Divorce is hard enough, but these 5 common divorce settlement mistakes can make it even harder. Here’s what you can do to avoid these common mistakes and be on your way to a brighter future.
1.) Failing to Budget for All Lifestyle Expenses (Worst Divorce Settlement Mistake)
The biggest divorce settlement mistake we see is failing to budget for all lifestyle expenses in the aftermath of divorce. Whether you were married for one or 30 years, it can be difficult to unravel your finances during a divorce. You may find yourself navigating decisions (and bills) that you didn’t have to think about when you were married. This is why it’s so crucial to make a budget in the early stages of the divorce process. The last thing you want is to find yourself overspending because you didn’t know what you needed, or worse, with a settlement amount that doesn’t actually cover your expenses.
Make a list of all your lifestyle costs, including housing costs, utilities, food, transportation, clothing, childcare costs, and entertainment. Be as detailed as possible and use this information throughout your divorce proceedings to advocate for what you will need to ensure a smooth transition into your post-divorce future.
2.) Not Fully Understanding the Settlement Terms
When assets are divided, they are usually divided according to monetary value regardless of how easily accessible that money is. For example, the value of a shared home may be significant. This means it’s assigned a high value in the division process. But because you can’t easily withdraw cash from a home’s value, continuing to pay for the mortgage and maintain the home would be difficult without the necessary cash flow to do so. Therefore, one of the most common mistakes in a divorce settlement is failing to understand the terms of your settlement and how the assets received will affect your finances long term.
Accepting a “50/50” division of assets may not be a wise decision if you do not have the cash flow to maintain them. You may feel strong emotional attachments to assets like your home, but fighting for full ownership may not be in your best interest if you can’t otherwise afford the mortgage payments. These are important considerations to think about before agreeing to the settlement. What may seem great on paper can turn into a financial hardship waiting to happen if you don’t fully understand the long-term implications.
3.) Neglecting to Create a Long-Term Financial Plan
Similarly, not creating a long-term financial plan in the wake of a divorce is another common divorce settlement mistake we see. Just like you should make sure you have a budget going into divorce, you should also create a long-term financial strategy for the years following divorce. The truth is, your financial goals as a newly single individual will differ greatly from your goals as a couple. Not only that, you will likely have access to fewer financial resources than you did when you were married. While not necessarily a bad thing, it will certainly have an impact on how you spend money in the future. Proactive financial planning can be an effective way to make the most of what you do have and help you build a confident financial future.
4.) Overlooking the Tax Implications of Your Settlement
Additionally, overlooking the tax implications of your settlement—especially the varying tax rates on different types of assets—can be detrimental to your financial security. Unfortunately, we’ve seen financially savvy people offer seemingly attractive settlements to their ex-spouses under the guise of goodwill. But by failing to disclose the tax burden of the assets they’re offering, they actually walk away with the better deal. Familiarize yourself with the tax rates for illiquid assets. This includes investment accounts and real estate property if you plan to sell those assets for cash flow. While divorces finalized after 2019 no longer treat alimony as taxable income, if you were divorced prior to that, make sure you also know the rate at which any alimony payments will be taxed so you can budget accordingly.
5.) Navigating Divorce on Your Own
Lastly, be sure to include your entire team when making a decision about the divorce settlement. We’ve seen many clients make settlement decisions based only on advice from their attorney without involving their financial professionals at all. This may be a good decision from a legal standpoint; however, it’s a big divorce settlement mistake when it comes to your finances. There are many intricacies that come with a divorce settlement. From cash flow to taxes to alimony, a divorce settlement can have lasting financial consequences. Reviewing the settlement with a trusted financial advisor can be a great way to make sure you’re making the best decision for your needs.
Partner With a Professional to Avoid Divorce Settlement Mistakes
Even under optimal circumstances, divorce is tough. You may hit snags and face complications during this process, so having a team of experts behind you is smart. At Calamita Wealth Management, we can provide the support you need to avoid divorce settlement mistakes. Our team is also there to help you navigate the divorce transition with confidence. We will help you look at the big picture. We’re here to analyze how each financial decision impacts other decisions, especially from a long-term perspective. Schedule an introductory phone call using our online calendar or reach out to us at (704) 276-7325.
Catherine Dematte Burawski is a senior life planner and divorce specialist for women at Calamita Wealth Management. Calamita Wealth is an independent, fee-only wealth management company. After her life-changing divorce and financial disarray, Catherine was feeling like she ruined her life. But through the process, she realized that what she thought was ruin was actually a defining moment. Now Catherine uses her experience and passion to help other women navigate divorce transition. With the help of the Calamita Wealth Management team’s comprehensive financial planning services, Catherine, a Financial Paraplanner Qualified Professional℠professional, provides compassionate emotional support and the guidance necessary for a seamless and empowering divorce transition. She loves to help women see the possibilities of life and move forward with excitement and hope.
Catherine is a Pennsylvania native who has called Lake Tahoe, CA, home for the last two decades. She and her daughter, Mia, enjoy skiing, hiking, paddleboarding, kayaking, and river and lake swimming. They also enjoy music, dancing, and boxing. Catherine and Mia are up for about any adventure that comes their way (including a future trip to Italy)! To learn more about Catherine, connect with her on LinkedIn.