Like so many life changes, divorce can feel like completely uncharted territory. And while you know the nuts and bolts (hire a lawyer, divide the assets), few separations are actually that cut and dry, especially when it comes to your finances.
We chatted with Bob Carroll, a certified divorce financial analyst on Wealthramp, a platform that matches people with trusted financial advisors, about the most common money mistakes he sees clients making.
Clients come to Carroll with a common problem: They don’t know exactly what assets they need to divide. “In many marriages, not everyone plays an equal role in managing the family finances—that means that there’s a lot of discovery during this process, but it’s really critical that you have all those facts,” he explains. “People often discover that their financial footing wasn’t as solid as they were led to believe. Or that they have more debt. You’ve got the emotional side of divorce and then you have to navigate the financial reality of it.” In other words, as early in the process as you can, educate yourself on the true nature of your shared and individual money—everything from where you keep the login info for your accounts to how much is left on the mortgage and in your retirement accounts.
OK, so maybe you know how much you and your former partner have saved away, but do you understand the future value of all the unrealized assets you have, like stock options or deferred compensation? “A dollar of cash does not necessarily equal a dollar of an IRA,” Carroll says. “In a divorce, it’s not uncommon for one side to downplay their assets. That means there’s tremendous value that you could be missing out on.” Speak with a financial advisor about how much your various accounts and assets will be worth over time, and if you should be dividing their projected worth rather than their current value.
As you set out to divide things up, there’s another detail that’s critical to your future success, says Carroll: Liquidity. “The composition of the assets you end up with matters. A settlement could be considered ‘equal’ if you get all of the retirement and your ex gets the cash and the investment accounts, but if we’re going to relaunch you as a single person going forward, we want to make sure there’s enough money to meet your cash needs for at least 12 to 24 months as you reestablish your household.” In other words, depending on your situation, liquid cash may be more valuable other assets, like stocks or real estate.
During a time of great uncertainty, there may be comfort in keeping your home. But if it becomes a financial albatross with a mortgage and maintenance you can’t afford post-divorce, it’s much smarter to walk away. “I’ve seen more mistakes, more stress, more pressure being applied post-marriage just to retain the house,” Carroll says. “For example, a client of mine wants to maintain a house that’s over one million dollars, but her income after her divorce will be just $40,000 a year. She can live there for the next handful of years, but what happens next? It’s hard in the moment, but you have to think down the road.”
Many people go into a divorce thinking the lawyer they hire will be a magic bullet. But while an attorney knows the law, they don’t always consider context. “I went through a divorce myself and even with my experience, I made the decision to hire a financial specialist because I know that emotion and finance are tough to mix,” Carroll explains. In other words, a lawyer is just one member of the team that will help get you through this, and the rest of team might include people like a financial advisor, a therapist and (of course) a few super-supportive friends.
