Many experts will tell you that you need to approach your divorce as a business transaction and that is the best way to be smart about your finances and divorce. If you can do this, then figuring out the impact divorce will have on your finances becomes a mathematical analysis, a rational decision, but it’s rarely that simple or easy to do.
There’s almost always less money after divorce and that creates many fears, such as being able to maintain your lifestyle, having to earn more money, or being forced to move to a less expensive neighborhood. Even for the spouse who is used to managing the household finances, these fears can sometimes keep people in deeply-troubled marriages.
Fears however, are False Evidence Appearing Real and often the way to combat them is to do more research and gather more information. That’s definitely the strategy when it comes to financial fears.
In this episode of Conversations About Divorce, I’m joined by Certified Divorce Financial Analyst, Russ Luna from Luna Financial Advisors. Listen in to learn:
- what is a lifestyle analysis
- how to identify the financial obstacles to divorce
- how professionals evaluate the self-employed
- what is dissipation and how you can spot it
Everyone can learn from what Russ and I discuss – these tips don’t apply only to the wealthy. The approach to developing your financial settlement is essentially same regardless of your net worth or even if your debts exceed your assets. And the strategies for confronting common suspicions such as one spouse hiding assets, or the self-employed person whose reported income doesn’t match their spending, can be used by anyone. So listen in or keep reading or do both …
Understand Your Current Financial Situation
The first financial step for anyone facing divorce is to understand their current financial situation and this is about creating a balance sheet. That’s basically a list of everything you and your spouse own either individually or jointly. It includes your house, rental properties, vehicles, checking and savings accounts, retirement accounts … EVERYTHING. And don’t forget your debts too, such as your mortgage, Home Equity Line of Credit, credit cards, student loans.
If any of these items would be classed as a non-marital list keep it on the list but in a separate category.
Next to each item you’ll need to put down its value. To start with it can be a simple estimate. As you get into negotiations you will likely need to use more objective measures and ultimately you and your STBX will need to agree on the value.
If your spouse is the one who handles all the finances this may not be easy for you. However, you can start identifying the things that your family uses and this gives you the basis for asking your STBX questions such as if your car is own outright or if there is car loan on it.
Understand Your Lifestyle
This goes hand-in-hand with the balance sheet and is how you typically spend your income. It includes everything from regular household bills such as water and trash collection to dining out to car maintenance to activities and entertainment.
If you don’t use a program to record these, then now is a good time to start. Personally, I like the YNAB program because I can record expenses on my phone and I do record my purchases daily. (Use that link to YNAB to get a $6 discount.) I also reconcile to my credit card and bank statements every month. It sounds like a pain but truly, this is the most effective way I know of understanding where my dollars are going. I would start doing this as soon as you possibly can because while the data may be incomplete initially, over four to six months you’ll start to have a much better picture of your spending. You’ll also start to see the gaps and know that maybe you have to plug in estimates for these, such as car registration costs or vacation spending.
Create Your Settlement Proposals
The next step is to start creating your proposed financial settlement which is how you and your STBX will divide your assets and debts. In doing this, it helps to have a good understanding of what the law provides in your jurisdiction. You’ll likely need to know how a marital asset is defined and how the law would divide the assets – is it 50/50 or an “equitable division.”
The marital home is often the largest and most valuable asset a couple has and this sort of modeling will help you see what it would take for one spouse to keep the home and to buy out the other spouse.
You’ll also need to know how child support and/or spousal support could impact you because these two things will factor into your monthly spending.
Chances are in doing this modeling you’ll come across some obstacles, such as you want to buyout your STBX’s equity in your home but you don’t think you’ll qualify for a mortgage, which leads us to the next point…
Identify Your Obstacles
This is part of the trick to overcoming your financial fears … when you come across an obstacle, such as maybe not qualifying for a refinance, don’t stop there. Ask more questions about what is needed and then go back to your settlement proposal and see if that can be tweaked.
