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 paystubs?
While taking these steps are certainly helpful, there are a whole host of other things you can (and need) do to financially prepare for a divorce.
8 Smart Financial Steps to Prepare Your Finances for Divorce and Beyond
1. Create Budgets to Assess Your Current Financial Situation and Plan Your Financial Future
If I asked you right now, how much you spend a month on groceries, could you tell me?
My guess is you probably could.
You’d simply look at your credit card statements, identify the charges from your local supermarket or Costco, and add up the costs.
But what about the ones that aren’t so easy to quantify?
Like drive thru meals for your kids on the way to soccer practice? Or money spent on birthday, and/or holiday gifts?
In my experience, most people have no idea what they spend on these kinds of household expenses on a monthly or annual basis. Yet it’s these very things that drive most people’s spending.
And cause them to quickly get into credit card debt.
The only way to avoid going deeper into debt, and effectively manage your finances once your divorce is finalized, is to create a budget.
Actually, two budgets!
One for what your life looks like now, and one for when you’re divorced.
Doing so will allow you to stay on track by understanding if you need to reduce expenses, or increase your household income, in order to make ends meet. Or if you can maintain the status quo now, and into the future.
Pro Tip: Purchasing our Pre-Divorce Financial Preparation Kit can provide you with a structured and proven process to help you investigate, understand, and take control of your income and expenses, before, during, and after your divorce is final.
This will greatly increases your chances of financial stability post-divorce.
2. Use Your Budgets to Negotiate Child Support and Alimony
Want to know a secret about divorce that most people don't realize?
Everyone thinks there's this magical rulebook that spells out exactly what you'll get in your divorce settlement. But the truth is, it's not nearly that simple.
Sure, every state has official guidelines for child support, and some even have them for alimony. But divorce laws vary, and these guidelines are typically a one-size-fits-all solution. Getting real support that actually works for you and your kids all comes down to one thing: negotiation.
Think about it: What happens when those state-calculated support numbers don't come close to covering your real expenses? This is where being prepared with a detailed budget makes all the difference.
Pro tip: Really spend time putting together a detailed budget showing your soon-to-be ex-spouse exactly what life will cost for you and the kids after divorce.
In my experience, when working with real numbers, you and your spouse can agree far more easily to support payments that will keep your family comfortable (to the best of your ability) rather than just settling for whatever the state calculator spits out.
3. Create a Balance Sheet Detailing All Property, Bank Accounts, Investment Accounts, Mortgages, and Debts
Just as budgets can help you understand what your current marital spending looks like, a balance sheet can help you understand what your current marital assets and debts look like.
So, why is preparing a balance sheet a critical step in preparing financially for a divorce?
Two reasons.
- First, the balance sheet will serve as the foundation of your property division negotiations in your divorce. Allowing you to see everything you and your spouse own, and everything you owe, all in one place.
- And second, by preparing a complete list of your assets and liabilities, and their respective values upfront, you can begin to form your negotiation strategy before you enter the divorce process.
It's important to start as early as possible giving thought to what assets you’d like, and what liabilities you may be required to take on once you’re divorced.
Pro Tip: As is often the case with child support and alimony, most people don’t realize the answer to the question, “Who gets what in a divorce” is decided entirely through negotiation. There is no magic rule book that says, “I get this, you get this,” etc.
In most cases, it’s up to you and your spouse to ultimately decide. So by knowing in advance what you own and what you owe, you can more easily and expertly form your negotiation strategy.
4. Decide if You Can (or Want to) Stay in the Marital Home Once Your Divorce is Final
When my mom got divorced, she was laser focused on keeping the house. No matter what the cost. To her, it was more than just a house, it was our home.
And no one was going to take it away from her!
And while in retrospect I can appreciate her decision, the financial cost to her - and the emotional cost to me, was immense.
As I recall, she waived her rights to my father’s pension, took out a mortgage at 11% interest, and worked multiple jobs to make it work. Not exactly a recipe for long-term financial success.
Meanwhile, 14-year-old me was not ready to be a homeowner, spending my weekends cutting grass, cleaning gutters, fixing leaky toilets, and raking leaves.
But there I was.
So, if you own a home, and you’re thinking you’d like to stay there, keep that in mind as you prepare 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 the home in good working order.
Doing so upfront will allow you to give thought to your 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.
Pro Tip: Once you’ve prepared your balance sheet, you’ll have a better idea of the amount of equity in your home. As well as how much you may have to give to your soon-to-be-ex to buy them out.
