When you think about how to financially prepare for divorce, what comes to mind?
Thinking about how much child support or alimony you’ll have to pay or should ask for? Or gathering up copies of your tax returns, bank statements, and spouses pay stubs?
While taking these steps are certainly helpful, there are a whole host of other things you can (and should) do to financially prepare for a divorce.
1. Gather financial documents and records
When it comes to preparing for a divorce, one of the most critical steps is to gather documentation your financial documents and records. Think of it as creating a financial snapshot of your financial life together.
Having a clear picture of your financial situation will empower you to make informed decisions during the whole divorce planning process.
Start by collecting these essential documents:
Bank statements and account information: This includes checking and savings account statements.
Credit card statements and account information: Gather statements for all credit cards.
Credit reports from all three major credit bureaus: This will give you a comprehensive view of your credit history.
Retirement account statements: Such as 401(k) or IRAs.
Investment account statements: Any stocks, bonds, or other investments.
Tax returns and W-2 forms: At least the last three years.
Pay stubs and employment information: Your most recent pay stubs.
Other debt information: Including personal loans, and mortgages.
2. Create budgets to assess your current financial situation and plan your financial future
Creating a budget is like drawing a roadmap for your financial journey through and beyond divorce. It’s an essential step to assess your own finances, current financial situation and plan for your financial future.
A well-thought-out budget will help you understand your income and expenses, identify areas where you can cut back, and set realistic financial goals.
Here’s how to get started assessing your situation:
Identify your income and expenses: List all sources of income and categorize your expenses.
Categorize your expenses into needs and wants: This will help you prioritize and make necessary adjustments.
Set financial goals: Whether it’s saving for a down payment on a new home or paying off debt, having clear goals is key.
Create a plan to achieve your financial goals: Outline steps to reach your goals, such as cutting discretionary spending or increasing your earnings.
Review and adjust regularly: Life changes, and so should your budget. Regular reviews will keep you on track.
3. Use your budgets to negotiate child support and alimony
Many divorcing couples assume that child support and alimony are set in stone by state guidelines and divorce laws, but the reality is far more nuanced.
While states do provide guidelines for child support and, in some cases, alimony, they may not meet your unique needs. The key to securing support that truly meets your needs lies in effective negotiation.
With a detailed budget, you can clearly demonstrate to your soon-to-be ex-spouse the true cost of living for you and your children post-divorce.
This transparency can facilitate more amicable negotiations on support payments, ensuring your family's well-being rather than merely accepting the default numbers from a state calculator.
4. Create a balance sheet detailing all property and debts
Just as budgets can help you understand what your past year current marital spending looks like, a balance sheet can help you understand what your current marital financial assets and debts look like.
So, why is preparing a balance sheet a critical step in preparing financially for a divorce?
First, the balance sheet will serve as the foundation of your property division negotiations in your divorce proceedings. Allowing you to see everything you and your spouse own, and everything you owe - aka your joint assets and liabilities - all in one place.
And second, by preparing a complete list of your marital assets and liabilities, and their respective values upfront, you can begin to form your negotiation strategy before you enter the divorce legal process.
5. Establish individual financial accounts and credit
As you prepare for divorce, establishing individual financial accounts and credit is a crucial step towards financial independence. In my experience as a mediator, it's one of the biggest financial issues a stay-at-home-parent faces.
Here are some steps to gain financial independence:
Opening individual bank accounts: Start with checking and savings accounts in your name.
Applying for individual credit cards and other credit accounts: This will help you build your credit history.
Building individual credit: Make on-time payments and keep your credit utilization low to improve your credit score.
Monitoring your credit report and score: Regularly check your credit reports to ensure accuracy and identify areas for improvement.
6. Decide if you can (or want to) stay in the marital home once your divorce is final
If you own a home, and you’d like to stay there, keep that in mind as you prepare financially for divorce.
Understand not only the costs associated with your monthly mortgage payment and taxes, but also the cost of necessary maintenance like landscaping, snow removal, gutter cleaning, etc. required to keep many aspects of the home in good working order. And whether you'll be able to maintain an emergency fund for when things go invariably wrong.
Doing so upfront will allow you to give thought to your divorce planning and negotiation strategy as you enter the divorce process, and what financial moves you’re willing to make, or will need to do, in exchange for keeping the house.
7. Consider credit counseling and pull your credit report
When applying for a mortgage, having a strong credit score is crucial for securing a favorable interest rate. Many individuals overlook the importance of maintaining a good score, but as you prepare for divorce, it's essential to understand where you currently stand and take steps to improve.
In many marriages, despite having joint finances, one spouse is the primary account holder for credit cards, mortgages, and other debts. This can result in that spouse having a well-established history, supported by timely payments and longstanding accounts.
If you're the spouse without this history, financial institutions may view you as a higher risk, making it challenging to secure loans in your own name.
