Keeping a stable marriage is one of the best ways of creating and preserving wealth. But divorce, on the other hand, is expensive. Marital property, including assets and debts acquired during the marriage (and sometimes even before the marriage), is divided between the parties. In most cases, divorcing couples often need about a 30% increase in their income for them to maintain the kind of lifestyle they enjoyed before divorcing. The main reason is that the same cumulative income and pool of assets now have to support two households instead of one.
For the more affluent couples, divorce might shake up their finances, but it won’t necessarily ruin them financially. Such an example is the divorce between Amazon founder Jeff Bezos and his ex-wife MacKenzie Bezos. While their marital property was divided into two, that didn’t leave any of them “ruined” financially.
“Will divorce ruin me financially” is a question most spouses ask themselves. Each year, almost 3 million men and women have to go through the financial and emotional trauma of divorce. In most divorce cases, women are often concerned about their economic survival – and with a good reason. A study shows that in the first year of divorce, a woman’s standard of living drops by about 27% while a man’s living standards might increase by up to 10%. While this has many variations, most ex-spouses don’t prepare themselves financially and emotionally.
How divorce affects women financially
Generally speaking, women suffer more financially than men, following divorce. The greatest burden will be experienced within the first year after the divorce, and this may depend on two factors:
- How much money the woman contributed to the marriage. Inequitable distribution property states, you will receive a fair share of the marital property, and
- The ability and willingness of the ex-husband to action child support payments
Quite a significant number of mothers don’t receive full child support from the ex-spouses. If she is currently unemployed and she receives partial child support payments, it means she has to foot the remainder of any existing bills related to the child’s upbringing. At least a quarter of divorced women lose their health insurance for some time after the divorce. These women, even with children, sometimes lose their homes. As a woman, it’s easy to fall into poverty as a consequence of divorce. However, in recent years this has dramatically improved with more mothers depending on themselves and becoming financially stable.
How does divorce affect men financially?
Most men have to pay child support, spousal support, and other divorce-related payments once divorced. A man will most likely experience a 10-40% drop in his standard of living. Living and paying for separate home and dealing with a possible loss of the wife’s income add up can significantly hurt the ex-husband financially.
Men who provide less than 80% of the family’s income suffer the most following divorce. On the contrary, men who offer more than 80% don’t suffer much financial loss. Surprisingly, their financial situation may marginally improve after divorce. A father who shares custody or bears full custody has to cater for additional expenses. Mostly, his earnings will be “garnished” by the state directly from his paycheck.
Since divorce is a naturally stressful process, it’s necessary to alleviate some of the stress by being proactive and prepared. Consider these seven tips that will prevent financial pitfalls and prepare your post-divorce financial future.
Expect a drop in your income after divorce
Once your divorce decree is issued, your income will drop. Develop a budget with this revelation, based on needs and not wants. Remember that some sources of income, like spousal and child support won’t last forever. Use a detailed worksheet to help you record all expenses. Talk to a family member, friend or financial expert to review your budget and challenge anything that isn’t reasonable.
Consider tax consequences
Any accounts with a pre-tax contribution and tax-deferred growth all come with a tax liability. Determine the tax-equivalent value before agreeing on taking an asset. When deciding on who should keep the house, retirement plan, etc., consider the hidden tax costs of divorce. You may need an accountant to determine whether you have the best deal or not.
Be dispassionate and businesslike
Most people struggle to keep emotions off their divorce suit. Emotions will want you to keep your home and other items without regarding other factors like if you can afford to keep it. While it might seem traumatic giving up your house, you might end up happier without it. Emotions can blind you and, as a result, lead you to spend more on legal fees trying to fight for emotionally invested items or giving up more valuable assets just to keep less valuable assets. A nasty divorce only benefits the lawyers.
Build your career
Before you even think of divorce, ensure you build up your career. Most women concentrate fully on their families at the expense of their careers. Once divorced, you need a way to support yourself and your kids. A common divorce pitfall is waiting for the divorce to be finalized before starting a job hunt. This should be an excellent time to boost your career, polishing skills, networking, or even starting a new career.
Get a good team for advice
While friends or family are great sources for advice, it’s best to hire professionals to help you. Get a qualified team consisting of a divorce lawyer and a certified divorce financial analyst. You may also want to include a mediator, a pension valuator, an accountant, and a therapist into your team of professionals. While you may think this might be too expensive for you, but having the appropriate help is pivotal in cutting down on litigation costs and ultimately preventing you from making blunders regarding your settlement.
Divorce is indeed a long, complicated process that needs enough preparation. Consult legal and financial professionals, or read books on the subject of divorce and finances. The failure of a marriage has consequences beyond the personal lives of the couple. Society always picks up the financial burden of a failed marriage. Be prepared well in advance for a stable financial future post-divorce.