Posted by Karen Munoz, EA

Top Financial Mistakes to Avoid During A Divorce

Top Financial Mistakes to Avoid During A Divorce

Divorce comes with a series of surging emotions and the last thing on people’s mind, most times is finances. However, you will make several decisions that might directly or indirectly affect your finances. 

As a result, we will discuss several financial mistakes divorcing couples might be guilty of and how to avoid them. While you might be comfortable dealing with some of these personally, it is important to consider talking to an experienced professional:


  1. Underestimating or Ignoring Your Expenses

Everyone knows what they earn per month, even though not many can explain where their money goes. As a result, try and jot down your entire expenses and come up with a realistic budget for each month. It would help if you also considered what future living expenses would likely cost while accounting for inflation. 

Ignoring inflation is a bad call as you might shortchange yourself with an inability to maintain your lifestyle.

 

  1. Assuming that you must divide your property Equally to be fair

Make sure to understand that the value of an asset is not tied to the present market value. As a result, any asset that generates income will be worth way more than its current market value. 

With this, agreeing that both spouses will get the same monetary value property does not always translate to a fair and equal share of the asset. When trading assets in a divorce, be sure to compare the actual worth of assets, and don’t forget present value, tax basis, and transaction cost.


  1. Failure to Secure Alimony Payment and Child Support Payment with Insurance 

If your spouse is willing to pay alimony and child support, collection will not prove difficult. Your spouse must get life and disability insurance so that the payments will keep on even if your spouse dies or becomes disabled. 

Review the policies and ensure that your spouse has the correct designations. Know that should your spouse decide to stop paying, such policies will not help. To enforce this right, you might have to go to court and get an order to force your spouse to make the necessary payment.

 

  1. Failure to Know Your Liability for Unsecured Debt

For many people, unsecured debt translates to debt from consumer credit cards. This debt would be a shared liability if incurred in the marriage, irrespective of the spouse who used the card. 

While settling a divorce, responsibility for that debt will be divided. However, the credit card company is often not interested in how you settle as they can come after you two for payment. As a result, you are better off paying off the entire debt before finalizing the divorce.

 

  1. Not Having Realistic Expectation on Investment Returns 

Your spouse might be trying to convince you to settle for a particular investment because they projected it would grow over the years. Getting professional advice is the best bet in such a case as such investment might either not grow or yield a negative result. 

You will get more financial security from liquid assets (assets or cash that one can easily convert to cash) than other investment types, which come with some risk. As a result, make sure to investigate any investment before accepting it. 


  1. Failure to Evaluate a Defined Benefit Pension Plan well

A (DBP) defined benefit plan is a real pension plan controlled and funded by the employer, which pays a monthly income when retired. It is not the same with a defined contribution plan like a 401(k).

While workers need to wait until after retirement before they receive payments, a DBP has a value at the moment, and the spouse that is not working qualifies for a share from that.

 

  1. Not Considering Long Term Financial Security

It is wrong to focus solely on dividing assets, getting child support, alimony without giving attention to how things might be in the coming decades. As a result, try and work with a financial planner to examine any proposed settlement before signing and guide you on the long term consequence of such a decision. 


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THANKS FOR VISITING.

Karen Munoz, EA
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