To address this, consider opening accounts in your own name and regularly monitor your credit reports from the Annual Credit Report website to ensure accuracy. This proactive approach will help you establish a solid credit history for when you apply for additional credit accounts or mortgages in the future.
You can also consider scheduling time with a counselor to see what steps you can take to improve your individual credit score. Doing so now will help when it comes time to open new credit cards or apply for a mortgage if you decide you want to keep the house.
8. Evaluate Social Security benefits
If you're divorcing later in life- often referred to as a "gray divorce"- it's important to evaluate how your divorce might affect your Social Security benefits. By applying using your soon-to-be-ex's financial records, you may be eligible for a higher benefit amount than if you applied using your own records.
To maximize your benefits, consider the following steps:
Research and Understand Eligibility: Familiarize yourself with the eligibility criteria for claiming Social Security benefits based on your ex-spouse's earnings. Typically, you must have been married for at least 10 years and be currently unmarried to qualify.
Calculate Your Potential Benefits: Get your social security benefit statement to see how much you qualify to receive. Then use tools available on the Social Security Administration's website to compare your benefits under both your own and your ex-spouse's earnings. This will help you make an informed decision about which option is more advantageous.
Consider Timing: The age at which you begin claiming benefits can affect the amount you receive. Delaying your claim until you reach full retirement age (or beyond) can result in higher monthly payments.
Consult a Financial Advisor: Given the complexities of Social Security benefits and divorce, consulting a financial advisor or a certified divorce financial analyst can provide personalized guidance. They can help you navigate the intricacies of the system and develop a strategy to optimize your benefits.
By taking these steps, you can better prepare for your financial future post-divorce and ensure that you are making the most of joint assets and the benefits available to you.
9. Find a (better) job
When planning for divorce financially, understand that two households are more expensive to run than one. So, expect your post-divorce cost of living to go up. And with it, the likely need for you to generate more money than you currently do.
Beyond the immediate need for increased income, consider the long-term financial implications of divorce. Things like having to share in the cost of your children's extracurricular activities, or contribute to their college tuition. This period of transition can be an opportunity to reassess your career goals and explore new job opportunities that align better with your financial future.
Additionally, it's important to factor in potential changes in your work-life balance, especially if you have custody of children. Balancing a new job with family responsibilities may require adjustments, so plan accordingly to ensure stability for you and your children.
10. Get a (new) financial advisor to help with divorce planning and future financial decisions
If you find yourself without a financial advisor, you're not alone. Even if you do have one, it's common for them to work more closely with one spouse, often leaving the other without personalized guidance.
If your advisor primarily assists your soon-to-be ex-spouse, it might be time to seek a new professional who can focus on your needs and well being more. Engaging a new, financial planner or advisor is a critical step in divorce financial planning and making informed future financial decisions.
You might wonder, "Why do I need one if I'm not a millionaire?" The truth is, no matter how much money you've got, a skilled money manager can be invaluable during a marriage or divorce.
Financial planning can take many forms including:
Analyzing your household income and expenses to effectively plan for child and spousal support.
Compiling a comprehensive financial overview, including all bank and credit card accounts, investments, 401(k) and IRAs, real estate, mortgages, and even unique assets like collectibles and antiques.
Clarifying any financial intricacies, especially if your spouse has complex compensation such as stock options or restricted stock units (RSUs).
Creating a thorough financial plan to determine the necessary portions of retirement and non-retirement accounts to secure your financial future.
For those already retired, they can provide estate plan and investment strategies and advice to help you minimize capital gains and maximize discretionary income in light of your divorce settlement.
The true value of a top financial planner or advisor lies in their role as a neutral, steady partner. Much like a calm voice during stock market fluctuations, they help prevent hasty decisions that might lead to future regret when circumstances change.
Reach out to friends and family for referrals and if no one comes to mind, check out the National Association of Professional Financial Advisors website to find someone in your area.
Also, having a financial adviser who partners with a tax professional can help you understand any tax implications of receiving any joint assets in your divorce settlement.
Key takeaways when financially preparing for divorce
Navigating the financial aspects of a divorce can be a challenging journey, but with careful planning and informed decision-making, you can secure a stable financial future.
Start by gathering all necessary financial documents
Create a comprehensive budget and use it to effectively negotiate child support and alimony.
Prepare a detailed balance sheet to understand your marital assets and debts.
Start building your credit to gain financial independence and explore credit counseling to enhance your financial standing.
Consider the implications of staying in your marital home.
Evaluate your Social Security benefits.
If needed, seek better employment opportunities to support your new lifestyle.
Finally, enlist the guidance of a financial advisor or other professionals to provide insights and strategies for managing your household finances during and after the divorce process.
Remember, while the road ahead may seem daunting, and the steps may seem time consuming, taking these proactive steps will empower you to embrace your new life with confidence and security.
