The two things that people worry about most in divorce are their money and their kids. Unfortunately, worrying about money doesn’t prevent those same people from making enormous financial mistakes in divorce.
Here is a list of the top financial mistakes people make in divorce. Once you know them, you can (hopefully) avoid making them yourself.
Top 10 Financial Mistakes in Divorce
1. Not taking the time to do an accurate post-divorce budget BEFORE you settle!
Doing a budget is a hassle. Roughly two-thirds of Americans don’t make (let alone follow!) a budget. But trying to settle your divorce case without making a budget is like trying to drive from Texas to New York without a map. You can do it, but you are probably going to get lost a lot along the way.
In order to know whether you are going to have enough money to survive post-divorce, you have to figure out how much money you will be bringing in and how much money you will be spending once you are on your own. For example, before you fight to keep your house, you have to know whether you can afford to keep your house after divorce. Before you agree to pay for everything for the kids, you've got to know what "everything" costs!
Yet, compiling your budget alone isn't enough. What's equally important is knowing that your numbers are accurate! If your budget is based on estimates of what you “think” you spend, you may be shocked after your divorce to learn that you need to work three jobs just to survive.
2. Not insisting on getting all of your (and your spouse’s) financial documents.
No one likes to spend days digging up and organizing old financial documents. It is even worse if you don’t happen to be the best record-keeper on the planet. Digging through closets and dresser drawers of disorganized paperwork is definitely not fun. But having that information is absolutely essential if you want to settle your divorce fairly.
There is no way you can accurately divide up your assets if you don't know what they are. You can't possibly divide up your credit cards without knowing how much you owe. As painful as gathering financial information may be, when you're getting a divorce you have no choice. Knowledge isn't just power. It's everything.
Nothing causes people to make more divorce money mistakes than not getting the financial documents that show whether their budget and balance sheet are accurate reports of their financial situation or simply creative fiction.
3. Not getting assets valued.
Getting your house appraised when you are getting a divorce is a hassle. It takes time and costs money. But the only way to really know what your house is worth is either to sell it or get it appraised. If you choose not to do either, that's fine. Just know that, if you do that, whatever you value your house at may be wildly different from what it is actually worth.
The same thing is true for pensions. Unless you hire an actuary to figure out what the present value of a pension is today, you can’t know what it is really worth.
Dividing assets without knowing what they are worth is almost guaranteed to be a mistake for either you or your spouse (depending upon which one of you ends up with the short end of the stick).
4. Not looking at (and understanding!) all of your financial documents.
It is not enough to get the financial documents that show the state of your family’s finances. You actually have to read them and understand them!
If you are a numbers person, and you geek out when you look at spreadsheets and financial documents, awesome! You are going to have a field day going over the numbers in your divorce.
If going over numbers makes your head spin and your eyes glaze over, all I can say is: You’re going to have to suck it up and learn. Or risk getting screwed. It’s up to you.
5. Relying on your lawyer to do everything.
Having a lawyer to help you in your divorce is a wonderful thing. But, contrary to what some lawyers believe, they CAN'T do everything!
Divorce lawyers may be great at giving legal advice in your divorce, but they may not be the best professional to help you analyze your financial documents. If your finances are complicated, if you own multiple businesses, or have lots of different investments, you may need to either consult with a divorce financial planner or hire a divorce attorney who has a strong financial background.
It is also a huge mistake not to carefully review your financial documents yourself. No matter how financially savvy your lawyer is, s/he is not going to be as familiar with your life and your finances as you are! Your lawyer may not be able to spot expenses that don’t make sense or other financial red flags the same way that you can.
6. Not understanding how taxes will affect your support and settlement.
There is no way you can know how much your divorce settlement is really worth without understanding how taxes will affect that settlement.
You may think you are getting $100,000 in your divorce. If that money happens to be sitting in a savings account, then, yes, you may get $100,000. But, if that money is in a retirement account, you will have to pay taxes, and possibly a penalty, when you withdraw it. So that $100,000 will be considerably less once it is in your pocket.
Taxes can also affect your cash flow as well.
It used to be that maintenance/alimony/spousal support was tax deductible to the person who paid it and taxable income to the person who received it. That is no longer true.
Now, the person who earns income pays the taxes on it. There is no more alimony tax deduction. That means that taxes are paid at the higher wage earner's income level. That also means there is generally less cash left in everyone's pocket at the end of the day. (... except, of course, Uncle Sam!)
7. Forgetting about the long term.
Negotiating a support agreement that will allow you to live after the divorce is critical. But, unless you are going to be getting support for the rest of your life (which is extremely unlikely these days), you have to plan for the time when your support runs out.
