April was forty-two when she divorced Michael, and as a working mother of two, she wanted to get it over with as quickly as possible. She fought for the house because staying home seemed important and Michael wanted her to have what she wanted. So she kept the house – along with the hefty mortgage payment – and they shared custody of their two children.
Two years later, April found herself in serious financial trouble. She was at or above her credit limit on both credit cards, and her home was being foreclosed on. She just wasn’t able to make the mortgage payments on her salary alone, even with the alimony she was receiving, and she still owed income taxes to the IRS.
April didn’t know how it happened, how things went from okay to bad so quickly. All she knew was that she had to find someplace else to live, and in starting over – again – she realized she needed help.
Financial Repercussions Of Divorce (or separation)
Often the toughest times in our lives – times of divorce or separation – are times when money moves and things change. In our haste to get the process over with, we often overlook the financial repercussions of our decisions.
While it’s only natural to want to get things over with as soon as possible, resist the temptation. The assets at stake involve more than just the physical items of your home and car. They involve every area of your life and the stability of your financial future. What struck me most when I looked at April’s financial situation was how easily the last two years could have been avoided. In most cases, the following five money mistakes can be avoided by handling things proactively.
5 Money Mistakes To Avoid During Separation or Divorce
- Mistake #1: Emotional attachment to an investment: A lot of people get attached to an investment because of emotions. In April’s case, it was the family home. I’ve also seen people attached to a particular company stock or piece of real estate that has been in the family for years. An investment is only good if it helps you meet your financial goals.
- Mistake #2: Lack of a budget: Had April sat down and drafted up a simple budget of her household expenses as a single mother supporting two kids, she would have seen beforehand how her financial picture was changing. When you are no longer sharing expenses such as the heating or electric bill, expenses add up pretty quickly.
- Mistake #3: Not understanding tax repercussions: Most people find two surprises when it comes to divorce and taxes, and they aren’t happy ones.
- First, your filing status changes. Without your spouse’s income to balance things out, your refund could be turned into a bill. This is especially true for self-employed people.
- Second, alimony payments are considered income and as such they are taxed. This reduces your overall net income, which is another reason why drawing up a budget is so important.
- Mistake #4: Not completing QDRO paperwork: Pronounced quwa-dro, the acronym stands for Qualified Domestic Relations Order, and is basically means you may have the right to receive all or a portion of your spouse’s retirement benefits. QDRO’s are crazy difficult to navigate, however. They must be worded properly, signed by a judge, and accepted by the administrator of the retirement plan. In April’s case, she was entitled to receive $60,000 worth of benefits had she filed before the deadline.
- Mistake #5: Failure to get professional advice: It’s clear to see that mistakes one through four wouldn’t have happened had April come in to see a financial professional before the divorce process had begun. It might not be too late to seek help. You owe it to yourself and to the security of your RichLife. Find a qualified professional who can help.
Know somebody going through a divorce or legal separation? Don’t let them go it alone. Check out the Conversations For A RichLife Kindle Book, The Five Biggest Mistakes When Dealing with Divorce. A collaboration between myself and Certified Divorce Financial Analyst, Noah Rosenfarb, this book can help prevent major money mistakes.