4 Simple Financial Rules you Should Know before Divorce

Anger and hurt tend to figure strongly in divorce, hand-in-hand with resentment, sadness, and fear about your future. And more often than not, these emotional woes all coalesce under the banner of money.


Based on National Survey of Family Growth (NSFG), conducted by U.S. National Center for Health Statistics (NCHS), the probability of a first marriage ending in separation or divorce within 5 years is 20 percent. After 10 years, the probability of a first marriage ending is 33 percent.

Anger and hurt tend to figure strongly in divorce, hand-in-hand with resentment, sadness, and fear about your future. And more often than not, these emotional woes all coalesce under the banner of money. That’s because divorce usually hits both parties’ wallets hard. This is one sad fact about money, but this is the reality.

Here are the key financial issues you should consider:

1. Try to Minimize your Legal Fees. If you and your soon-to-be ex are on friendly terms, you can save as much as 65 percent of the legal cost of splitting with a collaborative divorce. It is relatively new way to formally end marriage that emphasizes cooperation over confrontation. Collaborative divorce resolve disputes by removing the disputed matter from the litigious court room setting and treating the process as a way to “trouble shoot and problem solve” rather than to fight and win.

If you can’t come to an amicable agreement, try mediation before calling out the legal big guns or expensive divorce attorneys. Remember that when you communicate with your divorce attorney, the meter is running.

2. Choose between Alimony Payments or Child Support. Keep in mind that a way a divorce agreement is structured has major tax consequences for both parties. Payments classified as child support are not taxable to the payee spouse and not tax deductible by the payor spouse. Unlike child support, alimony is tax deductible for the person making the payments and considered taxable income for the receiver. As a result, divvying up the total is often contentious.

In theory, divorcing spouses may be able to save money in taxes by taking advantage of this difference, but you must be careful in how you should do this.

From my friend’s experience, if you choose to pay the alimony, do not rely on your divorce attorney to arrange your deductible alimony payments. Many divorce lawyers are woefully ignorant on this subject. Instead, you should hire a CPA or tax attorney to check out the proposed settlement.

3. Should you Stay or Go? At the time of the separation, one party may choose to leave the family house to reduce the ongoing hostility with the other spouse. The children tend to stay with whoever chooses to remain in the house.

It’s is probably your biggest asset, so deciding whether to keep the house, and who gets it, can be an emotional process. But financially it’s easy call: SELL. The big family home is often too much for either spouse alone. The resulting financial pain can disrupt the kids’ lives more than moving would.

4. Focusing on Long-Term Thinking. Make sure you understand the financial implications of your decisions. Divorce settlements should cover more than alimony and child support. Work out issues like how to divide retirement funds and who will pay for college, and how. And you’ll probably want to update your beneficiary designations, including those for your 401(k) and insurance policies, as well as you will.
Rather than accepting a car worth $35,000, for example, consider taking a mutual fund with the same current market value. The car will depreciate; the fund, if chosen wisely, probably won’t.
Marie Claire Cooper is a Certified Management Accountant. She grew-up in Brewster, New York, U.S. and now working in an investment firm in Singapore. Please read more about practical tips on personal finance management at her blog at PERSONAL FINANCE MANAGEMENT GUIDE



1 comment so far

  1. Howard MacKinnon on

    Great article, and Blog! I found you doing some research and looking for some very good blogs that are dealing with relationships and marriage, but especially all the aspects of divorce… Because, I believe that it has and will always be a factor of communication that is the key to any good relationship and that the lack of it, is where the trouble starts for every marriage… Whether it be money, alcohol and drugs, adultery, pornography or and abuse in every form of mental, spiritual, and yes physical will all lead back to one thing, and that is no real communication, especially after reading this post it reminds me how important it really is…Keep up the good work on all of our behalf’s. Thank you, Howard M.

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