
3 Financial Mistakes to Avoid Before Your Divorce
3 Financial Mistakes to Avoid Before Your Divorce
If you are contemplating divorce or are in the process currently, you may find the following pre-divorce tips helpful in optimizing your post-divorce financial wellbeing.
Mistake #1: Not putting emotions in their place.
A divorce is an emotional event. We all know someone who is a level-headed, rational person yet lets emotions get the best of them during their divorce. Why is that?
I recently read a revealing article that provides insight into how our brains react when contemplating revenge— a common objective in divorce. The blog post titled The Upside of Irrationality and Revenge, by behavioral economist Dan Ariely, cites work where researchers had the opportunity to scan brain activity of people actively taking revenge. The findings showed that during the act of taking revenge, activity increased in the part of the brain associated with the way we experience rewards. In other words, we may be hardwired to feel good when we exact revenge. Unfortunately, seeking financial revenge in divorce doesn’t typically translate to a well-thought-out long-term financial strategy.
The takeaway here is not to provide a solution to blocking out naturally occurring and powerful emotional tendencies, but rather to create awareness about the potentially costly impact emotion-based decisions can have during a divorce. In my experience, spiteful and emotion-based actions do nothing to meaningfully change the divorce outcome but can add thousands of dollars in unnecessary costs to the process. The best course of action is to base decisions on facts, budgets, and planning needs; trade the short-term pleasure of revenge with a more successful long-term focus on your post-divorce life.
Mistake #2: Not approaching divorce as a financial-planning process.
The process of divorcing requires that income, assets, expenses, and debt be measured and divided at a specific point of time, typically as of the date of divorce. As a result, negotiations tend to focus on the present finances (which will soon change) and not post-divorce finances (where the outcome matters most). For example, mortgage, taxes, and other expenses related to the marital home are of little value to the spouse moving out and supporting 100% of their living costs post-divorce. Ignoring post-divorce finances can lead to harmful and unintended financial consequences.
Tip: In addition to providing the court with current expenses (required), create an accurate list of your expected post-divorce income and expenses. This will help provide a thoughtful and targeted focus on the asset-division process and likely result in settlement agreement terms that increase your odds of financial success post-divorce. Clever post-divorce budgeting can help eliminate uncertainty around proposed agreements and help to speed up the negotiation, which brings down the overall cost of the divorce process.
Mistake #3: Not hiring a divorce professional.
Income, savings, retirement, and debt are part of nearly every divorce. In some cases, money and finance-related topics may cause the separation itself. Given the significance that finances play in divorce, it is surprising that most divorcing individuals continue to leave financial decisions in the hands of the courts, family law attorney, or their divorce mediator. Consider this question: If you seek financial guidance outside of divorce, would your first call be your family law attorney?
Who can assist with divorce finances? It is essential to know that today, there are financial professionals with specific training and expertise related to divorce finances and asset division. You should specifically look for a professional that holds the Certified Divorce Financial Analyst™ (CDFA™) or Advanced Divorce Financial Analyst® (ADFA®) credential. Both credentials are sponsored by the Institute for Divorce Financial Analysts, providing specialized pre-divorce financial planning education and certification since 1993.
The takeaway for this tip is certainly not to discredit family law attorneys and divorce mediators, but to recognize that better results can be achieved by utilizing a collaborative approach with highly specialized professionals. When each expert focuses on their area of expertise, the process is quicker, less expensive, and produces a better outcome.
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