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Avoiding Common Money Mistakes in Your Divorce

April 10, 2019 By Beth McClelland, MBA, CFP®, CDFA®

finances in divorce

There are no easy do-overs in divorce. The courts do allow revisiting child support and spousal support in some situations, but wouldn’t it be better to do it right the first time?

In most couples, one member is more familiar with the finances than the other. This is perfectly normal, but in divorce, both people need to understand the finances to properly divide and manage their money in the future.

The three main financial decisions in a divorce are:

  1. Temporary support during the divorce process
  2. Ongoing support
  3. Division of assets and debts

After looking at that list, it is pretty clear that if there are any significant resources such as a house, retirement assets, or income it is definitely beneficial to have some knowledge and a clear head when making these critical decisions.

Common Financial Mistakes include:

  1. Making emotional rather than rational decisions. Keeping the house, without fully thinking through this decision in terms of ongoing expenses and the tradeoff for other cash or investments can be a big mistake. Emotional decisions are not just about the house, they can be about a variety of things. I once heard about a couple who took a chain saw to their couch. Certainly, an extreme example, but need I say more…
  2. Not understanding the assets and debts at stake in the divorce. What you have and what you owe are vital contributions to the marital settlement. Some obligations like IRS debt cannot be allocated to one party in a divorce, and mortgages cannot be automatically assumed by one of the parties. In regard to assets, one dollar of cash is not equal to a dollar of retirement savings or stock. Assets acquired before the marriage, as gifts or inheritances are excluded, but what about the retirement account that includes contributions made during the marriage as well as before marriage or after separation?
  3. Not considering tax consequences for each of the assets when dividing them. Investments and houses may have capital gains tax consequences, and retirement savings and pensions will be taxed as income in the future.
  4. Not thinking about your future. It isn’t possible to plan your entire life ahead of time, but a little forethought goes a long way. Some thinking about where you might live, career and work-related decisions, and an idea of your spending are key considerations as you make divorce-related financial decisions on the division of income, investments, and retirement savings.

How to avoid these mistakes?

Using the services of a Certified Divorce Financial Professional (CDFA®) and a divorce coach can go a long way to helping you make better financial decisions. The collaborative divorce process includes both these professionals on the team to support the you in identifying, valuing, understanding, and dividing your assets and debts. Thoughtful decision making is much more likely to lead to solutions that better serve the interests of both parties. Informed decisions lead to better outcomes and make it less likely you will have regret later.

Finding Financial Peace through Life Transitions

Filed Under: Blog, Collaborative Divorce Tagged With: Divorce, Financial Professional

About Beth McClelland, MBA, CFP®, CDFA®

Beth McClelland, MBA, CDFA®, CFP® is the founder and managing principal of East Bay Divorce Financial Planning. Beth provides guidance in settlement planning, finances and decision-making for clients as they journey through the divorce process.
| Beth’s Website

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