’t give in just because you’re tired of fighting, or want to move on.
However, signing out of exhaustion could end up costing you big time. Don’t give in just because you’re tired of fighting or want to move on. You’ve come this far. You can go a little longer. Exhaustive decision making is one of the most common financial mistakes to avoid.
- Seeking Revenge
Revenge probably sounds pretty good when you are going through a divorce. You may think that undermining your spouse will be worth it no matter what the cost. Be cautious though, because attorney and specialist fees can add up quickly. Is it worth it? You may try your best to seek revenge and still not feel any better when it is all said and done. Be realistic and try to see the big picture.
- Not Considering Insurance
The cost of insurance can be high, so it’s critical that you include the cost in your post-divorce budget. Life insurance is especially important if there are kids involved. If you’re the one paying support after the divorce and you die, what will happen to your children? If you are the one receiving support and your ex-wife passes away, how will you provide for the children? These are questions you must address during a divorce. Consider requiring you, your spouse (or both) to hold disability and life insurance if there are children in the picture.
Understand When You Need a Professional Opinion
Unless you are a financial expert yourself, sometimes it’s best if you call in a professional to help you dodge these common mistakes.
- Underestimating Expenses
You may know exactly how much you make each month, but do you know where your money goes week by week? Devote some time and make a detailed list. Open up your credit card statement, your bank account any other accounts you have that you might use to pay expenses (i.e. PayPal, etc.). Go through at least three months of information to ensure you get any bills that might be due quarterly. Write it all down. Create a budget. Share it with your lawyer. Know where your money goes and what your current expenses are.
- Believing all Assets are Equal
It might be difficult to think about the future, but looking 10 or 20 years down the road might save you a lot of financial headaches. For example, your spouse may try to convince you to settle on an investment because it is growing in value. However, that investment could tank tomorrow. You might want to hire a financial expert to review the proposed settlement agreement to look into long-term financial consequences. Not all assets are equal. Investments are much riskier than liquid assets. Make sure you thoroughly evaluate each asset to ensure you are getting a fair deal.
- Relying Exclusively on Lawyers
Lawyers know the law, and they probably do their best to help you out as much as they can. But lawyers are not financial gurus. If they have been in the divorce business for a while, they probably have picked up a few things but are by no means experts. You may need to consult with a financial advisor or planner to help review your financial documents, especially if your finances are complicated. Don’t always rely exclusively on your lawyer’s advice and experience. No two divorces are the same.
- Being Ignorant of the True Costs
When you are in the moment, it is easy only to look at only current values of investments and assets. You may not even think to consider liquidation expenses. For example, if you maintain ownership of a rental property and eventually choose to sell it, you could get stuck with substantial tax and realtor fees. When you are negotiating your divorce settlement, always think of considerations such as depreciation recapture, capital gains and costs of selling.
- Forgetting about Taxes
Divorce settlements consist of a bunch of moving pieces. Don’t make the potentially costly mistake of forgetting about the tax piece of divorce. Consider what tax exemptions and breaks you claim as a couple and decide how you are going to split them. For example, are you going to trade off on a child exemption year after year? Who will get to claim the “head of household” status? These are two potentially considerable savings. Furthermore, consider how alimony payments are taxed when determining what works best for your individual situation. Lump sum payments may be taxed differently than monthly payments. Do your homework or hire a professional consultant.
The Financial Stakes Are High During Divorce
There are lots of big decisions to make during divorce that could impact your entire life. While you may feel as if you can handle the decisions on your own, consulting an expert or doing research can help you avoid big financial trouble down the road. Don’t let yourself be one of the guys who makes the most common financial mistakes of divorce.
Did you dodge a financial bullet during your divorce? Tell us your tale in the comments below.
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