The divorce process is emotionally draining and mentally exhausting. After the initial shock and anger, many people describe it as a time of being frozen, numb, or treading water. Despite that emotional and mental trauma, you will be expected to go through your finances with a fine-tooth comb to ensure that your settlement agreement is fair and equitable. With divorce brain, that’s easier said than done!
Even if you feel like you are clear-headed, here are a few of the most common money mistakes to look out for when getting divorced.
Underestimating post-divorce expenses
You will be asked to prepare a budget that reflects your expenses AFTER the divorce. It is critical that you are realistic and don’t leave anything out. This information will be used to determine if spousal support is necessary and to what extent. You must be sure to include everything from your health care expenses to anticipated home repair charges for the roof you need to replace next year. If you underestimate your expenses by $200 per month, that’s $2400 per year. Where are you going to get that extra money? When you’re the primary breadwinner, this mistake could lead you to agree to pay spousal support that you ultimately can’t afford. A Certified Divorce Financial Specialist™ will help you double and triple check your budget for errors and make sure that you don’t leave anything out.
Believing that your Lawyer will handle everything
Your lawyer is an expert in the law, not finances. Would you ask your doctor for advice about your car? Not likely, so why would you expect your attorney to be an expert in your finances? Your lawyer’s job is to ask you to fill out your budget and take your word for it that it is correct. A good lawyer will glance over it looking for any glaring errors but they truly can’t speak to any tax issues you might encounter, inflation, how much you need to save to meet your retirement goals, projected increases in the cost of living and so much more! The most commonly miss-valued asset is a pension. And sometimes, the pension is the most valuable asset in a marriage. I often see lawyers accept a present value statement from a pension as the correct value to include as marital property. It’s not. Not by a long shot. A CFDS™ can value it properly and make sure that tax ramifications are considered as well.
Forgetting about tax deductions & credits
Not everyone realizes that portions of your legal or CFDS™ fees during divorce are tax-deductible. In fact, very few people do. Any fees for obtaining spousal support or professional fees related to your non-registered investments are tax-deductible. And even though the tax rules can change anytime, currently spousal support is taxable to the recipient and tax-deductible to the payer. This should be considered when the settlement is drafted.
Letting lawyers do the talking for you
The more you and your spouse can work out by just communicating, the more money you’ll save. I’ve seen many couples that could not bear to be in the same room, but consider the cost. If you have your lawyer relay information to the other spouse’s lawyer, you’re racking up bills upwards of $600 an hour because you refuse to talk.
Say your lawyer charges a rate of $300/hour (a common amount for a mid-range lawyer in Alberta) and you talk to or email your lawyer twice a week for a period of 2 years (A rather short contested divorce in my experience) then your cost for just talking – not including any court time or drafting of documents – is $62,000.00! This can be devastating to your financial future. Put your anger aside as best as you can, your retirement plan will thank you.
Letting your emotions dictate your decisions
You may come to a time during your divorce where you simply want to get it over with. This is not the time to throw in the towel – this is a time for resiliency. No matter how stressful, you cannot agree to a settlement just to be done with it. This kind of thinking is why divorce so often leads to bankruptcy or why only one of the retired divorcing parties ends up back at work. A 50/50 split of assets is almost NEVER a truly equitable settlement, so there are going to be a lot of emotions through the process. It is imperative to work with a CFDS who truly understands what ‘equitable’ means for you. A CFDS will be your advocate when you are emotionally exhausted and ready to settle and give up important assets that are critical to your financial wellness. Take your time and make sure you thoroughly understand what your future will look like post-divorce and be sure to hire the right experts to help you.