Divorce affects every aspect of your life from your day-to-day activities to your financial future. While any couple may experience divorce, people between the ages of 55 and 64, members of the military, and people in second marriages are at the highest risk.
The American Psychological Association estimates that about 40% – 50% of American marriages end in divorce. Divorcing couples often cite finances, communication, and infidelity as the main reasons for separation. Unfortunately, financial problems plague many women long after the divorce is final.
Given these facts, it’s essential to be prepared for the financial impact of divorce. A divorce planning checklist can help you prepare your finances ahead of time, preparing you for the financial changes that may come your way.
Let’s look at how to prepare your finances for divorce before separation occurs (if possible). Here are the steps:
Step 1: Gather Financial Documents
If you will be the one filing for divorce or if you suspect that you may be headed for a divorce, it’s essential to gather all relevant financial documents. These documents will help you assess your current financial situation, determine your net worth, and identify any assets or debts that may need to be divided.
The following personal and marital documents should be included in your divorce planner checklist:
- Tax Returns – Three years of tax returns provide your financial planner and attorney with hard data about your joint income, deductions, and credits, as well as any investments you may have. You will also need any W-2s that were used to prepare the tax returns.
- Pay Stubs – While the tax returns are helpful in determining income and expenses for the past three years, you will need year-to-date pay stubs for both you and your spouse to verify that the incomes have not changed. These will also provide valuable information such as health insurance premiums, 401(k) contributions and/or loan payments, and other employee benefits.
- Bank Statements – Three years of bank statements from both your checking and savings accounts provides information about your cash balances, deposits, and withdrawals.
- Credit Card Statements – Your credit card statements give a snapshot of how much you owe in consumer debt, and can help to establish spending habits (aka the lifestyle) during the marriage. Collect three years of these too.
- Retirement Accounts -Your retirement account statements, including IRA, 401(k), Roth IRA, 403(b), 401(a), and pension accounts, show the amount of assets to be divided as well as contributions that have been made. There can also be loans against the account that need to be taken into consideration during the settlement as well. You’ll need three years of statements for each account, and more if you need to calculate how much may be the separate property of one spouse.
- Insurance Policies – Your life, health, and disability insurance policies provide information on the amount of coverage and the premiums associated with each policy. Life insurance can also include a cash surrender value that is a marital asset. So, you will want to collect copies of each policy as well as the most current statement.
- Mortgage/Rent Agreement – Your home is likely your highest-value asset, and your mortgage your largest liability. You will want to find out the current value of your home, either through market comparisons that a realtor can provide or through an appraisal (which is not free). In addition, you’ll need a copy of the note for your mortgage and at least the most current statement.
- Investment Accounts – This includes any non-retirement accounts such as brokerage accounts that typically hold stocks, bonds, and/or mutual funds. You will need at least three years of these statements–and more if there are any separate property portions.
- Student Loans – Student loans can often be separate debt of the party who incurred them since they were taken out during college and before the marriage. You will need to obtain a copy of the original terms of the loan(s) as well as a current statement.
- Other Debts – These include car loans, personal loans, loans to/from family members or friends, and any other debts. Depending on the nature and use of the funds, these may need to be paid off or awarded to one party.
Step 2: Assess Your Current Financial Situation
This step involves determining what assets and liabilities will need to be divided and also calculating your net worth. Your net worth post-divorce will be approximately half of the total marital net worth. To calculate, take the total value of your assets as your total debts. You will also want to calculate your income and expenses. All of this information will be required to complete your Affidavit of Financial Information (AFI) for the Court. Having a divorce financial expert assist you with this will help to ensure that your attorney is prepared to negotiate for the best settlement possible.
- Understand your current income and expenses: Calculate your monthly income and subtract your regular monthly expenses to determine your disposable income. Don’t forget to include income taxes–which will likely be different post-divorce. This will help you to know what kind of a lifestyle you can afford post-divorce, which helps you to make decisions about things like keeping your marital home or selling it and renting or buying one that is less-expensive. If your situation warrants child support and/or spousal maintenance, this will help you to see how much you would need.
- Assess your savings and investments: Review your emergency savings, retirement accounts, and other investments to assess your level of financial security. These types of assets offer you liquidity–meaning that you can access them if needed to pay monthly bills. Equity in a home, by contrast, is illiquid and harder to access to support your lifestyle.
- Analyze your debt: Obtain a copy of your and your spouse’s credit reports and review them for accuracy and to make sure there aren’t any debts of which you were unaware. Credit reports also help clarify which party is legally responsible for each debt. This is important because even if your divorce decree awards a certain debt to your ex-spouse if they don’t make the payments you are still legally responsible if your name is on the loan agreement.
- Analyze your credit score: Check your credit score to assess your overall creditworthiness and understand how it may affect your financial goals. Work with a qualified professional if you need to improve your score.
Step 3: Create a Budget
With your current financial situation in mind, it’s important to create a budget that reflects your post-divorce financial situation. This involves estimating your forward-looking monthly expenses and determining what changes to your spending habits may be necessary to accommodate your new circumstances. This will help you establish a realistic picture of your financial situation moving forward, and reduce the stress of not knowing whether your income will be sufficient to support your lifestyle.
- Establish a clear goal. While the main purpose of having a budget is to have a plan for your spending, decide what you want to achieve with it. This might include things like saving for retirement, funding education savings accounts for children, growing your emergency fund, etc.
- Track your spending. Determine how much money you have coming in and going out by tracking your expenses over a period of time. Ninety days is a good period to start with, although there will be expenses that aren’t paid monthly such as the registration on your car, vacations, holiday gifts, or insurance premiums.
