Thinking About Divorce? What you Need to Know About Your Finances First

Have you been thinking about getting divorced and don’t know where to start with getting your finances in order? The good news is that it boils down to getting a handle on just a few topics. That’s enough to get you started.

There’s no part of divorce that’s easy. But uncertainty about money can keep women from initiating divorce, and make it harder to thrive afterward. With money issues being one of the top reasons people get divorced, it makes sense that it complicates the process.

There are two main buckets of items you need to consider if you’re thinking of splitting.

#1 – income/expenses/cash flow.

#2 – assets and liabilities.

Cash Flow

Ok, so number one is income, expenses and cash flow. You need to assess 5 things:

1.        Your own income situation – are you working and earning your own income? Is it enough to support yourself (and kids if you have them)? In a high cost of living area like I live in, the answer is often “no”. Then you’ll need to figure out how you’re going to make more money.

2.        Your spouse’s income situation – is your spouse employed? What is their income compared to yours? Is it regular and consistent?

3.        What are your expenses? – the reality is that two households cost more than one. Divorce is always going to be more expensive. Can you cut expenses to make it work? Suck it up for a short amount of time in a smaller apartment? This is the time to get real about wants v. needs.

4.        Child support (if you have kids) – you need to assess if you will be likely to get support awarded during your divorce. If you agree on 50/50 custody, and you make about the same amount of money as your ex, you likely won’t get support. In all other cases, you might. California has a guideline support calculator. Most other states have them too. It’s worth searching out these calculators to see what they say. However – child support doesn’t last forever and you still need to have a plan for what you’ll do if you don’t get paid. I don’t love it when women have to depend on support to pay their bills.

5.        Spousal support (i.e. Alimony) – this is where it gets super tricky. And this is probably the hardest item to predict ahead of actually going through the process. If your spouse makes tons more money than you, and you have a long-term marriage, you may be entitled to spousal support. But don’t count on it, and don’t count on receiving it even if you should.

In the situations where I’ve seen women thrive after divorce, they had their own income, they faced their finances head on, and they planned ahead with a budget for before, during, and after divorce/support.

Assets/Liabilities

Number two is the “marital estate”. Many people jump to this part before figuring out the cash flow situation. The reason I tackle it second is because the cash flow situation may impact how you decide to divvy up the assets.

You need to sit down and write out all your marital assets, what kind of asset it is, what the value of it is, and also any liabilities as well. States have different laws, but in general, assets that are acquired, earned, or grown during the marriage are marital assets and subject to division in the divorce.

Another thing to know is that your marital property begins the day you get married and ends on the date of separation. That’s not the date of divorce, and the definition of separation can be different across states.

Now that we’ve covered that, here are six key things to consider:

1.        Lots of women want to keep the house or other real estate. I get this. But equity in a house cannot buy groceries, or pay for kids’ activities. Liquid money is better than illiquid money.

2.        A dollar is not a dollar is not a dollar. A dollar in a pre-tax retirement account is not the same as a dollar in a bank account, is not the same as a dollar in a brokerage account. The after-tax value needs to be calculated.

3.        Just because one party’s name is on the account, doesn’t mean they get that money. If it’s part of the marital estate, it can be divided. There can be “separate property”. An example of this is an inheritance you get during the marriage that you keep in a separate account. That’s yours as long as you don’t comingle it with your marital money. Another example is an asset that was acquired before the marriage like a retirement account from an old job. This can be separate also.

4.        Liabilities/Loans have to be divvied up too. You don’t want to have your credit trashed because your ex didn’t pay the mortgage or car payment. You need to know whose name is on the loan and think about getting your name off it during the divorce.

5.        Assets/Liabilities can be divided before, during, or after the divorce. However, there are legal rules concerning what can be done with accounts once the actual process is started. And, if the asset is divided after divorce, you need to make sure you’ve got language in your agreement about what happens if x, y, or z occurs.

6.        Assets can be traded in lieu of support. This is key and there are definitely pros and cons. And also why it’s really important to understand your cash flow first to know what you need.

Divorces can get bogged down arguing over these topics. I’ve seen divorces go to court about the value of an asset, whether it was kept separate, what was the actual date of separation, the tax rate to calculate the after-tax value, etc. Almost everything can be argued over if you want to. But do you??? Know where you’re willing to give (and find someone to help you assess whether it’s worth arguing).

A Word on Mediation

One more thing to know. If you can find a way to mediate your divorce, this is the way to go. It’s so much cheaper (think $5,000 compared to $20,000 plus), can get done quicker, and leaves you in a better position to negotiate for yourself. Mediation can be a great option when your divorce is amicable (lots of divorces are amicable, until they’re not), but it’s worth trying even when it’s not.

I always recommend interviewing a couple of mediators and looking for one who will knock your heads together and get it done. Not one that drags out the process and keeps asking you both what you want as if it’s therapy.

However, in mediation, you’ll still need an attorney to consult with, even if it’s just to review the final agreement. This ensures that you have a set of eyes reviewing the agreement that has your interests in mind. The mediator is a neutral and won’t be able to tell you if something you’ve agreed to is detrimental to your future.

Divorce is hard. I get it. Taking control of the financial side of things will make it easier. Arm yourself with the knowledge of your own situation, and decide what’s the best outcome for your new future. If you need help figuring it out, please set up an intro call.