Divorce often reduces both spouses’ standard of living as the same income and assets must now support two households. Most people aren’t prepared for this financial and emotional challenge. Here are seven concise steps to better prepare for your post-divorce financial future:
- Expect Lower Income: Anticipate a drop in income post-divorce. Create a needs-based budget using a detailed expense worksheet, accounting for all income sources (e.g., spousal/child support, investments) and irregular expenses like taxes or insurance. Have a trusted friend review your budget for reasonableness.
- Evaluate Keeping the House: Decide if you can afford the marital home. Options include one spouse buying out the other (via refinance, asset trade, or note), selling the house and splitting proceeds, or alternatives like renting, “birdnesting,” or selling at a loss. If underwater, clarify who covers the shortfall. Pre-qualify for a mortgage before finalizing the divorce to avoid being stuck with unaffordable debt.
- List All Assets: Collect statements for all financial holdings (retirement, liquid assets, real estate, etc.) and create an asset list with values and ownership portions. This helps during settlement negotiations.
- Consider After-Tax Values: Understand that pre-tax accounts (e.g., IRAs) have a tax liability, reducing their value compared to liquid assets like checking accounts.
- Assess Financial Needs: Ensure your asset liquidity matches your needs. For example, keeping an illiquid asset like a house may strain finances if future expenses (e.g., mortgage after child support ends) are unaffordable.
- Include Pensions in Settlements: Factor in any pension earned during the marriage. Options include splitting future benefits, offsetting with present value, or a combination. Choose based on your immediate and long-term needs.
- Hire Professionals: Engage a divorce lawyer and a Certified Divorce Financial Analyst® (CDFA®). Consider additional experts (e.g., accountant, therapist) if needed. A good team can reduce litigation costs and prevent costly settlement mistakes.
Proactively addressing these steps can ease the financial strain of divorce and set you up for a more secure future. For tools like the “Monthly/Annual Expenses” worksheet, visit www.institutedfa.com or work with a professional who is trained to help you through this life changing event.
