Divorce is an emotional time and individuals considering divorce often worry about how getting divorced will impact their home life, work life and their financial life. As emotions run high it is common to look for the quickest way out. However untying years, maybe decades, of memories and finances are painful, difficult, and sometimes impossible. If you are considering divorce it is important to educate yourself on the financial impacts and learn ways to separate your emotions from your finances. Below are five tips to evaluate the financial impact of divorce.
1. The Budget Before and After Divorce
Budgets are the linchpin for evaluating and planning for the future. However budgets are only as good as the information they hold. It is vital to understand where the “household” money is spent today and which of those expenses will carry forward after divorce. Additionally, try to think about what new ongoing expenses you will need to pay. Mapping out where your money goes today and what will change in the future will help you in your settlement negotiations.
2. Living Arrangements Before and After Divorce
Determining where you will live after divorce is just as important as managing your finances. In many cases both people fight over their primary residence without understanding the financial impact, to either person, of keeping the home. If you end up keeping the home you need to determine very quickly how that expense will impact your cash flow and what other current, or future, goals it may take away from. It is common to see emotions run hot and the primary residence be a “sticking point” in the settlement negotiations. If the outflow consumes more than 30% of your gross monthly cash flow then consider other living options as the costs of ongoing maintenance over time will gradually increase your overhead costs.
3. Divorce Can Change Your Marginal Tax Bracket
Calculating a budget or determining one’s housing arrangements are difficult but common as you go through the divorce process. You have to know where you will live and if you can afford to maintain your lifestyle. What is less common is the calculation of “net income” as compared to “gross income”. When evaluating divorce options remember to consider taxes in your settlement options AND consider what marginal income tax bracket you are in before and after divorce. In 2017 a married couple making an adjusted gross income of $75,000 will be in the 15% marginal bracket; whereas a single filer with an adjusted gross income of $75,000 will be in the 25% marginal bracket. Consider how taxes could affect your net (after-tax) cash flow.
4. Child Support vs. Spousal Support
When considering divorce it is important to understand all cash flow options, or obligations. For those with children, child support is determined at the state level and calculated based on a predetermined formula from the state. Spousal support on the other hand is typically negotiable between spouses with the final decision in the hands of the presiding judge. If you will be expected to pay, or receive, one, or both, of these it is important to consider how this income is taxed and how long the income will last. This information will be used to determine your standard of living, living arrangements, and what your budget should be after your divorce.
5. Maintaining Employer Benefits After Divorce
Health Insurance, flexible spending accounts, life insurance, and retirement savings are just a few examples of resources that are put to the side during divorce negotiations. If you are considering divorce AND you are losing access to any of the above benefits you will need to evaluate the costs of acquiring them all over again. As an example, if you need to acquire health insurance for you, and for any children, make sure you include that expense in your monthly obligations and assess the impact to net cash flow. In some cases these benefits may not be replicated.
Getting divorced is an emotional process filled with twists and turns, highs and lows, but most of all a lot of questions. These five tips only scrape the surface of the financial challenges facing both spouses as they negotiate settlement options. One important fact to remember, as hard as the process will be and as emotional as individuals might become try your best to separate your emotions from the financial discussions that may affect your future.
**The material was created for educational and informational purposes only and is not intended to provide specific recommendations, tax, or legal advice.