7 financial mistakes people make during divorce

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Posted by Manisha Thakor on Aug 1, 2016 7:24:00 AM
Divorce can be hard, but if you steer clear of these common pitfalls, you may avoid financial hardship in the long run.
  • Not seeking professional financial advice. I’ve mentioned “divorce brain” before; how it temporarily clouds judgment (I know this from first-hand experience!). By recognizing the phenomenon, you can better avoid rash decisions—like which attorney to use. Rather than picking someone who merely feels right, employ more practical criteria, like whether you want someone who charges by the hour or works on a retainer, or practices collaborative divorce. Also, consider using a Certified Divorce Financial Analyst (CDFA), who can help you and your attorney understand the long-term effects of dividing assets.
  • Holding onto the house. Keeping the family home may feel like a win, especially if you’re looking to cause minimal disruption to your children. We tend to equate familiarity with safety; even though it feels like your safe space, holding onto your home during a divorce may cause you financial harm in the long run. Remember, a house is not necessarily the most valuable asset owned by a couple, in terms of long-term growth potential. There are ongoing expenses to consider, such as property tax and maintenance.
  • Focusing on equitable division (rather than quality) of assets. $100,000 in a traditional IRA vs. a Roth IRA is a classic example of two accounts that, on the face of it, appear to be of equal value but are not. $1 in a Roth is worth only 60-80 cents in a traditional IRA, since the latter is taxable. A financial advisor can better help you and your attorney evaluate the quality of marital assets.
  • Not adjusting lifestyle expectations. Splurging on designer shoes and taking an expensive vacation may make you feel better in the short term. But living off of one income when you’re used to two requires a readjustment of expectations, especially if your spouse was the breadwinner. In your new economic paradigm, that country club membership may no longer be feasible, and you may have to trade in your luxury car for a less glamorous automobile.
  • Overspending on kids. No matter how good it feels to spend money on the innocents caught in the crossfire of your divorce, spoiling them sends out the wrong message. Just as scientific studies indicate the overuse of antibiotic hand sanitizers may cause an increase in susceptibility to disease,1 kids are less likely to develop resiliency (what some call “grit”), when you sanitize their lives from emotional pain, as it ill-prepares them for the negative life events they will inevitably encounter later on.
  • Not paying off shared bills. To avoid legal responsibility and a damaged credit score in the event your ex is late with payments, it is vital that any co-signed debt, such as credit cards or mortgage, be paid off or retitled before your divorce is finalized. The same goes for utility bills and any other jointly-held account.
  • Lock in your alimony payments. An unexpected event, such as death or disability, may leave your spouse unable to make alimony payments required by the divorce settlement. Payments should be secured with a life insurance policy that names the person who receives alimony, listed as the beneficiary. Your attorney or financial advisor will be able to help protect you against whatever fate might have in store.
     
In the fog of divorce, it’s common to say and do things we may later regret. Be sure not to add any of these common financial mistakes to that list.

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1 “Scientists Discover That Antimicrobial Wipes and Soaps May Be Making You (and Society) Sick,” Scientific American website, July 2011.
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