Going through a divorce can be costly in more ways than one. Hiring a divorce attorney will cost money, but divorce is also costly to your mental and emotional health. Time and money are spent in the divorce process, so you want to do your best to also avoid costly financial mistakes that can be made during and after the divorce case is finalized. The best way to avoid any unintended financial mistakes is to talk to an experienced divorce attorney, or even consult with a financial advisor.
Table of Contents
- Financial Mistake #1: Fighting to Keep the Marital Home
- Financial Mistake #2: Not Understanding the Different Types of Retirement Accounts
- Financial Mistake #3: Forgetting to Account For Taxes
- Financial Mistake #4: Assuming “Equal” Division Is the Fair Division of Property
- Financial Mistake #5: Don’t Make Financial Decisions Based on Your Emotions
Here are some of the most common financial mistakes that are made during the divorce process:
Financial Mistake #1: Fighting to Keep the Marital Home
Make sure to consider all of your options before fighting tooth and nail for the marital home. Keeping the marital home will likely involve a refinance of the mortgage and a buy-out of the other spouse’s equity in the house. This refinance will increase the mortgage payments, so you probably won’t be paying what you used to be paying per month to live in the house. Also, before the divorce, you and your spouse might have been sharing the cost of the taxes insurance and utilities, but now, you will be 100% responsible for those monthly expenses. Do your math before you start your fight for the house. Figure out first if you will be able to afford the house, and whether those payments will be worth it. Being awarded the house in the divorce does not sound so great when you have to eat Ramen noodles every night and skimp on toilet paper just to afford to live there.
Financial Mistake #2: Not Understanding the Different Types of Retirement Accounts
It’s important to remember that not all retirement accounts are the same. There are retirement accounts that offer a set payment to you each month upon retirement, defined benefit plans, which are usually pensions. The longer you work, the larger your monthly payment will be from the pension plan.
The other retirement plans are defined contribution plans, which include IRAs and 401(k) accounts, and the life. These accounts allow you to withdraw funds upon retirement age (with certain limits set by the law), but the balances of these accounts fluctuate based on the investments. Any funds that were added the IRAs or 401(k) accounts during the marriage, and any pension benefits that accumulated over the years of the marriage are all considered marital. Knowing what retirement accounts exist between you and your spouse, and how they will be divided, will help you identify your current retirement position, and what action you might need to take in the future to feel secure about retirement.
Financial Mistake #3: Forgetting to Account For Taxes
Just about everything about your tax situation is going to change upon divorce. You will have a new filing status, different tax bracket, and possibly a change to the dependents you claim if you or your spouse will get to claim the minor children, or you alternate each year. You should consider the tax implications of divorce before your case is final so you can adjust your withholdings appropriately on your paychecks. You also need to consider your future liability when it comes to your income. If you have dividends, sell stocks, or withdraw funds from your retirement, this could negatively affect your tax liability for the next tax year. Consider meeting with an accountant or other tax preparer so you won’t be surprised about your tax liability once the divorce is final.
Financial Mistake #4: Assuming “Equal” Division Is the Fair Division of Property
A house in divorce does not have the same value as a retirement account. A rental property does not have the same kind of value of a car. When trying to settle a case, you need to think about more than just the inherent value and whether it is worth it on your end to fight for an unequal division of some assets. If you are planning on receiving 50% of the equity from the marital house, that is money you get at the divorce and unless you invest it, that’s all the money you get. However, a retirement account that is divided has the potential for losses and gains but hopefully gains if you won’t be retiring for many years. A car’s value will go down the longer it is used and the older it gets, but a rental property has the potential to earn you additional income despite having bills to pay and possible loss in value. Consider the real value of the property and other assets you are going to be dividing in your case and think about what might have more value for you based on your financial situation currently and in the future.
Financial Mistake #5: Don’t Make Financial Decisions Based on Your Emotions
It’s understandable that many people will be emotional during their divorce, however, you have to attempt to separate your emotions from trying to settle the financial side of your case. One spouse might want to fight tooth and nail for their pension, or their house, or even a particular car because they want to get back at the other spouse and they know the other spouse also wants those particular items or property. Even worse is fighting over small items, like lamps, silverware, or other household items just because you don’t want your spouse to get them. Allowing your emotions to get in the way can drag the case out causing additional, and unreasonable litigation, ultimately resulting in higher attorney fees. Take some time to deal with your emotions before making any financial decisions, and consider your future financial security more seriously rather than focusing on getting back at a spouse.
To learn more about these 5 financial mistakes, and to hear about more mistakes you want to avoid, listen to the interview between Anderson & Boback attorneys, Kimberly Anderson and Janice Boback, and Beth Kraszewski, President and Founder & Wealth Manager in Chicago focusing on Financial Planning for High Achieving Professionals. Click on the following link to hear the full interview and to get more advice: https://illinoislawforyou.com/resources/common-financial-mistakes-during-chicago-divorce/