More than half of all divorced women fear they will end up a “bag lady.” Even high net-worth women are concerned they’ll run out of money and won’t be able to support themselves or their families.
I get it: I’ve been there. Living through my own divorce — and advising the numerous women with whom I’ve worked — I’ve seen how all too often, given the financial and emotional toll divorce takes, women focus on “just getting through it” and turn their attention away from money matters.
Yes, divorce can be emotionally and financially devastating. But, it can also be a time of opportunity — a chance for a fresh start and to establish a solid financial foundation from which to build your next chapter — and your success depends on the steps you take. Here are five money mistakes to avoid during the divorce process.
1. Thinking Your Lawyer Is a Financial Expert
While a family law attorney generally assumes many roles throughout a case — a legal expert, a therapist, and even a shoulder to cry on — most divorce lawyers will agree that they are not financial experts. Having a solid understanding of the law does not equate to a solid understanding of things like how to value stock options; calculate the tax consideration of taking one asset over another; value a defined benefit retirement plan; or identify hidden income.
In order to ensure you receive the most equitable settlement possible, you need to equip yourself with a comprehensive team. This includes not only a family law attorney, but also a financial expert(s).
2. Letting Your Emotions Do the Talking
Whether it’s insisting on keeping the house before determining if you can really afford it; throwing in the towel before assessing your true financial snapshot; or sabotaging your settlement by posting libelous remarks about your estranged husband on Facebook at 1:00 a.m.; too often women make critical decisions about their divorce without thoroughly analyzing the impact their actions could have on their financial future. For example, retaining your home may be the greatest decision you make during your divorce, but it must be for economic reasons. Ignoring the fact that you may not be able to afford the property taxes, maintenance expenses, and homeowners insurance could be financially devastating.
3. Having No Access to Cash
Cash is king! Although it is wise to have a diversified list of assets on your balance sheet post-divorce, there is arguably no greater resource than a liquid asset during the year following a split. After all, you will likely have furniture to buy, dishes to replace, or a security deposit to provide.
Unfortunately, during divorce, many women do not have a comprehensive understanding of the assets that make up their balance sheet. Often times assets like automobiles, boats, and furniture (which are depreciating); retirement accounts (which have significant penalties and tax consequences if liquidated); and real estate (which can generate high carrying and closing costs) are selected over good old cash.
4. Not Adequately “Insuring" Child or Spousal Support Payments
Successfully negotiating the dollar amount of your support — child and/or spousal — is only the first step in securing that income. Next, you need to insure it, and life insurance policies are a great place to start.
Begin by checking whether your existing policies have death benefits large enough to cover the present value of future support payments. Some variables to consider include the age of your children, amount of time you were married, inflation rate, and tax adjustments. (Note: spousal support is taxable while death benefits typically are not.)
Then, negotiate so that the ownership of that policy is transferred to you. Simply becoming a beneficiary is not enough. If your soon-to-be ex does not agree to this condition, consult with the insurance company directly before finalizing your agreement. You must ensure that you will remain the beneficiary as long as a support order is in place, and that you will be notified immediately if premiums are missed.
Finally, if you need to purchase a new policy, negotiate the premiums into your settlement so that the supporting spouse covers the cost. After all, it is insuring his liability.
A word of caution: In certain circumstances the ownership of a life insurance policy may trigger unnecessary and extreme estate tax liability. Therefore, it is extremely important that you consult with an estate planning attorney to ensure property procedures and structures are considered.
5. Not Accepting That Your Standard of Living will Change
Be proactive! The quicker you embrace your “new normal,” the faster you can create a life you can afford to love. Rather than living within your means, live below your means. Nothing is more liberating than generating a surplus each month to replenish the savings and investment accounts that were just slashed in half.
Navigating divorce is challenging, both emotionally and financially, but how you handle your money matters will have a significant impact on your future. And trust me, it is worth switching to boxed wine for a while! Because if you do this right, the challenges are only temporary.