Top 5 Divorce Financial Mistakes And How To Avoid Them.
By Elizabeth Billies
I like talking about money. Okay maybe not my own money, but I do like talking about my client’s money. Not in the “how can I get more of it” way, I promise. In the, “how can I help my client understand their money so they can live their best post-divorce life and avoid disastrous financial mistakes” way. That’s right, today we are talking about money and the top financial mistakes that you need to avoid in your divorce case and beyond.
Does the topic of personal finance scare you? Make you uncomfortable? Make you feel stupid? It shouldn’t. Everyone needs to deal with the topic of personal finance when when going through a divorce and I am here to help you navigate the divorce process to get to your best post divorce life. And part of that expert navigation is helping you understand basic personal finance and how to avoid financial mistakes in your divorce.
Let me be blunt with you. You must face your financial mistakes head on if you want to have a great divorce and an even better post-divorce life. Let’s review the top 5 divorce financial mistakes and learn how to avoid them.
Financial Mistake #1: Not understanding your tax obligations post-divorce.
Taxes. I feel like I should follow this word up with some ominous crime music straight from a 1940’s black and white movie. While I hope that taxes don’t strike that kind of fear into your heart, you do need to take them seriously. Not doing so could be the biggest financial mistake in your divorce case because it could be the hardest to fix quickly.
You don’t mess with the IRS. Failing to file your taxes correctly could not only cost you additional tax liability but also penalties and interest. And the IRS always makes sure it gets paid. What are the potential ways that taxes could result in the biggest financial mistake of your divorce? Here are some examples of how tax issues can turn into huge financial mistakes:
Using the wrong tax filing status post separation (remember you are still married!);
Making the financial mistake of not changing your W-4 withholding with your employer to reflect your new post-divorce tax filing status;
You and your spouse both attempt to claim the same children as dependents resulting in your tax return being rejected;
Making the financial mistake of not filing your taxes on time because you were waiting for financial information from your former spouse;
Not claiming the right amount of alimony paid (or received) as your former spouse;
Trying to claim alimony payments for divorce agreements entered into after January 1, of new year;
Not communicating with your spouse regarding the allocation of certain expenses and income; such that your return is not accurate; and
Deciding to file with your former spouse to save your tax liability and getting audited because he or she didn’t claim all their income.
The best way to avoid these financial mistakes is to do the following 3 things:
Keep (and organize) all your tax related documents during the year. This will allow you to access them easily at tax time;
Start communicating with your former spouse early if you plan on filing together; and
Seek professional help from a reputable tax accountant if necessary. While you may want to save money (particularly after paying divorce legal fees) you could potentially make a financial mistake and cost yourself thousands if you attempt to DIY your taxes. This is particularly true if your income is complicated or it is your first time filing your taxes on your own.
Financial Mistake #2: Not reviewing your credit report after separation.
I used to put off looking at my credit score. I think because I was afraid it wasn’t a good one. Spoiler alert: it was good but not great. Unfortunately, failing to review your credit history isn’t going to make it any better. And it could be a big financial mistake.
Like it or not, you need to have good credit to get things in life. Mortgages, car loans, apartment rentals, even car insurance rates can all live or die by your credit score. So you need a good one.
One of the first things that I tell clients to do during our initial consult is to do a soft-inquiry of their credit history with a company like Credit Karma or Credit Sesame. Why? Because it would be a financial mistake to not know what their credit score is and what lurks on their credit report before they get divorced.
Why is failing to know what’s on your credit report a major financial mistake? Because the best chance you have of addressing who is going to pay for a debt with your spouse is in your divorce agreement! Once you are divorced it may be hard (and expensive) to get them to contribute. Here are some reasons why divorced persons need to know what’s on their credit report:
Do you want to keep your house? Well then you may need to qualify for a mortgage on your own and for that you need a good credit score;
Are you moving out of the residence and need to rent an apartment? It’s hard to do that if you don’t have good credit (or any credit at all);
What if you see a credit card on your report that you don’t recognize? Did your spouse take out an account in your name (yes that’s fraud but it still happens)? You need to address this ASAP;
Do you owe back taxes? Again, address those in your agreement so that your spouse shares in the payment of this liability; and/or
What if there are other old debts owed that could become liens on your house affecting your ability to sell? Better to take care of those in your divorce agreement so they don’t hurt your credit post-divorce.
Financial Mistake #3: Failing to prepare and follow a budget post-divorce.
Can I let you in on a secret? I love budgets and budgeting!! I know it’s a little nerdy. But it’s true. Why do I love budgets? Because it is the best way to keep track of how you spend your money and make sure that you aren’t wasting it! Wasting money is probably the most common financial mistake people make. And the best way to avoid it is to make a post-divorce budget once your divorce case is done and stick to it.
Why is failing to adjust your budget post divorce a big financial mistake? Like many other aspects of your life, your monthly budget has also likely changed post-divorce. Want to know how so?
