Ending a marriage can rank among the most challenging transitions in life. It often brings about deep emotional turmoil, resulting in sensations of sorrow, anxiety, anger, resentment, and shame. Besides the emotional hardships—which can be significant even when parting ways on good terms—divorce can also disrupt your financial stability.
Financial Planning for Divorce
Certified divorce financial analysts possess unique training geared towards aiding individuals financially during the divorce process. They organize the experience into three segments: anticipation, dissolution, and transition.
Here are practical tips for managing the financial aspects of each segment of divorce as suggested by financial professionals.
Phase 1: Anticipate Divorce and Organize Your Financial Plan
Even when one spouse’s decision to separate comes as a shock, there is typically a phase during which both partners sense divorce is forthcoming. In this interim, it’s vital to assess the marital financial landscape and each person’s expenditures.
This task can be daunting, especially when child support is involved, as noted by Amy Irvine, a certified financial planner and certified divorce financial analyst at Rooted Planning Group in New York. “When you’ve combined your finances for a significant period, untangling them may appear straightforward but can actually be quite intricate. It requires considerable time, energy, and careful consideration,” she explains. Therefore, she advises reviewing bank and credit card statements spanning six to twelve months to categorize expenses as belonging to either partner or as shared costs.
Next, evaluate how these expenses will shift or be allocated once the couple separates. For instance, weekly grocery costs may change into the combined grocery expenses of two distinct households, while other expenditures, like a mutual gym membership, might cease entirely. Certain costs, such as tuition for children’s schooling, may continue but will need to be split. “Visualization of the new financial dynamic can be particularly challenging for many,” Irvine remarks. She encourages individuals to map out their envisioned post-divorce life and then work backward to strategize on financial arrangements. It’s common for both partners to experience a decrease in living standards during the restructuring of their lives and finances, demanding both perseverance and creativity to restore their financial footing.
Phase 2: Conclude the Marriage by Allocating Assets and Liabilities
Slicing marital assets may be one of the most crucial yet painful parts of the divorce process. Many jurisdictions enforce community property regulations that declare both spouses as equal proprietors of assets. While courts and legal professionals generally aim for equal asset distribution, achieving true equity can be more complicated.
Given that each individual’s financial landscape is unique, splitting every asset evenly may not be the most advantageous route. For instance, one partner might gain more from retaining the family home and its equity to reduce housing payments while forgoing certain retirement savings. Conversely, keeping one of two vehicles might be less significant for a partner with ample access to public transportation. Irvine notes that although deciding the future of a shared home can be emotionally challenging, the transactional aspect is often relatively straightforward.
Determining the handling of debts can be more problematic. Any debt incurred during the marriage is usually considered jointly owned by the partners, particularly in the eyes of creditors. It’s essential to establish how these debts will be settled (whether by the individual who incurred it or jointly) and to ensure that partners disentangle their credit by removing one another from loans or joint credit arrangements.
It’s crucial for every divorce decree to explicitly define how assets and debts will be managed. “Without clear terms laid out and agreed upon upfront, conflicts typically arise post-divorce,” Irvine warns. Moreover, should assets like pensions or retirement savings plans, such as 401(k)s, need division, a qualified domestic relations order (QDRO) may be necessary. These orders often extend beyond the divorce decree to detail divisions of retirement plans and aspects such as child support and alimony.
Certified divorce financial analysts can guide parties in identifying the most beneficial options and discuss tax implications related to their choices. Even if financial advisory services are unavailable, it’s important to maintain a flexible mindset when seeking financial guidance during a divorce to achieve arrangements that are fair and beneficial—not merely equal.
Phase 3: Focus on the Future and Financial Rebuilding
Nancy Hetrick, a certified divorce financial analyst and founder of Smarter Divorce Solutions, emphasizes that one of the biggest tasks in regaining financial autonomy post-divorce—often an unexpected challenge—is the task of rebuilding credit. Hetrick shares her own experience, stating, “Despite having a credit score exceeding 700, the day my divorce concluded, my credit history was lost since I was just an authorized user on all credit accounts.” It took her eight years to restore her credit history. She coaches clients through various methods to improve their credit ratings, including maintaining low utilization rates and ensuring a mix of credit types (like credit cards along with car loans).
Financial professionals unanimously stress the importance of promptly establishing a personal budget. As partners frequently see a reduction in household income, confronting the financial situation after divorce can be tough. They suggest planning for a one- to two-year recovery phase to stabilize expenses when developing a financial strategy.
The Disproportionate Financial Impact of Divorce on Women
A 2018 study published in Demography revealed that while men experience immediate negative impacts of divorce in various well-being metrics, women face the financial repercussions more profoundly over the long term. Women often accumulate additional debt, face health insurance gaps, and suffer more substantial losses in household income, leading to a heightened risk of poverty. Research indicates this is particularly pronounced among women undergoing “gray divorce” (divorce after the age of 50), who may suffer a “45% decline in their standard of living.”
Due to the gender wage gap, women frequently earn less than their male counterparts. They are also likely to step back or interrupt their careers to assume the primary caregiver roles for children and aging relatives, potentially resulting in lower income and limited or nonexistent credit cards, investments, and retirement savings in their names. Consequently, they usually possess fewer financial resources to absorb the impact of divorce compared to their male spouses.
There has also been a significant evolution in how courts are viewing spousal support, according to Hetrick. “In the United States, divorce laws are undergoing transformations. Alimony is becoming increasingly rare. In the 1970s and 1980s, divorce was treated as a breach of a lifelong contract, often resulting in long-term spousal maintenance awards for women, which is no longer common,” she explains. Today, any awarded support is perceived as rehabilitative and is typically granted only temporarily.
Women often find themselves needing to reinvent their lives. “The quicker a woman can begin to strategize for her new chapter, including potential educational pursuits, the more impactful this process will be,” Hetrick advises.
Hetrick encourages her clients to view the silver linings. While divorce can feel overwhelming, it also presents opportunities for personal growth. “Many women dedicate themselves to being mothers and wives, often losing sight of their authentic selves,” she notes. “However, they have the chance to reflect on their younger selves. What were your childhood dreams? What if you revisited some of those aspirations? It’s never too late to bring those visions back to life.”
