We have said it before: divorce is an emotional, legal, and financial process. Your best strategy is to focus most of your energy on the financial issues while reducing the influence of emotion and following the rules set out by the law. As you move through the divorce process, you will need to make many financial decisions. Follow these guidelines to make the best decisions possible.
Avoid the temptation to take a vacation from financial reality. We have seen people spend more money than they should when their marriage is ending because they feel great, feel depressed, or think that somehow their spouse will wind up with the bill. While it may be hard to accept, divorce is likely to change your lifestyle in such a way that you have to be more careful with money than you were before—even if you were a penny pincher. The sooner you accept this change and begin conserving your financial resources, the better off you will be.
Value your property as if you were selling it. As you consider the value of items during negotiations, do more than just consider the item’s market value. This is particularly true when dealing with a house, where you can wind up paying 5 percent of the sale price, or more, to real estate agents if you want, or need, to sell it. It is common for people who initially think they will stay in the marital home for many years after divorce to sell it in a much shorter period. Such moves are hard to predict, but the costs associated with selling a property are easier to know and should be taken into account.
Do not forget about taxes. Lawyers generally have a basic understanding of tax implications for common situations. However, you may need to talk to an accountant if you have anything that is nonstandard. One example of a tax implication you might overlook is when an investment account is divided. Stocks in the account may have different amounts of taxable capital gains. If you don’t take that into account when valuing them, you could be at risk of getting less than you expect.
Choose cash now. When negotiating the property division or alimony portions of your divorce agreement, you may be given the option of receiving payments for a specified period of time or receiving a lump-sum immediately. The lump sum would be less money than if you added up the ongoing payments. However, you need to consider three things when contemplating a decision like this. First, money you receive in the future will be worth less than an equal amount of money you receive today, as a result of inflation. Second, money you have today has more value to you because you can benefit from investing it. Third, if you get an immediate payment, you do not have the risk that your spouse will fail to make the promised future payments. When we take these factors into account, in most cases, we advise people to take the lump sum, even though it may be a smaller amount. This same rule applies to other types of promises of future compensation.
Adapt to changed circumstances quickly. Trying to hold onto a lifestyle that is no longer affordable can cause you to get into significant debt faster than you might think. You will need to monitor monthly expenses carefully to ensure that the budgets you created during the divorce process were realistic. If you find otherwise, you need to take an honest look at whether what you are seeing are unusual expenses, perhaps related to setting up a new residence, or expenses that you can expect will recur and will need to be cut or eliminated.
Do not make quick decisions about major commitments. If at the beginning of your divorce, you owned a home with your spouse, and you now find yourself selling or moving out of that house, be wary of the urge to make a new major commitment quickly. Not only may you find that your post-divorce budget won’t support the home you want but you may also find that within a few months of your divorce you have very different feelings about your needs. Your life is going through a major change, and it is difficult to predict exactly how things will turn out. As a result, you should use caution and consider renting or some other short-term option that allows you some time to get through the adjustment before taking on significant debt or long-term financial obligations.
Consider the cost of the fight. We write a lot about avoiding court fights. It’s also important to realize that even if you avoid going to court, you can easily run up large attorney fees. It’s not extraordinary for complex cases going to court to cost the marital estate hundreds of thousands of dollars. All too often people spend more in fees and their own time arguing about a particularly emotional piece of personal property than the item is actually worth. Try to remove emotion as much as possible from your negotiations and think like a business person. Always review whether the cost of winning the fight is worth the reward. Ultimately, the ability to step back from strong feelings and make a calm, rational decision is one of the most valuable life skills that you can hone during your divorce.
