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I know this isn’t an ideal topic to cover, but it is a big life event that impacts 42% to 45% of first marriages in the United States.
During this stressful and emotional upheaval, we may be more prone to making financial mistakes that will be costly in the long run. Let’s do a rundown of some financial mistakes to avoid during a divorce:
1. Mistakes with Expenses
As I’ve mentioned time and time again in my posts, over half of Americans don’t actually have a budget. So, if you don’t know what your month to month expenses are you may lose financially in the divorce by undervaluing how much money you need.
Deciding to divorce usually isn’t an instant decision, you may have “seen it coming”. You may have tried marriage counseling, sought advice from divorce lawyers, and even separated. But one thing you might have neglected to do was prepare financially for it.
You need to start setting aside as much money as you can for the lawyer, court costs, paying for your own place (or two places if you’re still paying the original mortgage or rent), and any other hardships that will happen.
Lastly, another financial mistake some people do with ill-intent is to try and hide their money or make it inaccessible for the other party. Not only is this immoral and mean, it’s illegal. If the court discovers that you’ve hidden or under-reported your assets, they can do a number of things, such as:
- Charge you with contempt and perjury – receive fines or jail time
- May you pay your spouse’s share of those assets
- May give your spouse the whole value of those assets
- May award more to the other spouse – no longer 50/50
It’s best to have a budget and calculate all your current and future expenses, be financially prepared to survive the divorce process and be honest about everything you own and earn.
2. Mistakes with Equal Division
It’s so easy to just split everything 50/50 equally and get the divorce over with, right? You may lose out financially this way, either now or in the future.
Deciding the share of assets on their current market value robs you and benefits the other person. Such assets such as rental property, investments, a family business, and anything with the potential to grow. Be sure to calculate future growth value when splitting assets.
Another drawback of splitting everything evenly is by itemizing things one at a time instead of the overall financial picture. For example, deciding to split a rental property by how much it makes a month, but forget to include its taxes, capital gains, investment losses, and other business issues.
A fair financial solution is to predict future outcomes of any growth assets and split them evenly from there, consider all the costs involved and include stipulations that will not cost extra out of pocket to maintain. An even better solution would be to just sell everything that’s in both of your names and split the money instead.
3. Mistakes with Documents
I know the thought of getting large thick documents full of legalese may be daunting, but it’s important to know all the details in them. If you blindly sign them and stick them away, you may end up paying heavily later.
If all the jargon and numbers are too confusing, seek the help of a third party to explain them all to you and find out exactly what you will be getting (or paying) from it. Documents are easier to contest and adjust before they’re signed.
One other thing you should do with documents is to verify its information. If your spouse states that the family home is worth $150,000, or they’re only earning $45,000 a year – do your homework. Call a realtor to do your own property assessment, finding a paystub or income tax forms, and other investigations can help save you from a financial nightmare.
Lastly, find out any documents, state and federal, that you can file to protect yourself. One of these is the IRS form 8856 that relieves you from any tax liability, plus related penalties and interest, where your former spouse should be held responsible for all or part of the taxes
So, be sure to read and understand any documents that the court, your ex’s lawyer and your own lawyer provides and for extra protection seek a third party to interpret the data.
4. Mistakes with Emotions
Very rarely are divorces done amicably and smoothly, which means that most of the time it’s emotional, which means it’s easy to make hasty decisions based on these emotions.
One mistake that happens so often during divorces is emotional retaliation – sending angry emails and texts, talking nasty about your ex-spouse to family and friends, and so on. Lawyers can use this as leverage against you to gain more for their client. If there are children involved, don’t use them as pawns against the other parent. You’ll lose financially as well as emotionally and even possibly lose them – maybe not custodially, but relationship-wise.
You many feel like leaving everything behind – quit your job and move away, but this could be a costly financial mistake. Not only have you destroyed your established home and steady income as proof for gaining custody if children are involved, but some courts may even order you to move back as part of a custody or alimony order. So, you just cost yourself big time money-wise.
It’s a common misconception that whoever has the most time with the children should get the family home. This isn’t always true, and unfair too. This is mainly due to emotional security rather than financial security, after the divorce that home may just be too costly to upkeep and you lose money staying there “for the kids’ sake”.
Finally, you may feel the need to just sign the papers and get it over with. You may end up getting a real unfair settlement. Many judges will not re-assess divorce papers after they’re signed.
For best results, set your emotions aside and take your time before taking any action on anything to save your money.
5. Mistakes with Timing
The last financial mistake I’m going to cover is making financial mistakes with our timing. I don’t mean the right time to start a divorce, I mean for the future.
When we’re reviewing finances and proposing numbers in the divorce settlement, we forget to account for the long-term. You base your financial needs on the current numbers in front of you – current mortgage or rent, current debts, current income and so on. Maybe you don’t realize that after the divorce you are now down to one income supporting yourself, needing a new place, and so on. Be sure to account for any future instances instead of your current one.
One more frequent circumstance that occurs during divorce is assuming that you are no longer responsible for any consumer debts. Imagine many people’s surprise when they find out they’ve incurred penalties on a consumer debt they thought they passed off to the ex?
Plan for your future needs, cover all future debts, and be sure anything that has your name on it is settled to avoid any future hardships and surprises.
There’s no real easy way to get through a divorce, but you can recover easier by avoiding the financial mistakes I discussed.
Just remember to:
- Prepare financially ahead of time, have money for court fees, lawyers, rent or mortgage payments for a separate place, or for two places, and as much extra as you can.
- Get all your assets assessed for both current and future values.
- Contact an accountant to protect your finances during the divorce.
- Include a neutral third party to go over any documents and court requests with you.
- Keep your cool and don’t do anything drastic, take your time before responding to any paperwork and correspondence.
- Be upfront and honest about everything, hiding or minimizing your assets will cost you more in the long run.
For more financial ideas that may help during a divorce check out these posts: