This is one of the most common questions when contemplating divorce. Your thoughts may range from the legal costs of the divorce itself to what life would look like with twice the expenses of two separate households. Then questions start to swirl about who is keeping the house, if the stay-at-home parent needs to get a job, child care, and the list goes on. For those who are not the breadwinner or who manage the finances, this can be downright terrifying. Divorce can be the largest financial transaction in many people’s lives. Just because it may be scary, doesn’t mean it can be ignored. We encourage you to get a handle on your current situation and start thinking through some of the changes you may need to make.
Get a Sense of Your Financial Situation
Step 1: Get yourself organized and informed
If you take care of the finances, this is probably fairly easy. If not, it may be more of a challenge. Even if it’s the latter, trust me when I say it is do-able! One step at a time. Once you face your fear and start getting a handle on it, you’ll be surprised at the confidence you’ll gain! Start by gathering the important documents– tax returns, monthly bills, credit card and bank statements, and payroll stubs. At this point, find what you can and make note of what you believe is missing.
Step 2: Determine your current financial situation
Use your documents to get a rough idea of where you currently stand and what a post-divorce budget could look like. Start with completing the take-home income for you and your spouse using your payroll stub(s). Next, use the documents you have gathered to identify regular expenses. Don’t forget to include half of the minimum monthly payments for credit cards. Once you’ve taken a good first pass through, think about what you may have missed and estimate for those the best you can. Subtract these expenses from your income, and this will give you a rough idea of your monthly cash flow. Please note–this is likely higher than reality. The devil is in the detail, and you’ll always uncover more expenses when you take a more thorough approach.
Step 3: Project a post-divorce budget
For simplicity’s sake, take your income and subtract the total expenses to determine your post-divorce monthly cash flow. This yields a much different picture. If you are the breadwinner, you’ll likely be paying spousal maintenance or child support. Conversely, if you are making the lower-income or are a stay-at-home parent, you’ll likely receive some amount of maintenance. That said, this exercise will give you a general idea.
Decisions to be Made
If you are a bit shell shocked from the budget exercise, you aren’t alone. This is a huge wake-up call for most people. As difficult as it is, this exercise is important to do. Since you are still thinking through whether or not divorce is right for you, just start considering these items. There’s no need to make any final decisions yet. Gathering information and advance planning is never a bad practice!
Below are some questions you should start considering:
- Does my employment situation need to change? What about for my spouse? The answer to this will lead to many other questions.
- Based upon the projected income, location and hours of anticipated employment, how is child care impacted?
- Where do potential new homes need to be located to accommodate commutes and parenting time transitions?
- Can either party really afford to keep the house?
Understanding Assets and Debt
Next, let’s move to assets and debt. This is not something you have to figure out now. If you want to know, keep reading. If you’d like to tackle this later, jump to the next section. Again, we’ll tackle this in 3 steps.
Step 1: Identify what you own and what you owe
Assets are what you own and are checking, savings, investment, cash, retirement accounts. You should also include real estate and automobiles, but just the estimated resale value less what you owe. Now look at what you owe. This will be a mortgage, automobile or personal loans and credit cards for most folks. You’ll want to create a list of all assets and all debts.
Step 2: Identify property as Separate or Marital
Marital Property is any property or income obtained by either spouse during the marriage, regardless of the name on the account or asset. For example, a 401K started during the marriage, and, in the wife’s name, is marital property.
Separate Property are assets owned by just one spouse and the asset is kept by that spouse after divorce. The asset could have been brought into the marriage by a spouse, or received during the marriage as an inheritance or gift. Separate property is not divided between spouses.
Each state has guidelines for how property is generally divided. You’ll need to understand if your state follows equitable or community property laws. Beware though, many states have nuances even beyond this.
Equitable – Dividing assets in a fair, but not equal way. Determining factors include, length of the marriage, grounds for divorce, age and health of each spouse, income potential and other special circumstances.
Community – Each spouse keeps assets and property they owned prior to marriage (separate property), and marital assets are split equally.
Again, this isn’t something you need to solve right now.
If finances are not your strong suit and an area you are really concerned with right now, you may want to engage a financial professional to help you through this. A Certified Financial Planner (CFP) or Certified Divorce Financial Analyst (CDFA) would be your best option for planning in this state.