For most, going through a divorce is an extremely difficult and emotional time. Some become so exhausted by the process – or eager to get it over with – that they make costly financial mistakes they later regret. Here are several ways to avoid some of the most common errors:
Document your financial situation — Make copies of your tax returns from the last five years. Also, understand and document your total net worth. This includes your investments and other assets, such as your home and vehicle, and your liabilities. These numbers are essential in accurately determining fair alimony or child support payments and an equitable division of your assets. They are especially important if you believe your spouse may be hiding assets from you. Even if your partner has been dishonest with you, it’s likely he or she has been honest on income tax returns.
Realize that not all assets are created equal — Dividing assets is complex and a 50-50 split is rarely even. For example, assets that may have a similar dollar value at the time of the split – such as a 401k and a house – can have very different values when liquidated. Additionally there are different tax implications for both, which may further affect their relative values. Consider working with trusted legal, tax and financial professionals to understand the true value of your assets before you negotiate how to divide them.
Take emotion out of financial decisions — Some couples are eager to put an end to their conflicts while others may spend a longer time resolving their financial and other concerns before their relationship is legally dissolved. Yet it’s important to keep in mind that the divorce process, albeit painful, is shorter term and its financial implications are long lasting. Although it’s easier said than done, try to separate emotions from logic and long-term goals to protect your financial well-being.
Avoid racking up legal fees — Whether or not your split is amicable, it’s probably fair to say that you and your soon-to-be ex-spouse would rather keep more money in your own pockets than in those of your respective divorce attorneys. This means getting your paperwork in order, being prepared for meetings and being efficient in your decision-making.
Be realistic about your financial future — Whether you are still in the workforce, retired or relied on your spouse’s income, it’s likely your financial situation will be different after your marriage ends. Even if you receive alimony, child support or other types of post-divorce income, expect to alter your lifestyle and budget. Planning ahead for this new reality can help you prevent financial mistakes that can threaten your long-term financial stability.
Review your insurance, legal and financial documents — The court may require you to update your insurance and legal documents after the split is official so take time to re-evaluate your life, disability income, healthcare and dental, and auto and property policies to make sure you have the right amount of coverage for yourself and your dependents. Keep in mind that your beneficiary designations trump your will.
You can be held liable for any debt in which you are listed as a co-owner. So immediately change your beneficiary designations, joint bank accounts, credit cards, property deeds and car titles to reflect your wishes and newly single status.
Don’t overspend on your children — Divorce can create difficult situations between you and your ex, especially when it comes to your children. It’s not uncommon for divorced parents to try and “buy” their children’s affections. Keep in mind that what most kids really want – regardless of whether they are young or grown – is more time with you. What’s more, the memories you make spending time together will be of greater value over the long haul. Before you say “yes” to a purchase, examine your motives and make sure it’s worthwhile and within budget.
Re-evaluate your plans for retirement — As you begin to envision a future without your former spouse, you may determine your long-term financial and lifestyle goals are changing. As you look ahead, be realistic in what you can afford to do, and make sure that you take the necessary steps to save or preserve assets for your future financial stability.
Paul F Rycroft CRPC®, CPA, is a Financial Advisor with Ameriprise Financial Services, Inc. in Alice, Texas. He specializes in fee-based financial planning and asset management strategies and has been in practice for 16 years. To contact him please call 361.668.1212. Paul F Rycroft is located at 604 E. Second St. Alice, Texas 78332
Advisor is licensed/registered to do business with U.S. residents only in the states of Texas, Oklahoma, West Virginia, New Mexico.
Ameriprise Financial and its representatives do not provide tax or legal advice. Consult with your tax advisor or attorney regarding specific tax issues.
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