- Create a budget. Based on your goals and spending history, create a budget that allocates money to different areas such as regular bills, savings, and discretionary spending items like clothing or dining out. The best type of budget is called a zero-based budget, where every dollar of your income is allocated to a category. The goal is that your income minus expenses equals zero. You may find it helpful to budget with a web-based application such as EveryDollar, Mint, or GoodBudget to help you out.
- Monitor progress. This is key! Creating the budget will not, in and of itself, have any impact on your financial health unless you follow it. Keep track of how you’re doing by reviewing your spending weekly and making any necessary adjustments. For each category, once you have spent the amount allocated to it, you’re done until the next month. If it’s a category you can’t control, like a car repair, you must decide which other category you will reallocate the funds from. This will most likely be one of your discretionary spending categories.
- Revise as necessary. At the end of each month, schedule a budget meeting with yourself to review your budget. Put it on your calendar and treat it as an important meeting. Go over your actual spending for the month and compare it to your budget. Occasionally, you may find that one or more of your categories require a larger allocation, so this is a good opportunity to revise some of the allocations. Remember, increasing one category’s allocation requires you to reduce another one’s so that you maintain your zero-based budget.
Step 4: Establish Credit
If you haven’t already done so, establishing credit in your own name is an essential step to take when preparing your finances for divorce. Especially if you are the lower income-earning spouse, you may not qualify as easily for credit cards after divorce.
- Determine ownership of debts. Review each credit card and loan account to find out which debts are joint and which are individual. Having a credit card with your name on it doesn’t indicate whether you are an owner of the account. You may just have charging privileges, and once your divorce is final those will be revoked. As part of the divorce process, debts will be awarded to one party or the other. However, you are still legally liable for any joint debts awarded to your ex-spouse post-divorce, so it’s important to understand your risk. If they do not make the payments, the lender will be demanding payment from both of you.
- Obtain a copy of your credit report. As mentioned above, knowing your credit score as well as what is on your credit report is an important step in understanding how to protect your credit before and during a divorce. It will also help you confirm which accounts are in your name.
- Monitor your credit report. Regularly check your credit report for any suspicious activity. This can help you detect potential fraud and take action to protect your credit. You are entitled to a free credit report annually from each of the three credit reporting agencies, Experian, TransUnion, and Equifax. If you rotate requests between the agencies, you can obtain a report for free every four months.
- Open credit in your name. Make sure that you have at least one credit card in your name prior to your divorce. Opening up a bank account in your own name is also a good step. You will need to disclose these accounts during the divorce, but having them set up ahead of time could save you the stress of not having access to credit if you need it.
Step 5: Negotiate Division of Assets
Dividing assets (and debts) is one of the most challenging aspects of a divorce. It’s essential to understand the difference between separate property, which is not subject to division, and marital property, which is subject to division. Negotiating the division of assets with your spouse is a critical step in the process and can have a significant impact on your post-divorce financial situation.
- Know your objectives. Before beginning negotiations, it is important to have a clear understanding of your goals and what you are willing to accept in a divorce agreement. Do you want to keep the house? Can you afford it? Would it be better to have liquid assets? These are questions a divorce financial expert like me can help you answer.
- Seek the right advice. A good divorce attorney will help you understand your rights and obligations and ensure that you are protected throughout the process. They will help you negotiate with your spouse, but they need to be armed with the right information. That’s where I come in. I can analyze all the numbers and put together a case for the division of assets, child support, and/or spousal maintenance to help put you in the best financial position possible.
- Understand that it’s a process. There may come a point during the divorce that you are tempted to accept what is being offered to ‘just get it over with.” But in a divorce, you only get one chance to do it right, and the implications of your decisions can be life long. So, in those moments, take a deep breath, remember that it’s a process, and trust your team to help you stay the course.
Step 6: Create a Post-Divorce Plan
Begin now to devise a post-divorce plan that reflects your financial goals and objectives. This may involve working with a CPA and CERTIFIED FINANCIAL PLANNERTM professional who specializes in helping women experiencing divorce. That’s me! A financial planner who is also a tax expert can help you establish a plan that reflects your current financial situation and helps you achieve your long-term financial goals.
- Set clear financial goals. Crafting financial goals is important in a post-divorce financial plan. Consider what is important to you and decide on the goals that you want to work towards.
- Address debt. Take a look at your debt and create a plan to manage it. This may involve paying down or consolidating debt, negotiating with creditors, or creating a debt repayment plan.
- Invest for the future. Investing for the future is important for post-divorce financial planning. Consider setting up automatic investments and retirement accounts so that your money is working for you.
- Review your insurance. Consider taking out insurance to protect yourself and your family in case of an unexpected event. This could include health, life, disability, or property insurance.
- Create a new estate plan. After your divorce, you will need a new estate plan for your assets. You will no longer want to have your ex-spouse listed as a beneficiary on any of your property, or as your power of attorney. Meet with a qualified estate planning attorney to get this done as soon as possible.
Step 7: Get Professional Help
A CPA and CERTIFIED FINANCIAL PLANNERTM professional can help you create a financial plan that reflects your post-divorce financial situation, while a divorce attorney can help you navigate the legal aspects of divorce. During your divorce, having a Certified Divorce Financial Analyst® professional on your team will provide the financial advice you need. Lucky for you, I am all three!
At Bridge Divorce Strategies, we offer a complimentary initial consultation along with fixed-fee packages or an hourly rate to meet the needs of your unique situation. We also offer a Settlement Satisfaction Guarantee where I guarantee to increase your settlement by at least the amount of our fees or I will refund your money in full. There is nothing to lose and much to gain by bringing us onto your divorce team.