In my CPA practice, I’ve worked with hundreds of divorcing clients who have made a few common money mistakes that they really should have avoided.
The Money Mistake Divorcing Women Make
Too often, women going through a divorce fail to educate themselves on post-divorce financial issues. Their four crucial errors:
Short-term thinking Many women getting divorced concentrate only on daily cash needs and miss the financial big picture.
One client was interested in keeping her current lifestyle, including the country club membership. But she hadn’t earned a salary in several years and didn’t want to think about the difficulty of qualifying for a mortgage after her divorce.
To her credit, she realized the family home was too large for her to afford on her own. Unfortunately, she assumed the sale would produce enough cash to pay for a replacement house for the children and her. She didn’t realize the mortgage was so large they might have to pay money instead of receive money when the house sold.
Be sure you look at both the short term and the long term when forecasting what your finances will look like when you’re on your own.
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Outdated financial statements When determining how much money the couple has, some wives rely on whatever brokerage statements they can find, even if the documents are a few years old. As a result, they think money is still around — but it might not be.
The reasons aren’t necessarily related to dishonesty on the part of the husband. Most of the time, this money was spent on things both spouses wanted, like vacations, clothing, restaurants and cars.
It’s important to become familiar with your household’s current financial statements before or early in your divorce; you might enlist the help of your attorney. This will help you realistically plan for your post-divorce life.
Wrong assumptions Seven years ago, one client went along with her husband’s idea of a do-it-yourself divorce. She let him take the lead on all the paperwork.
They agreed pretty easily on a property settlement: She would get $30,000 cash from his pension account soon after the divorce. Her husband wrote that into the divorce decree, got the judge’s approval and filed the document with the county court. Today, however, she’s still waiting for that $30,000.
Neither spouse had called the pension plan administrator to find out if the husband’s employer would allow a lump sum distribution to a participant’s ex-spouse. It turns out the ex-wife will have to wait until her former husband retires to get her $30,000. Even then, the money will be spread out over many years and not come to her as a lump sum.
The moral of this story: Don’t assume everyone connected to your divorce decree has to abide by it. Educate yourself on the rules and laws governing the division of assets and liabilities, including pension distributions. This is critical to negotiating a divorce settlement that meets your financial expectations for the long term.
(MORE: Don’t Let Your Ex Ruin Your Credit)
Expecting the husband to pay their adult kids’ costs In one recent divorce case, the wife thought her soon-to-be ex would cover their children’s expenses through college and perhaps beyond. Her husband, however, didn’t anticipate that she’d insist he shoulder these costs because he’d been out of a job and clinically depressed for about five years.
I encourage divorcing women with children in college to work out with their husbands who will pay for the kids’ expenses and for how long — perhaps even past college, if they'll need help.
The Biggest Money Mistake of Divorcing Men
Men who’ve been making more money than their wives are particularly prone to what I call the “I don’t need to do that” mistake. It’s a guy thing.
In my experience, divorcing wives typically create a budget laying out how much they spend. But most husbands don’t feel the need to put together budgets for their own spending.
The men feel their personal outlays are modest and that their wives are the ones who’ve been spending all the money during their marriage. As far as the husbands are concerned, they don't need a budget — their wives do.
They’re wrong. Divorcing husbands need to let their wives see their living expenses. The amounts may be modest, but they’re rarely as small as men think. I’ve found that men often underestimate what they spend by at least 50 percent, sometimes as much as 100 percent.
Here’s the story of one of my clients: The husband wanted me to work with his wife on ways to cut her post-divorce expenses and told his attorney we didn’t need to look at his budget because he didn’t spend much. In his mind, he made enough money that he’d be just fine.
He offered to provide for the children’s private schools, summer camps and extra-curricular activities, in addition to child support. He also said he’d support his wife.
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During our discussions, this man finally decided to see whether he could afford to pay all those costs. One night, he awoke to realize that he may have offered a settlement he couldn’t afford. So he put together some estimates on a spreadsheet.
When he contacted me the next morning, I saw right away that he had underestimated his living expenses. As a result, he backed off his settlement offer and the divorce had to be put on hold while I nailed down his true costs.
You can imagine how well that went over with his wife and her attorney.
The husband’s mistake slowed down the couple’s divorce by about three months and increased their attorney fees while they once again hashed out the agreement.
Guys: You need to show your living expenses early in the divorce process. Yes, pulling all the numbers together is time-consuming and boring. You might want to ask a CPA for help.
Be sure that your budget is accurate and honest. Then, if you find you’ll need to cut back on spending, turn this assignment into a priority.
You and your family will benefit in the long run and you’ll be better able to manage your post-divorce cash flow — not to mention ensuring that you will have some!
Excerpted with permission from Save Wisely, Spend Happily: Real Stories About Money & How to Thrive from Trusted Advisors. © 2012 American Institute of CPAs.