Divorce Mistakes That Can Cost You Thousands
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Divorce is not only an emotional journey but also a financial one. While many people expect the pain of separation, few realize just how costly certain decisions can be. Divorce can leave lasting financial scars, especially if you’re not prepared for the mistakes that many make during this turbulent time.
Understanding these pitfalls is crucial to ensure that you don’t add financial ruin to the emotional toll of a divorce. This article delves into the top five financial mistakes people make during a divorce and provides practical advice on how to avoid them.
From heavy spending after the split to underestimating your post-divorce expenses, we’ll cover the major traps that can cost you thousands.
Overspending Post-Divorce
It’s common to feel the urge for a fresh start after a divorce. Whether it’s splurging on a vacation or buying a new car to symbolize independence, the temptation to treat yourself can be overwhelming. However, many find themselves regretting these impulsive purchases later.
Why is overspending a mistake?
Divorce often leaves one partner with a reduced income, especially if you’ve been out of the workforce for years. Splurging on big-ticket items like a new home or a luxury car can tie up your finances, making it harder to rebuild your savings and move forward. Divorce coach Liza Caldwell warns against rushing into these major purchases.
Divorce often leaves one partner with a reduced income, especially if you’ve been out of the workforce for years. Splurging on big-ticket items like a new home or a luxury car can tie up your finances, making it harder to rebuild your savings and move forward. Divorce coach Liza Caldwell warns against rushing into these major purchases.
She advises her clients to wait until their financial situation stabilizes before committing to such purchases. Moreover, purchasing a new home too quickly can lead to overextending your budget. If you’re still in the process of understanding your new financial situation, rushing into real estate can saddle you with a mortgage that feels comfortable in the short term but becomes a burden long-term.
Take a step back. Resist the impulse to indulge immediately after the divorce is finalized. Focus on rebuilding your financial foundation first. Give yourself time to assess your income, savings, and long-term goals before making any major purchases.
Failing to Identify Hidden Assets
In many divorces, one spouse may attempt to hide assets to ensure they get a larger portion of the settlement. This is especially common when dealing with small business owners or high-net-worth individuals. If you suspect your spouse may be hiding assets, this can be a costly mistake.
According to Mirtha Valdes Martin, a Florida accountant, she often sees small business owners use these tactics. In these cases, it’s crucial to act quickly and with precision. If you suspect your spouse is hiding assets, it’s vital to act early.
File for divorce first if you suspect foul play. You can also hire a forensic accountant or private investigator to uncover hidden assets. Seeking legal advice about post-divorce settlements can also help ensure you’re not left in the dark when it comes to equitable distribution.
Letting Emotions Drive Your Divorce Process
Divorce is an emotional rollercoaster. The pain, anger, and frustration can cloud your judgment and lead to costly decisions. It’s tempting to try to ‘win’ the divorce, but this mindset can significantly inflate your legal bills and prolong the process.
Emotions are powerful drivers of behavior, and they can cause divorcing individuals to act impulsively. Whether it’s a custody battle or a fight over assets, turning to your lawyer for emotional support can rack up your legal fees. Maggie Kim, author of Divorce or Die, shared that she spent an astounding $500,000 on legal fees over the course of a seven-year divorce due to emotional decisions.
The more you allow emotions to take the lead, the more time your divorce will take, and consequently, the higher the costs. Lawyers are there to handle the legal aspects of your divorce, not to offer therapy. Using them as an emotional outlet only prolongs the proceedings and increases your financial burden.
Overlooking the Complexity of Illiquid Assets
Dividing marital assets during a divorce isn’t as simple as splitting up cash and property. Many couples also face the complex task of dividing illiquid assets. These are assets that cannot easily be converted to cash, such as retirement accounts, stock options, or real estate.
Illiquid assets are financial investments that are difficult to sell or divide. For instance, you can’t easily divide a retirement account without incurring significant penalties, and real estate may need to be sold or co-owned post-divorce, which may not always be ideal.
Dividing these assets can create serious challenges, especially if they are a large portion of the marital estate. Selling these assets can lead to transaction fees, lost future value, or penalties, making them complex to settle.
Underestimating Your Post-Divorce Expenses
Many individuals who have been married for a long time forget the expenses of single life once they are divorced. With the loss of a second income and the added responsibility of maintaining a home on your own, expenses can quickly spiral out of control.
Living solo after a divorce comes with expenses that many don’t anticipate. These include housing costs, health insurance premiums, child support, and discretionary expenses like groceries and entertainment. You may also need to adjust your lifestyle to account for the cost of running a single-income household.
Rick Jones, a divorce lawyer, notes that fathers often misjudge the additional costs of having a larger home for child visitation, while mothers may forget the financial strain of running a home on a single income.
To avoid underestimating your post-divorce living expenses, it’s important to create a realistic budget. Factor in all potential costs—housing, insurance, food, and transportation. Be sure to include the cost of child support and any other necessary payments. Knowing your financial limits will help you avoid surprises down the road.
Conclusion
Divorce is undoubtedly challenging, but the financial mistakes made during this time can have lasting consequences. By being aware of the top financial pitfalls—overspending, failing to identify hidden assets, letting emotions take the lead, mishandling illiquid assets, and underestimating post-divorce expenses—you can avoid making costly errors.
The key to a financially successful divorce is preparation, awareness, and seeking professional advice. By keeping your emotions in check, working with financial and legal professionals, and planning for your future, you can navigate this difficult time with confidence and emerge with a financial future that’s secure.
