How Should I Financially Plan For Divorce?

To create a robust pre-divorce financial plan, you need to do the following:

1. Figure out how much the divorce will cost
2. Make an inventory of the marital assets
3. Set up separate bank and investment accounts
4. Prepare a post-divorce budget
5. Plan what to do with your assets
6. Set up your retirement fund
7. Control your expenses
8. Consult a financial planner

1. Figure Out How Much The Divorce Will Cost

For the Average Joe, a divorce can cost anywhere between $3,000 and $20,000 depending upon the circumstances of the case, the complexity of the unresolved conflicts, and the level of acrimony between spouses. (Hint: The more the acrimony, the more you’ll probably spend.)

For the rich, a divorce can cost much more, especially in high-conflict cases involving children. As money is important to all, you need to be thorough with your finances before, during, and after a divorce – it doesn’t matter whether you are a regular person or a celebrity.

So, be methodical and know how much you may have to pay for the divorce – and budget for it. Divorce costs include:

• Attorney fees (billed by the hour)
• Filing fees, serving fees, and court costs
• Parent education tuition fees (if mandated by the state)
• Court-ordered evaluation(s) fee(s)
• Expert witness and private investigator fees (if necessary)
• Any costs to be incurred on property division (taxes, statutory fees, costs related to home refinancing, etc.)
• Fees related to Alternate Dispute Resolution (ADR) (if you choose mediation or collaborative divorce)

2. Make An Inventory Of The Marital Assets

You need to create a list (along with copies of documents/deeds) of:

• Marital assets and liabilities that were accumulated during the marriage and which are usually distributed 50/50 on divorce (The list should include tangible assets like home, financial assets, bank accounts, etc., and intangible assets like goodwill, brand value, etc. If you are unsure about their valuation, ask your divorce attorney to get them appraised.)
• Separate assets and debts of each spouse, which are distributed upon divorce
• Sources of income and expenses – for example, pay stubs, rent receipts, credit card statements, income from any other source, business accounts, etc.
• Titles on ownership deeds (for example, who owns marital property like the car or house?)
• Income tax returns

3. Set Up Separate Bank And Investment Accounts

If you have any joint bank or investment accounts, consider withdrawing your share of the bank account, (and, possibly, the investment account, but you want to check with your accountant to make sure removing those funds won’t create a tax liability) removing your name from the account, and opening separate accounts by depositing your share of the money or assets. Alternatively, review joint accounts with your spouse, close them down, take your share, and deposit your assets in new, separate accounts. Change beneficiary names as applicable, and don’t forget to close down any inactive joint accounts.

If you continue holding joint accounts with your ex-spouse after separating, you may be forced to deposit funds to or make investments from these joint accounts during the pre-divorce period. It is possible that your funds or investments may be misused and therefore it makes sense to open separate accounts.

Keep in mind that certain states will order you to leave the accounts are they are once a divorce has been filed, so check with your attorney before removing money from your accounts.

4. Prepare A Post-Divorce Budget

You need to know how your financial life will approximately pan out in the post-divorce period. So prepare a budget that will address the following questions:

• What will be your sources of income? (Alimony, child support, interest, salary, etc.)
• How much will be your monthly expenses?
• Will you be saving anything or will you need loans to survive?

You need to figure out if your standard of living in the post-divorce period will match the same standard you enjoyed during the marriage. Depending on what your budget turns out to be, you may have to consider finding another job. You should also take the worst-case scenario into account and make an action plan if your ex-spouse stops paying you alimony or child support. Perhaps, you may also have to buy a life insurance policy on your ex-spouse to guard against unforeseen circumstances.

Likewise, if you are the paying spouse, the budget will create another set of questions at you. The point is you should be financially prepared for whatever is thrown at you during the post-divorce period.

5. Plan What To Do With Your Assets

Depending upon what your post-divorce budget is, you may have to consider buying out your ex-spouse’s share in the home, selling your share to him/her, refinancing the home, or selling the marital home or property and dividing the money according to the agreement you may have reached with your ex-spouse.

If you have operated a business with your ex-spouse, you will need to value the assets and goodwill, and either sell your share to your ex or buy his/her share.

Your post-divorce budget would have already painted a realistic picture for you – all that needs to be done is the planning, either to sell the assets or to raise money to keep them. Plus, every decision you make must be in your children’s best interests. Think through this step carefully and don’t fall so much in love with any asset that you cannot let go of it. Be practical.

6. Set Up Your Retirement Fund

If your marriage lasted for a medium to long term, then ask yourself how you will earn a monthly income after retirement. It doesn’t matter whether you are dependent on your spouse’s retirement fund or not – you need to set up your very own retirement account. Experienced attorneys are usually networked with quality financial consultants, who can help you plan and set up a retirement fund from the marital assets or income that are awarded to you.

Note: To get a share of your spouse’s retirement fund, your attorney has to request a QDRO (Qualified Domestic Relations Order).

7. Control Your Expenses

Divorce not just divides the family – it slashes the monthly income by 50%. While you may not want to sacrifice the standard of living you enjoyed during the marriage, consider controlling expenses and building up cash reserves. Consider spending only on necessities and basic comforts, while ignoring the luxuries.

If you splurge and are then made to pay a larger-than-budgeted alimony and child support, it could hit your finances hard. Likewise, if you are the alimony receiver, and you spend money according to your estimates, then your finances may suffer a blow if the alimony awarded is lower than expectations.

8. Consult A Financial Planner

You may like to consult a financial planner, especially if you haven’t been managing money during the marriage. Even if you know how to manage money, know that divorce can complicate your finances as much as it can confuse your emotions. A quality financial planner and a divorce attorney can guide you smoothly through financial complications and help you secure your future.