Question I am getting divorced after 14 years of marriage.
I never paid too much attention to my finances in the past. What do I need to do and what should I look out for?
Divorce has a massive impact on everyone in the family on all levels. There are so many decisions that need to be made ranging from agreeing to the conditions of the divorce to setting up new homes. Add in the effort of trying to keep everything together at an emotional level then it is not surprising that few people have the capacity to make difficult financial decisions. The reality is that the longer these decisions are postponed, the more financial risk you expose your family to.
You and your partner were on a particular financial trajectory and now that has come to an end. You need to understand that there will be less available cash than you were used to. Your combined basic living costs will have increased. The two of you, for example, will no longer be living in one dwelling so your fixed costs like rates and rent will have doubled. As a couple, this will have reduced your disposable income. It is important to recalibrate your finances.
Here are some of the main areas that you should look at
First thing to do is to draw up a budget. You no longer have two incomes coming into the same household and your expenditure pattern will be different. It is rare that people can maintain the same lifestyle immediately after a divorce. You need to understand how much will be coming in, adapt your lifestyle and manage your expenses accordingly. I have an easy to use budget spreadsheet that I can send you if you have not drawn up a budget before
Protect your children's finances
You then need to check that your children will be financially okay should anything tragic happen. Check that you have sufficient life and disability cover to ensure that they will be looked after if you are no longer around or are unable to work. If you are receiving maintenance payments check that there is risk cover in place should the payer die or become disable.
Retirement savings usually take a knock in a divorce. Your partner is entitled to a share of your retirement savings and you are entitled to a share of theirs. If you can, avoid the temptation to take this payout as a cash benefit. Not only will you pay tax on this, you will also create financial problems in the future when you do not have sufficient retirement savings. I would recommend that you invest the proceeds into a preservation fund. You will not pay any tax on the money and you will have the option of making one withdrawal from this fund should you run into financial difficulties later.
Change your beneficiaries
Beneficiaries on your policies and retirement funds will probably need to be changed. I have come across several cases where ex-spouses are still the nominated beneficiaries on policies. This can cause a lot of unnecessary complications. I would recommend that you get your financial adviser to run a database search and draw up a complete list of all your policies so you can change your beneficiaries.
Change your will
You will probably need to amend your will. You must ensure that you have the right structures in place to manage the financial arrangements of any minor children. You want to ensure that any money you leave them actually goes to and supports them. I have seen a lot of unhappiness caused by a sloppily written will resulting in the children’s inheritance being used to support the second family’s lifestyle.
When assets are divided, there will often be a cash payment made to one of the parties as part of the settlement. Avoid the temptation of leaving this in your bank account. Not only are interest rates low at the moment, you run the temptation of using this money to support a lifestyle that is beyond your means. Remember, when you get divorced, there is a very good chance that your disposable income will be less than it was when you were married (and that was bad enough!). Rather invest this money where it will grow but be accessible in an emergency.
To summarise - divorce is a time of massive change. It is important that you stop, take stock of what you have, work out what you want and protect those you love. You need to work out a new budget and adapt your lifestyle to the new income. You must check that the right risk covers are in place with the correct beneficiaries. Pension fund benefits should be preserved, and a new will drawn up. Get someone who is experienced in this field to assist you as mistakes can be costly.