When navigating your changing family dynamics along with the legal system during a divorce, addressing your financial needs can feel overwhelming. But organizing your finances to understand your spending patterns, assets and debt is the first step to gaining the confidence needed to make sound financial decisions. Here are key mistakes divorcing women make and ways to avoid them:
Keeping a house they cannot afford without understanding the trade-offs
- Have projections run showing the long-term impact if you keep the house forever, sell during the process and receive retirement assets or downsize in 2, 4 or 10 years. Keep in mind you may need to have received six months of maintenance /child support before using it to qualify for a mortgage on a new house or a refinance. While you may feel your kids need the stability of the marital home, if the mortgage is stressing you out it won’t be worth it. They need a happy mom more.
Not budgeting or adjusting their lifestyle to their post-divorce income level
- Find a system to keep track of your spending that works for you. This Divorce Expense Worksheet or Mint.com are helpful tools. Use filling out your Financial Affidavit as the start of budgeting to your new expected income level. Have an honest conversation with your children about how your lifestyle will change.
Failing to close joint credit cards and loans
- It’s important to get a credit report during the divorce to make sure all debts are accounted for in your agreement and to close any joint accounts immediately after the divorce. Annualcreditreport.com or creditkarma.com are good resources. Keep checking your credit until you confirm any debts your ex-spouse is responsible for are closed.
Not properly executing a QDRO (Qualified Domestic Relations Order)
- To receive your portion of a qualified retirement account in a company plan you need to make sure a QDRO is prepared in line with the company rules before the divorce is settled and executed as soon as the divorced is finalized. Do not wait until your ex-spouse retires!
Not understanding how social security works in a divorce
- You need to be married 10 years to qualify for your ex-spouse’s social security. Once you hit that milestone and if you do not remarry, you will qualify after age 62 for the greater of your own social security benefit or half of your ex-spouse even if he remarries.
Not understanding why some assets that are valued the same are not equivalent in their worth
- Retirement assets will have income tax due on them but will likely grow at a faster rate than a house and will not have the upkeep expense. It’s important to have your advisors calculate your tax basis and taxable gain of investments and address how a tax refund will be split.
Not negotiating for a split of miles and hotel points
- While the value of these on paper is often minimal, I find the anger and frustration women feel if they are not included in the settlement to be significant.
Keep in mind your Marital Settlement Agreement (MSA) is a legal document you can only enforce by going back to an attorney and potentially court. Think through the practical issues of implementing with your attorney and our BDF team before you sign. Use your divorce as an opportunity to take control over your finances to create the full life you want. Read our blog “When I do Becomes I Don’t: Five Strategies for a Financially Responsible Divorce” for more tips.
Heather L. Locus, CPA, CFP®, CDFA® is a BDF Owner, founder of our Women’s Service Team and leads our Divorce Practice Group. She loves solving complex problems by balancing the financial and emotional components with tax and legal issues. Heather frequently presents “The Financially Responsible Woman: Five Strategies for a Full Life” and “When I do Becomes I Don’t: Five Strategies for a Financially Responsible Divorce”. She educates parents on instilling their values and work ethic through her presentation, “Raising Financially Intelligent Children”. Heather has contributed to various publications including The Wall Street Journal, Crain’s Chicago Business, the AARP Bulletin and Divorce Magazine. Heather serves on the Board of Directors for the Young Women’s Leadership Charter School of Chicago and is a member of the Chicago Estate Planning Council and Financial Planning Association.