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Marriage isn’t always “till death do us part.” Divorce can and does happen and is inherently stressful. It’s important to be proactive and in control to alleviate some of that stress. Here are some tips to help you prepare for your financial future.
Expect your income to drop after the divorce is final
Develop a budget based on your needs, not wants. Use a detailed worksheet to develop a budget. First consider all sources of income including support payments and investment income. Next identify all your expenses. Keep in mind that your expenses need to stay within your post-divorce income. If you pay your bills by check, the best source for your expense information is your check register. Remember that not all your expenses are paid monthly, such as your tax bill or insurance payments; make sure to account for these as well. Finally, ask a trusted financial advisor to review your budget and challenge items that don’t seem reasonable.
Understand your financial needs
You need to make sure that the liquidity of the assets you’re getting matches up to your needs. For example, assume you are getting the house as your share of the marital assets. If you plan on using child support income to make the mortgage payments, you will need to determine how you will make the mortgage payments when the child support payments end.
Know what you have
Account statements have a way of disappearing when divorce proceedings start. When contemplating divorce, start by collecting statements for all your financial holdings and put together a list of your assets. When negotiating your divorce settlement, this step will prove helpful as a starting point. Following are some of the assets that you’ll want to list on an asset worksheet. Note the value of each item and who owns what portion:
- Retirement Assets
- Stocks, Bonds, Mutual Funds/li>
- Bank Deposits, Savings, Checking, CDs
- Real Estate
- Furnishings & Other Personal Property
- Cash Value Life Insurance
- Business Interest(s)
Consider whether you can afford to keep the house
The equity in the house is illiquid, in that it cannot be accessed to pay the bills. If one spouse wants to keep the house, it’s likely that spouse will need to re-qualify for a mortgage before the divorce is final. Sometimes a divorcing couple will decide that one spouse is going to keep the house, then they take the other spouse’s name off the deed. Later the spouse who wants to keep the house is turned down for a mortgage because he/she does not have money to qualify on his/her own.
Don’t overlook the value of a future pension
Any portion of a pension that was earned during the marriage should be included in the marital pool of assets. Pensions can be handled in different ways and your particular situation will determine what makes sense.
Consider the after-tax value of your assets
Accounts with pre-tax contributions and tax-deferred growth come with tax liability. Know what the after-tax equivalent value is before agreeing to take an asset.
Hire a good team
Your team should consist of a divorce lawyer and a good financial advisor. In addition, if needed, an accountant or valuator can be retained to value a business. Having the appropriate advisors can save you from making costly mistakes regarding your settlement.
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