A professional will help you with any of the above steps but I think this is the step where it can be really important and hugely beneficial to call in the experts. Russ Luna gives the example of a settlement that doesn’t create enough monthly income for one party. In this case it may be possible shift the allocation of stocks and bonds in a portfolio to more income-generating bonds. Another possibility might be for a property holding to be sold and the proceeds invested in an income producing asset.
Will I Have To Go Back To Work?
It’s not uncommon for one spouse to be a stay-at-home parent and some couples do agree to continue that arrangement for a period, especially with very young children and when alternative day care arrangements are costly.
But with child support and spousal support based on each party’s income, in my experience it’s more common for the stay-at-home parent or the parent who is working part-time to be expected to return to full-time work.
While this transition may be in progress, the child support and spousal support calculations may be made using “imputed” income, that is a figure for earnings that the party could reasonably be expected to make given their qualifications, expertise and local market conditions. Sometimes, a vocational expert may be called in to help with this assessment.
Having income imputed to you doesn’t require you to make that income. If you have other assets that will be assigned to you in the settlement, you could make the decision to spend those assets rather than return to work. However, that is a personal choice and it likely doesn’t mean that you should have a larger portion of the assets or receive a higher support amount.
The decision to go back to work is an emotional and a rational one. Certainly from a rational standpoint, armed with your lifestyle spending, your anticipated assets and your projected income, you have what you need to understand the impact your new circumstances is going to have on your lifestyle. This will help you assess the feasibility of possible changes to your spending and the difference that a return to work would make.
My Spouse’s Income Is Really Much Higher
A common concern for people whose spouse has their own business is that the income tax returns for that business may not accurately reflect the complete income picture. Russ Luna says it is very easy for the self-employed to hide assets and shelter income and I’ve had clients tell me that they know their spouse does a lot of cash business on the side that likely goes unreported. I’ve also had clients tell me their spouse has stated that they are going to intentionally dial back the business until the divorce is complete.
Not so fast … this is another situation where a Certified Divorce Financial Analyst like Russ Luna can help. In this situation, a professional would conduct a lifestyle analysis to assess and highlight discrepancies between stated income and true income. This information can be presented to the other party as a bargaining tool to get full disclosure. In the best outcome, the parties would then come to a settlement agreement without going to trial.
Whether you need to involve a CDFA, is really a cost benefit analysis – weigh the estimated cost of using the CDFA against the potential difference in the settlement, factor in the emotional energy of more negotiations and you’ll have the basis for a rational decision.
My Spouse Is Hiding Assets
Possibly the worse fear is that of a spouse who has been contemplating divorce for some period and who has used that time to hide assets or to spend lavishly on the extra-marital affair. If this is one of your concerns, then you’ll need the help of specialists who can start tracing back assets and identifying where money was spent or when it went missing. Armed with the findings, you can present this to your spouse and make the case for a larger proportion of the assets to compensate you for the marital assets that they have already used. You can also use this as an argument for debts associated with an extra-marital affair, for example to be assigned to your STBX and not shared.
I’ve mentioned Certified Divorce Financial Analyst (CDFA) several times so a bit more about these professionals. Like divorce coaches, these are a new breed of experts in the divorce arena so don’t be surprised if you haven’t heard of them. A CDFA can work anywhere in the U.S. and usually they work in a team approach with you and your attorney. They can also be hired as a third-party neutral by you and your STBX so they are advising you as a couple. This will save money since it means that the analyses are shared and you’re not paying two separate experts to do essentially the same work. In this role, they can be particularly helpful to the couple who are trying to do their own divorce. In addition to gathering the financial information and modeling scenarios, a CDFA will help you understand the tax consequences of different proposals and how to divide your assets to avoid unintended consequences.
Are you fearful about your divorce? Letting your fears drive your decision-making in divorce or in life is not advisable – they will rarely lead you to good decisions. I can help you figure out how to overcome your fears and that starts with a free 30-minute consult. Contact me to get yours set up!