Finances are often one of the most stressful elements of a divorce.
Over the cost-of-living crisis, many people have delayed their divorce because they simply have not been able to afford to run a home independently of their spouse. Money worries can have a considerable impact on our mental wellbeing, but there are ways to ensure you are in the best possible position to move forward into divorce and to make the process as smooth as possible.
Jodie Phelps, financial adviser, talks about financial independence, what the main financial challenges of divorce are, and how best to understand your assets.
The Importance of Financial Independence
As a financial adviser, I often help clients navigate through life changes, whether it’s marriage, having children, moving house, divorce, or bereavement. Life inevitably throws challenges our way, many of which we cannot foresee or prevent. However, we can control how financially prepared we are for them, which can mitigate the additional stress that financial uncertainty brings during tough times. Being financially prepared means being in a stronger position to face the problem at hand, without the added burden of financial uncertainty.
What are the main financial challenges people face when going into divorce?
- Lack of Awareness and Control Over Current Expenses
Many people are unaware of their current spending habits. It’s common to have unnecessary subscriptions and unreviewed household bills, leading to overspending.
- Unfamiliarity with Savings and Investments
I often meet clients who are unaware of the savings and investments they have, or they don’t fully understand their significance and how they work.
- Complexity of Pensions
Pensions are often one of the most complex assets to divide. Without professional help, it can be challenging to comprehend their long-term value. A financial planner can provide clarity on pensions worth & how to handle these during a divorce.
- Valuation of Businesses
If a business is involved, determining its value and whether and how it should be divided can be very complex.
- Selling Assets
Sometimes, assets need to be sold to divide them, which can incur taxes and other costs. Understanding these potential expenses beforehand can help you make informed decisions.
- Division of Joint Debts
Deciding how to split joint debts like mortgages, credit cards, and loans is another challenge. It’s essential to reach an agreement on who will be responsible for what and how it will be managed moving forward so that your credit ratings aren’t affected.
- Changes to Income
Transitioning from a dual-income household to a single-income can be daunting. This often requires adjustments to your lifestyle and careful budgeting to ensure financial stability.
- Spousal and Child Support
One party may be required to make regular payments, which can affect their financial situation. Ensure these payments are factored into your budget.
- Reviewing Protection Setups
Your current protection setups, such as life insurance and critical illness protection, will need to be reviewed and probably changed. These were likely based on your married status and priorities, which will now be different. A Financial Planner can assist you with this.
- Emotional and Psychological Costs
Divorce is stressful and can impact your mental health. Many people find counselling helpful during this time. Additionally, the stress can affect work productivity and income.
Divorce can be financially complex, but with careful planning and professional guidance, you can navigate these challenges and secure a stable financial future.
How to Understand Your Financial Assets and Position: Step-by-Step
- Gather Financial Documents
- Bank Statements: For all current accounts & savings accounts.
- Investment Statements: For stocks & shares, bonds, mutual funds, retirement accounts
- Tax Returns
- Loan Agreements and Statements: For mortgages, car loans, student loans, credit cards, and other debts.
- Insurance Policies: Life, health, home, car, and other insurance documents.
- Business Financial Statements: For any business property or business bank accounts If you or your spouse own a business.
- List Your Assets & Liabilities
Create a detailed list of all your assets:
- Property: Home, rental properties, business property and land
- Vehicles: Cars, motorcycles, boats, and other vehicles
- Savings & Investments
- Pensions: Note the current value, contribution amounts, and any employer matching benefits
- Valuable items like jewellery, art, collectibles, and antiques
- Business Interests: Any ownerships in businesses
Create a detailed list of all your liabilities:
- Mortgages: Primary residence and any other property loans
- Loans: Car loans, student loans, personal loans, and other types of loans
- Credit Card Debt: Outstanding balances on all credit cards
- Other Debts eg. tax debts, family loans
- Calculate Your Net Worth
To determine your net worth, follow this simple calculation:
- Total Assets: Add up the value of all your assets
- Total Liabilities: Add up all your debts
- Net Worth: Subtract your total liabilities from your total assets
Net Worth= Total Assets−Total Liabilities
This figure provides a snapshot of your overall net worth.
- Review Your Income and Expenses
Document your monthly income and expenses to understand your cash flow:
- Income: Salaries, bonuses, rental income, dividends, interest, benefits, child support, and any other income sources.
- Expenses: Mortgage/rent, utilities, groceries, transport, insurance premiums, childcare, education, entertainment/hobbies, subscriptions, and miscellaneous expenses. Create a budget to track and manage these figures.
- Determine your disposable income: This is the amount that is left every month after you have paid for your essential outgoings. This can be used to save towards future goals and for enjoyment.
Jodie is a leading financial planner with over 12 years of industry experience. She is passionate about helping her clients achieve their life goals. She takes away the stress of financial planning and breaks down the complexities of the financial world.
You can find out more about Jodie via her LinkedIn.
Useful Links
Financial wellbeing and how to achieve it
“I want a divorce but I don’t think I’ll survive financially”
Can I get divorced when I’m in debt?
