Divorce can be a challenging and emotional journey, but approaching it with a clear, organized plan can make a significant difference. Taking the time to understand your financial situation, gather important documents, and assemble the right support team will empower you to navigate the process with confidence and clarity.
This guide provides a roadmap for preparing for divorce, broken down into three key areas:
- Building your budget,
- Compiling your assets and liabilities, and
- Building the right divorce team.
By following these steps, you'll be well-equipped to make informed decisions for your future.
Getting Organized: Build Your Budget
Creating a budget is an essential first step in preparing for a divorce. A budget is a statement of your income and expenses, and you may be required to submit it to the court as part of your financial disclosure. More importantly, understanding your income and spending habits is foundational to planning for your financial future post-divorce.
Featured Resource: Download Our FREE Budget Template
Whether you should complete your budget individually or with your spouse depends on your current living and spending situation. If you are divorcing amicably and still sharing expenses, it may be easier to create one budget together. However, if you are living apart and have already separated your finances, you should create your own budget. Below are the following steps to create your first divorce budget:
- Step 1: Gather Your Financial Information
- Step 2: Identify Your Income Streams
- Step 3: Identify Your Regular Monthly Expenses
- Step 5: Define Your Budget Categories
- Step 6: Build Your Budget and Zero It Out
Featured Resource: A Detailed Step-by-Step Guide to Building Your Divorce Budget
- Step 7: ACT On Your Budget: Building Your Cash Flow Management System
A budget is a plan, but a cash flow management system is the process of putting that plan into action. Think of a budget as your pre-planned road trip route and a cash flow management system as actively driving and monitoring your fuel gauge. The cash flow management system is how you manage and track your day-to-day expenses to stick with your budget. You need both to have a successful financial journey.
There are two common cash flow management systems and methods:
- The detailed method – recording and tracking each individual expense against budget categories, usually by paper or via an app, and
- The “bucketing” method – using a series of bank accounts and monthly automated savings plans to separate your monthly income into “buckets”, or high priority spending categories. This is the easier, and more often implemented method.
Featured Resource: A Comprehensive Guide to Using the “Bucketing” Cash Flow Management System
Remember, a budget is a powerful tool that gives you control over your finances. By creating a plan and implementing a system, you are building a secure financial future for yourself.
Getting Organized: Compiling Your Assets and Debts
Free Resource: A Detailed Guide to Preparing Assets and Liabilities
In divorce, the process of identifying and organizing your assets and liabilities can be an overwhelming experience, particularly if you weren't the one handling the finances during your marriage. However, getting organized and understanding your financial situation is an important step in determining an equitable division of assets.
This process will also give you a clear view of your financial position, which helps reduce stress and boosts your confidence as you move forward planning your financial future. The following steps will assist you in gathering all necessary information and provide strategies to ensure you account for all assets and liabilities.
Steps to Gather Financial Information
The first step in compiling your assets and liabilities is a thorough search for all relevant documents. This information will form the backbone of your financial disclosure to the court. Below are the essential steps to gathering the right information:
- Step One: Identify All Assets. Make a detailed list of all assets and collect supporting documents. While the information you may need for your divorce may be broader, collecting the documents noted below will provide a solid foundation. Examples (with necessary documentation):
- Vehicles: Titles.
- Bank Accounts: Monthly bank statements with balances and transactions.
- Investment Accounts: Monthly or quarterly statements with balance, holding, and transaction detail.
- Retirement Accounts: Monthly or quarterly statements with balance, holding, and transaction detail.
- Real Estate Properties: Deeds and valuation supporting documentation.
- Business Interests: Bank account statement(s), the most recent balance sheet and profit and loss statement, and legal operating document(s).
- Personal Property: An inventory of property and photographs of property with significant financial or sentimental value.
Featured Resource: Download a FREE Household Inventory Worksheet
- Step Two: Identify All Liabilities. Similarly, list all liabilities and gather supporting documents.
- Mortgages: Mortgage statement(s).
- Car Loans: Auto loan statements.
- Credit Card Debts: Credit card statements.
- Personal Loans: Loan agreements and current statements, if available.
- Student Loans: Student loan statements.
- Margin Loan or 401k Loan: Investment or 401k statement that shows loan details.
- Step Three: Run a Credit Report on Each Spouse. This step can help uncover any debts or credit accounts that you or your spouse have forgotten or not disclosed. You can obtain a free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once per year at AnnualCreditReport.com.
Helpful Tips to Track Down All Assets
Tracking down all assets, particularly if your spouse was responsible for the family's finances, can be a daunting task. However, there are several methods you can use to ensure you don’t miss anything.
- Review Financial Records Thoroughly: Examine all records for any discrepancies or unusual transactions. Look for patterns or transactions that seem out of the ordinary. Be mindful of payments to accounts you don't recognize or cash withdrawals that seem excessive.
- Use Legal Tools: If you suspect that assets are being hidden or you are unable to obtain certain documents, an attorney can use legal tools to get the information. This may include using subpoenas to obtain documents from third parties, such as banks, and depositions, where you can question your spouse under oath.
- Hire Professionals: For complex financial situations, consider hiring a forensic accountant or financial expert. These professionals are trained to analyze financial data, uncover hidden assets, and provide expert testimony in court.