Now is the time to invest in yourself and your own education. If you are unemployed or underemployed, it is time to retool and retrain yourself. You need to put yourself in the best possible position to support yourself at the highest level once your support ends. You would also be wise to save as much money as you can while you are getting support so that you will have a nest egg to fall back on once your support ends.
If you are the person paying support, your biggest potential mistake is in not locking down the exact terms of support in your divorce judgment. Your long term financial security depends on knowing how long you will have to pay support, whether your support amount is modifiable, and whether support can be extended for any reason. If your divorce judgment is unclear, you may find years later that you end up paying more support for a longer time than you expected.
8. Not thinking about insurance.
Lots of different types of insurance can affect your divorce settlement. Not thinking about all of them before you get a divorce can be a huge mistake.
Life Insurance
If you have kids, having life insurance on both you AND your spouse is critical. Why? Well, if you're supporting your kids and you die, what will happen to your kids? Who will pay for their food, housing, and education?
Even if you're not the primary breadwinner in the family, but you are the primary caretaker for your kids, what will happen to your kids if you die? Sure, your spouse may have enough money to support the kids now. But what happens when your spouse not only has to work full time and support the kids, but also has to become the kids' primary caretaker too? Can your spouse support the kids AND pay the cost of child care AND pay for a housekeeper too?
You've got to think of these things before you get divorced.
Health Insurance
In addition to life insurance, you've also got to consider how you will pay for health insurance as well. Lots of people wrongly assume that they can just get COBRA coverage after their divorce. They also assume that the premiums will be the same as what their spouse is currently paying based on his/her employer's policy.
Neither of those are safe assumptions.
First, COBRA isn't available to everyone. Second, even if COBRA is available to you, the cost will likely be substantially more than what your spouse is paying for his/her "portion" of the premium. (What you may not realize is that your spouse's employer is also paying a portion of the premium as well. Once you divorce, YOU become responsible for paying the WHOLE premium yourself.)
The bottom line is that failing to figure the cost of health insurance into your post-divorce budget can be a HUGE financial mistake.
9. Sacrificing your own financial security for your children.
We all want the best for our kids. We all want to shield our children as much as possible from the ravages of divorce. But there is a reason that flight attendants tell you to put your own oxygen mask on before you put a mask on your kid.
If you don’t have enough money to survive, your kids won’t survive either. If you're dipping into your retirement funds to pay for traveling soccer, you're going to have a bigger problem down the road. Your kids need to understand the value of money. They're not going to learn that if you lie to them and say everything is fine when you're on your way to financial ruin.
You are not doing your kids any favors if you negotiate a settlement that requires you and your ex to keep your kids in private school or expensive extracurricular activities if doing so means you can’t pay the mortgage. While no one wants to see their kids standard of living drop after divorce, no one wants to be a financial burden on their kids later in life either. Yet, if you spend your retirement money on your kids' activities, that could be exactly how you end up.
10. Making settlement decisions out of exhaustion.
Divorce is a marathon, not a sprint. Unfortunately, for most people, the most significant settlement negotiations occur at the end of the case, after you have spent months or years fighting with your spouse.
By the time you get to the end of your divorce, you are tired. You want to be done. So you give in and agree to a settlement just to be able to move on with your life. Sometimes, that works out okay. But other times, it's a disaster.
There is value in putting your divorce behind you. But settling your divorce on terms that leave you without enough money to survive is a huge financial mistake.
Avoiding Financial Mistakes in Divorce
Avoiding these, and other, financial mistakes in divorce isn't hard. But you can't avoid them unless and until you know they're a problem.
Awareness is the first step in avoiding any mistake, financial or otherwise.
In divorce, that awareness starts with education. You've got to KNOW how finances work before you can make the best financial decisions. You've got to KNOW what your post-divorce financial reality is likely to look like BEFORE you settle your divorce so that you can make sure you're on solid financial ground afterward.
Armed with the right education, you'll be prepared to make better financial decisions. When you make better financial decisions you'll be able to avoid making the biggest financial mistakes in divorce.
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This post was originally published on March 18, 2018 and updated on June 21, 2023.
Attorneys are not experts in financial matters. Be sure to get advice from a finance person. I got valuable free advice from my personal banker at my bank branch office. This person knew a lot of details that my lawyer did not.
Actually, some lawyers are financial experts, but generally that is because they are also tax attorneys, CPAs, or CDFAs. But, you make a good point. Good divorce lawyers have a solid, general knowledge of a lot of areas, including divorce-related financial issues. But no one knows everything. If you want more detailed or specific financial information, it makes sense to seek out a financial professional.
Karen
Thank you and thank you!
You’re welcome!
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