First, the amount of income coming into to your household each month has likely decreased. Second, while you may have lost your “better” half, it is unlikely that your expenses have decreased by the same amount. Third, your expenses may just be different post-divorce. My bills can vary month to month. So, why wouldn’t they vary before and after divorce? You could be living in a different place. You now have to pay for health insurance. You no longer have cable, etc.
So what does all of this mean? It means that you need to sit down and do an audit of your monthly income and expenses. Then you need to take that information and prepare a new budget that fits your current life and financial circumstances.
Not sure where to begin? Like I said, I’m a huge fan of budgeting. While there are a lot of services and budget templates out there, I personally use Mint.com (now connected to Credit Karma) as it connects to my bank and credit card accounts. This makes easy to categorize my transactions and adjust my monthly budget accordingly. Plus it’s free!
Financial Mistake #4: Putting off saving for retirement.
The longer I practice family law, the less and less I see clients that have pension plans. One of the benefits of pensions was that your employer did the retirement savings for you via your participation in the pension fund. So, when you retired, you didn’t have to worry as much about having income to sustain you in your golden years.
However, those plans (except for government employees) are really a thing of the past. What does this mean for you? It means that you are responsible for saving for your own retirement. And if you haven’t started doing so, you are making a financial mistake, particularly if you are post divorce and close to retirement age.
In many of my divorce cases, only one party has a sizeable retirement account. Can you relate? This can happen for a few reasons.
First, it happens when only one party works or works at a place that actually offers retirement plans. Second, I will also see cases where the couples decided to fund one party’s retirement account fully, instead of funding two halfly (a new favorite word), because it came with an employee match or a better return on investment. Third, sometimes the parties could only afford to fund one retirement account because they needed the other party’s full income to pay for everyday expenses. Do any of these sound familiar?
When you get divorced, retirement assets are considered marital assets to be divided regardless of who funded them during the marriage or how they are titled. So, you and your spouse are going to have to share. And that can often mean that there are simply not enough retirement monies to fully fund your retirement.
What does that mean for you? It means that it would be a financial mistake to not make it a priority to fund your retirement post divorce. You no longer have your spouses retirement continued contributions to buffer you. You have to assume that you are on your own and act accordingly. Don’t be scared. There are a few ways you can do this:
If you receive retirement assets as part of your property division, make sure they were rolled over into an appropriate retirement account to avoid early withdrawal penalties and taxes. You also want to make sure that they are well invested so that they can start making you some money!
If you have little retirement assets post divorce, make sure that you start contributing to a retirement account (either through your employer or a financial institution). Make it part of your budget (see above).
Avoid tapping into your retirement before you are ready to, you know, actually retire. If you must use retirement funds to pay legal fees or make a major purchase, try to take out a loan as opposed to just withdrawing the funds.
Financial Mistake #5: Avoiding your debt post divorce.
The worst thing to bring into your best post-divorce life is debt. So, while it may not be fun, you can avoid a financial mistake by getting rid of your debt after divorce.
First, why is this so important? One of the reasons that I see a divorce spike in January is the idea of going into the new year with a clean slate and sans spouse. I think the same idea can be applied to debt.
Think of your divorce debt as baggage. Do you want to take this baggage into your trip to post-divorce land? No. So get rid of it. Or, at least make a plan to get rid of it. How do you do this? Here are some ideas:
Instead of purchasing a new house or car, perhaps you rent an apartment or keep your current vehicle a little longer and use that money to pay your debt;
If you are struggling to pay credit card or other consumer debt each month, research debt consolidation plans or loans to lower your monthly payment and interest rates;
Take out a loan or reduce your expenses to pay off your attorney and other professional fees. Who wants to keep paying divorce related bills years after the divorce?
I get that you may be excited to make big new purchases on your own, particularly if your divorce was a brutal one. However, I think that it is much more important and, ultimately, much more rewarding to first pay off your debt post divorce. Failing to do so could be a financial mistake that could effect your post divorce life for years to come. While it may not be as sexy as a spa vacation or a new ride, paying off debt post divorce is the best gift that you can give yourself.
Are you prepared to avoid the top 5 divorce financial mistakes? It’s hard to have a great post-divorce life if you don’t have your finances in order! The best way to do that is to avoid these top 5 divorce mistakes so that you can successfully move on to your next, and maybe best, chapter. Here’s a reminder of what those financial mistakes are and what you should do to avoid them:
Understand your tax obligations and seek out the help of a professional tax preparer if necessary;
Don’t hide from your credit report! Make sure that you obtain it and understand what is included. Don’t like what it says? Make a plan to fix it!
Prepare a budget that accurately reflects your post divorce income and expenses. And then follow it;
Wisely invest any retirement proceeds you receive in your divorce settlement and keeping saving for your retirement; and
Pay off your debt post divorce before making any large but admittedly more fun purchases.
The best gift you can give yourself is to avoid these financial mistakes in your post divorce life! Make sure that you take an honest look at your finances and make every effort to get get things to a good place today.
If you have a divorce or family law question, reach out to a member of Dischell Bartle Dooley’s family law team today — contact us online, or call 215.362.2474.