Going through a divorce is hard enough. It becomes even more difficult when you find that you’re not able to reach the financial settlement you were hoping for because you didn’t take care of your finances when you first separated.
Here are some of the top financial mistakes divorcing couples make and how to avoid them:
1. Cashing in investments to pay bills
Once the money is out of your investment accounts, it can cost you more than you think. You may owe substantial taxes on the money you take out due to early withdrawal penalties and certain tax protections. It won’t help you stay on track financially if you end up owing a big tax bill.
2. Not considering extra expenses
Now that you’re separated and no longer living together, there are additional expenses to think about. You’ll need a new place to live which comes with rent or mortgage, utility bills, insurance, etc. But you can’t just forget about your old home, at least not until your divorce is settled. If both of your names are on the mortgage, you can be held financially liable for the mortgage even though you don’t live there. If it’s not paid, it will hurt your credit. There’s also the possibility that it will go into foreclosure.
3. Fighting over the house
Before you start to fight over who will get the house and whether or not you’ll sell it, consider the financial responsibilities of keeping it. Will you be able to pay the mortgage, utilities, taxes, insurance, and maintenance on it with just your income? If not, it may be better for you financially to let go and sell the house.
4. Not having a financial plan
Now that you’re living on one income, you need a financial plan more than ever. It’s time to create a budget, figure out how much you can afford to pay for your expenses each month, and start thinking about how you will put money away for retirement. Since you’re no longer married, chances are you won’t be eligible for your spouse’s social security when the time comes. (This depends on how many years you were married.) It’s important to know what you can afford on your single income.
5. Deciding your financial issues one-at-a-time
By looking at each source of income and each asset on its own, you miss the big picture of tax implications, capital gains and losses, and inflation. Not all assets are equal so they shouldn’t be divided equally. One asset may generate more income or be worth more in the future than another. Take a look at your whole financial picture, including future income potential and taxes, before making decisions about how to divide everything.
6. Forgetting about unsecured debt
Remember that you’re also on the hook for any unsecured debt that carries both of your names, like auto loans, personal loans, and credit cards. Decide how these will be paid and who will be responsible for these debts. But don’t let it go at that. If you’re no longer responsible for a debt, follow up to make sure it’s been paid or that your name has been removed by contacting the creditor directly. Otherwise, it could come back to haunt your credit score years later.
Avoiding these common mistakes when you’re going through a divorce can help ensure a solid financial future for you down the road. And if you’re trying to sort through the financial implications of a divorce, consider connecting with a trained financial counselor to discuss your options and create a reasonable monthly budget.