If a divorce is looming in your future, you’ll find you have a lot of things to take care of, but your finances should be front and center. Here are 5 ways to get your finances in order before a divorce.
1. Sit down with a Fee-Only Financial Planner, preferably a Certified Divorce Financial Analyst (CDFA®)
The role of the CDFA® professional is to assist you, and your attorney in understanding the financial impact of a divorce, and how the various financial related decisions you will need to make as part of a divorce will impact your financial future.
Your CDFA professional can assist you in pulling together a list of all joint and separate assets you own, including real estate, investment accounts, checking and savings accounts, and retirement accounts such as 401k, IRAs, and pensions. This list will be reviewed with your attorney to strategize with you an approach to a divorce settlement. Don’t hide or lie about assets. It could be illegal if you misrepresent how much money you have.
Consider your contributions to those assets, especially if they are unequal compared to your partner’s. For example, who paid the down payment on the family house? What about the mortgage? Who saved for retirement? If your spending was lopsided, who spent more than they earned and who was more frugal?
Adding up your debts is a similar exercise. Check all the current credit card bills and the amount of the outstanding mortgage and car notes.
A good financial planner will also help you get back on your feet financially, re-assess your financial goals and retirement plans, and create a roadmap to help guide you in living your best life with the resources you have.
2. Schedule an initial consultation with an experienced divorce attorney
Even if you’re just starting to think about getting divorced, learn what your options are right away, and get some guidance on potential next steps.
Undoubtedly you know others who hired a divorce attorney. Ask for recommendations. Go to several for a free consultation. Pick the one you feel most comfortable with. The fate of your financial future is in their hands.
In the end, if a divorce is necessary, they will take care of filing the morass of paperwork that is often required and working with your fee-based Financial Planner in helping put together your financial statements the courts will require while advising you about property rights and child custody matters.
3. Update Your Estate Plan
You don’t want to inadvertently leave your assets to your soon to be ex-spouse if you were to die prematurely. Be certain your attorney also assists you in writing a new will or amending an existing one to reflect your current estate distribution plans.
Similarly, at some point, you named beneficiaries for your life insurance policies and retirement funds. Now’s the time to update those designations.
Another important task is to review (or sign) health care and other powers of attorney. You might want someone else — other than your spouse — to make life-or-death decisions for you if you are unable to take care of these matters yourself.
4. Check Your Credit
It’s part of good financial housekeeping to check your credit reports regularly. At divorce time, it’s critical. You can get your free credit reports from each of the credit bureaus (Experian, Equifax, and TransUnion) once per year at annualcreditreport.com. You can get all three at once or several months apart. In the context of a divorce, it might make more sense to get the reports at the same time because they could contain slightly different information.
Review your reports with an eagle eye for errors. Each credit bureau has a procedure for you to report inaccuracies. Keep in mind that it can take several months to get errors fixed.
Your credit reports should show which accounts are joint and which are in your name only. If you have only a few credit cards, now might be the time to open some new ones. Don’t go crazy applying for a lot of cards. Your goal is to set yourself up to have a better credit profile if you close the joint ones.
Discuss with your spouse what to do about the joint accounts. The best move is probably to close them. That’s why you want to make sure you have your credit cards first. Closing accounts could hurt your credit temporarily if it lowers your utilization ratio. That’s the amount of credit you’ve used compared to the credit limit. It’s calculated for each card and all your cards in total.
You’ll still be wed to your spouse financially if you maintain joint accounts. If they don’t pay a bill, it will ding your credit. Alternatively, you could ask the credit card company to remove one of the joint owners of the account. However, you don’t want to do that if the credit history on that account is less than stellar, for example, if you made a lot of late payments.
5. Make a (New) Budget
Whether you followed (or tried to follow) a budget while you had a partner, you definitely need one based on your new financial circumstances.
First, calculate your income. Chances are, it will vary from your current position. If you’re a two-income household, you could be losing a big chunk. As a sole breadwinner, you might be compelled to pay child support and/or alimony. If you have no regular income, you might have to join the workforce or beef up a side gig to supplement any child support and/or alimony you might receive. Keep in mind that even if those amounts are court-ordered, it doesn’t guarantee that your ex-partner will pay them.
Expenses are the other side of the budget equation. Consider your likely costs, which could vary significantly now that you shoulder the entire burden.
Your highest expense is most likely a monthly mortgage or rent payment plus utilities. You have to eat, so budget amounts for groceries and the occasional restaurant meals. Health insurance and medical costs can take a big bite out of your budget. Car or public transportation expenses are another drain. If you have children, you already know it’s expensive to raise little people.
Tally up your income and subtract your expenses. If the result is a negative number, you need to adjust both sides of the equation. It’s critical to make more money and lower your expenses. If the result is a positive number, take the excess and deposit it each month into your emergency and savings funds. Emergencies are guaranteed. However, you also need to have savings goals, so you have something to look forward to – perhaps a nice vacation or education to further your career.
You’ll surely get pulled in a lot of directions when you plan your divorce. Make sure that you take care of your finances so you can start your new life on a good foot.
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