How to Prepare Yourself Financially for Divorce

Going through a divorce is no doubt an emotionally taxing experience. Yet, for many couples navigating divorce, the financial ramifications can be just as devastating.

According to Fidelity Investments® 2020 Divorce and Money Study, more than one-third of divorcees surveyed said they still hadn’t recovered financially up to five years following their divorce. Moreover, 54% of those surveyed admit to making financial mistakes during the divorce process.

Preparing financially for divorce isn’t just about protecting your assets; it’s about laying the foundation for your future financial stability and independence. This advanced planning is crucial, as the decisions you make during this period can have lasting effects on your financial well-being for years to come.

Preparing Financially for Divorce: 8 Essential Steps

#1: Gather Financial Documents

Gathering financial documents is a critical first step in preparing yourself financially for divorce. This process involves collecting all records that detail your financial history and current status, including bank statements, tax returns, investment and retirement account statements, property deeds, insurance policies, and any other assets or debts.

Understanding your complete financial situation allows for increased transparency, which can help facilitate the equitable division of assets. It also aids in future financial planning by allowing you to realistically anticipate your post-divorce financial status.

#2: Understand Your Assets and Liabilities

Gaining an understanding of your assets and liabilities is essential for anyone preparing financially for divorce. Beyond simply gathering financial documents, this step involves taking a deep dive into what you own (assets) and what you owe (liabilities).

Examples of assets may include:

• Bank accounts
• Investments
• Real estate
• Businesses
• Personal property

Meanwhile, liabilities might encompass:

• Mortgages
• Car loans
• Credit card debt
• Student loan debt
• Any other outstanding obligations

Knowing the full scope of your financial status is crucial for several reasons. It allows you to assess your net worth, identify which assets are most important for your future financial security, and understand how the division of these assets and liabilities might impact your life post-divorce.

#3: Open Individual Bank Accounts

Opening individual bank accounts is an important step for anyone preparing financially for divorce—especially those who rely on joint accounts for managing household finances. This action isn’t about secrecy or planning for a contentious split; it’s about establishing financial independence and making sure you have access to funds when you need them most.

This independence is crucial in situations where emotions and financial interests might run high, further complicating personal financial management. By establishing individual accounts, you can preemptively remove potential conflicts over access and use of funds, ensuring you can meet your daily living expenses and manage personal financial obligations without interference.

Individual accounts also serve as a straightforward way to begin segregating finances in preparation for the eventual division of assets during the divorce process. This simplification can significantly reduce administrative burdens and clarify financial assessments, making it easier for legal representatives and courts to establish a fair distribution of assets.

#4: Monitor Your Credit Score When Preparing Financially for Divorce

Divorce proceedings don’t necessarily impact your credit score directly. However, changes in your financial standing and obligations leading up to and following a divorce can indirectly influence your creditworthiness.

For instance, if your ex-spouse fails to pay for a debt that still bears your name, your credit score could drop unexpectedly. Similarly, if you become solely responsible for debts that you previously managed with a dual income, the additional financial burden may affect your ability to keep up with payments, thereby hurting your credit.

As you navigate the divorce process, it’s critical to monitor your credit score to ensure it accurately reflects your individual financial health and habits. It’s also wise to either close all joint accounts or transfer each account to the individual who will be taking responsibility.

This proactive approach not only protects your financial well-being but can also help ease the transition into your post-divorce financial life.

#5: Consider the Tax Implications

Various financial implications, particularly in relation to the division of assets, custody of dependents, and changes in filing status, can profoundly impact your filing status and tax liabilities post-divorce.

For instance, selling a joint home as part of the divorce agreement might result in capital gains taxes. Similarly, withdrawing funds early from a shared retirement account may lead to penalties and additional taxes in certain circumstances.

If you have young children, custody arrangements determine which parent will claim the child as a dependent, directly affecting eligibility for potentially valuable tax benefits such as the Child Tax Credit. While the parent with primary custody typically claims these benefits, this can be negotiated as part of the divorce agreement.

Lastly, your filing status will likely change after a divorce, either to “Single” or “Head of Household,” depending on your circumstances. This change can affect your tax bracket and the amount of tax you owe or the refunds you can expect.

Given these complexities, understanding your future tax situation is a key aspect of preparing financially for divorce. It’s a good idea to consult with your financial planner or tax advisor, who can provide guidance tailored to your specific situation.

#6: Review Your Insurance Needs

In many cases, preparing financially for divorce involves a reassessment of your insurance coverage and needs. You’ll want to consider how changes in your household composition and financial responsibilities may affect your needs for health, life, auto, and property insurance.

For instance, if you were previously covered under your spouse’s health insurance policy, you will need to secure your own coverage following the divorce. This might involve enrolling in a health insurance plan through your own employer, purchasing individual health insurance, or exploring options like COBRA to extend your existing coverage temporarily.

Additionally, you may need to adjust policies you already hold, such as life insurance. If your former spouse was the primary beneficiary on your policy, for example, you might want to update this to reflect your current wishes.

#7: Create a Post-Divorce Budget

Understanding and preparing for your financial reality post-divorce is a crucial step when preparing financially for divorce.

This is particularly relevant for women, who tend to experience a sharper decline in their standard of living than men after a divorce. According to a 2018 study from the National Library of Medicine, a woman can expect to see an almost 30% decline in her standard of living, whereas a man often sees an increase of 10% following a divorce.

Adapting to a single income often requires reevaluating your lifestyle to align with new budgetary constraints. This might mean downsizing your living situation, reducing discretionary spending, or finding ways to increase your income through additional work or investments.

By clearly understanding your income and managing your expenses, you can avoid financial pitfalls and unnecessary stress post-divorce. Creating a budget can also empower you by providing a clear path forward and helping you regain control over your financial life during a period of significant personal change.

#8: Seek Personalized Guidance from SageMint Wealth

Preparing financially for divorce can be a daunting task that requires diligence, careful planning, and a proactive approach. By taking these key steps, you can seek to protect your financial interests and pave the way for a stable and confident financial future.

Remember, preparation and knowledge are your best allies when it comes to safeguarding your financial well-being. Whether you’re facing a divorce or simply want to take control of your personal finances, SageMint Wealth can provide personalized guidance, empowering you to navigate your financial journey with clarity and confidence.

SageMint Wealth is a wealth management firm for high-net-worth individuals, families, and business owners. Our team is committed to growing wealth and investing in a better world. Contact us to discover how we can help you develop a comprehensive plan that reflects your financial needs and aspirations.