What to Do Once You Have Information
Once you have gathered all the necessary information on assets and liabilities, the next step is to compile it into one place. You may start by creating a simple list, or by using a spreadsheet tool. Wherever you organize this information, at a minimum, you should include the following details: (1) a description of the asset or debt, (2) who owns each asset or is listed on the debtor agreement, (3) the value of the asset or debt, and (4) the date of the valuation.
Featured Resource: Download our FREE Marital Asset and Debt Separation Worksheet
Finally, it may prove useful to review a sample financial affidavit to get a sense for what information may be necessary to produce as part of divorce discovery. A financial affidavit is a sworn statement that outlines your financial situation, including income, expenses, assets, and liabilities. This document is required in divorce proceedings as it provides a clear and comprehensive picture of your financial standing to the court.
Featured Resource: Download a FREE Sample Financial Affidavit
It's important to know that this document will change as you recall or discover new information. After separating, you might also need to update your living expenses. Divorce is a process, and adjustments are common as you gain a better understanding of your financial situation.
Organizing your financial information is a critical step in navigating divorce. By thoroughly gathering and documenting your assets and liabilities, you can further protect your interests. Remember, staying organized and informed empowers you to make sound financial decisions for your future.
Getting Organized: Building the Right Divorce Team
Featured Resource: A Detailed Guide to Building Your Divorce Team
When couples begin the divorce process, the first person they often think to hire is an attorney. While a skilled attorney is an essential member of your divorce team, they are not the only professional you may need to ensure a successful and less stressful divorce. In our work with clients, we’ve found that many people don't realize that other key advisors are critical to protecting what's most important to them, especially in high-net-worth or complex financial situations.
A hand-picked divorce team can make the process easier and less stressful at a time when you need it most. By assembling a group of experts, you can get the support you need to make informed decisions about your future.
Here is a summary of the key roles and the value each advisor can bring to the table.
Divorce Financial Planner
A divorce financial planner can help you assess your financial situation and develop a plan for your future. They are experts in the financial implications of divorce and can help you with:
- Gathering and Organizing Financial Information
- Clarifying Financial Implications of Various Divorce Outcomes
- Analyzing Tax Implications of Your Divorce
- Creating an Investment Strategy
- Planning for Your Future Post-Divorce
If you want the help of a divorce financial planner, hire one who is well-versed in the divorce process and has the necessary experience and education, such as a Certified Divorce Financial Analyst (CDFA).
In addition to the CDFA credential, here are some other important characteristics to consider:
- Educational and Empathetic Approach
- Certified Financial Planner™ (CFP®)
- Fiduciary
- Fee-Only
Divorce and Family Law Attorney
A family law attorney is your primary legal advocate. They will guide you through the legal aspects of your divorce, including:
- Understanding Your Rights and Obligations
- Negotiating and Mediating Your Divorce
- Court Representation
- Determine Child Custody and Support
- Asset and Debt Division
- Determine Spousal Support
Tax Professional
A tax professional, such as a Certified Public Accountant (CPA) or Enrolled Agent (EA), can help you with:
- Tax Consequences of Property Division
- Impact of Support Payments
- Identifying Tax Deductions and/or Credits You’re Eligible For
- Filing Your Taxes
Tax professionals and divorce financial planners, while similar, play different roles on a divorce team. Accountants and tax professionals often focus more heavily on the tax implications of today, whereas a divorce financial planner will often take a more long-term view of tax implications.
Divorce Mortgage Professional
A mortgage professional can help you refinance your home or obtain a new mortgage if necessary. They can:
- Evaluate Your Financial Situation
- Select the Right Mortgage
- Guide You Through the Process
Many individuals navigating divorce face significant changes in income and assets. As such, handling loans can be tricky. It often pays to work with a mortgage professional with specific knowledge and experience in working divorce cases, such as lending professionals with the Certified Divorce Lending Professional (CDLP®) certification.
Mental Health Professional
A mental health professional can provide emotional support and coping strategies during your divorce. They can:
- Help You Cope with Stress and Anxiety
- Address Grief and Loss
- Teach Effective Communication
Selecting the right mental health professional is a personal process. Referrals are often the preferred method of finding one. If needed, you can use resources such as the National Register of Health Service Psychologist’s find a psychologist or the Find A Therapist online search tool.
Specialty Appraisers
If you have valuable assets that are hard to value, such as art, antiques, collectibles, a closely held business, or private investments, you may need to hire a specialty appraiser to determine their fair market value. An appraiser can:
- Provide Accurate Valuation
- Prepare Documentation to Support a Valuation
Finding the right professional depends highly on the asset being valued. For artwork, consider contacting your local art museum for referrals to professionals they have worked with. For small businesses or private investments, you will want to find a certified valuation professional with specific divorce experience in your state. One online directory is the National Association of Certified Valuators and Analysts®.
Where Do You Start When Building the Right Team?
Given the complex landscape of divorce, it can be overwhelming to begin building a team. Start with a good divorce attorney or divorce financial planning professional. They serve as the “hub” of your team and can also provide valuable insight into finding the right professionals in other areas.
By assembling a skilled team of professionals, you can increase your chances of a successful and less stressful divorce. Remember to choose professionals who are experienced, knowledgeable, and compassionate.