Work with a mortgage professional to understand more about the mortgage options available to you, and what you’ll need to do to qualify. Also share with them your new budget as there are some general guidelines on how much of your total monthly expenses should be allocated to housing.
5. Consider Credit Counseling and Pull Your Credit Report
Speaking of mortgages, getting one, and one with a favorable interest rate, requires an excellent credit score.
And since credit scores are probably not on your list of things you think about every day, knowing your score, and taking steps to improve it, should be high on your list as you begin to prepare for divorce as a woman.
For many of the mediation clients I work with, only one spouse is the primary account holder for the couple’s credit cards, mortgages, and other debts. And it’s that spouse’s score that is supported by meeting payment deadlines, and loan longevity.
So if you’re the “other” spouse, you’re an unknown to those financial institutions. With very little credit history. And therefore, a big risk to lenders and creditors.
Which may make getting credit accounts in your name, difficult.
Pro Tip: Visit the Annual Credit Report website to download free personalized reports from all three credit agencies and regularly monitor the reports. They may also offer products and services to help you do this automatically.
You can also consider scheduling time with a credit counselor to see what steps you can take to improve your credit score which may include the need to establish accounts in your own name. 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.
6. Evaluate Social Security Benefits
I can’t believe what I’m about to say, but did you know that the IRS has an excellent website?!
I know. I didn’t believe it either.
One of my favorite posts on their site is about how a lower earning spouse can collect Social Security benefits based on their higher earning ex-spouse’s income.
It’s a great read if you can find the time, and if you’re approaching retirement and facing a divorce, it’s important!
If you’re divorcing later in life (also known as a gray divorce), you’ll want to understand what you could expect to receive in Social Security benefits if you applied using your soon-to-be-ex’s financial records as your divorce could really impact the amount your receive.
Pro Tip: If you don’t already receive a copy, learn how to get your social security benefit statement to see how much you qualify to receive, and compare it to what you’d get if you were to apply under your spouse’s income, so you can maximize your benefit.
7. Find a (Better) Job
When planning for divorce financially, you must understand that two households are more expensive to run than one.
Especially if you have children.
So, expect your post-divorce cost of living to go up. And with it, the likely need for your detached family unit to generate more income than you currently do.
Which may require one or both of you to switch jobs or for one of you to re-enter the workforce if you're currently a single income family.
Remember, every little bit helps. So even if it means a part-time job, or a modest bump in pay, it may be worth considering.
Pro Tip: Many community colleges offer career counseling. And if you’re a college graduate, don’t forget your alumni association as well. They may also have resources available to assist you in finding a (higher paying) job.
Also, if you and your spouse are amicable, try to negotiate financial arrangements in your divorce that empower the lower earning spouse to grow their career, and reach a certain income level before support is reduced.
8. Get a (New) Financial Advisor to Help With Divorce Planning and Future Financial Decisions
If you’re like most of our clients, you don't have a financial advisor. And if you do, my guess is that advisor probably works more closely with one spouse than the other. If that's your soon-to-be-ex, it might be time to find someone new who's truly in your corner.
"But wait," you might be thinking, "I'm not a millionaire - why do I need a financial advisor?"
Trust me on this one. A good financial advisor (especially one who's a certified divorce financial analyst) can be worth their weight in gold when going through a divorce.
They'll help you get your finances in order by assisting with:
- Creating those all-important budgets and help you analyze your household income and expenses to plan your child and spousal support ask
- Putting together your financial snapshot including all bank and credit card accounts, investments, 401(k) and IRAs, real property, mortgages, and even unusual items likes collectibles, antiques, and other valuable personal property
- Guiding you through tricky negotiations and help you sort through any financial complexities, or information presented you may not be clear on - especially if your spouse receives complex compensation ilke stock options or restricted stock units (RSU)
- Assembling a comprehensive financial plan to determine how much of those retirement and non-retirement accounts may be necessary to secure your financial future.
And if you're already retired? They'll help you with retirement planning and investment advice so as you disentangle your joint finances, you understand exactly what your capital gains and discretionary income might look like in your Golden Years, based on your divorce settlement.
But here's what I think the real value is: they're your neutral, level-headed partner in all this. You know how the stock market can be a roller coaster? Well, when things get rocky, it's natural to want to panic and sell everything. Your advisor is that calm voice of reason who can keep you from making decisions you might regret later.
Pro Tip: 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 your divorce settlement.
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