It is no secret that divorce is expensive, but because the process of getting a divorce can be so emotional, many people end up making poor financial decisions along the way. The combination of an expensive divorce and poor financial decisions can send you into the red pretty quickly. This is why it is a good idea to examine some of the common pitfalls others have succumbed to and create a financial plan that is specific to your situation.
According to a recent Forbes article, several common financial mistakes people make during a divorce include:
- Fighting to keep the marital house regardless of the cost
- Quitting a job to avoid paying alimony
- Cashing in investments to pay bills
- Forgetting the tax implications of taking money from a retirement plan
- Forgetting the tax implications of alimony
- Making unnecessary purchases
As you try to get financially prepared for your divorce, go through all of your family’s financial documents. Make copies for your own records, and take note of financial assets, as well as debts and monthly bills.
Determine what assets you are willing to fight for. Keep in mind that the house is not a liquid asset, and it often comes with mortgage and maintenance payments. You should also remember that not all assets have the same tax consequences. For example, you will typically need to pay income taxes on any distributions you receive from retirement accounts.
It is also a good idea to start setting some money aside for the numerous necessary expenses that come with divorce, such as legal fees, renting an apartment and unavoidable tax impacts. Having some financial cushion will also help you stabilize your monthly budget as you get used to covering bills on your own.
In general, if you know you are getting a divorce, it is a good idea to assess your current financial situation and do what you can to prepare for any financial burdens that the divorce could throw at you. If you avoid common mistakes and create a personalized financial plan, you will be more resilient to the high costs associated with divorce.