Going through a divorce can drain you both emotionally and financially. With emotions running high during a divorce process, it is easy to become overwhelmed even with small financial decisions. Here are some tips to avoid making poor financial decisions during your divorce:
Seeking Solace in Retail Therapy
Divorce will play havoc with your emotions, and many people going through a divorce will seek solace in emotional spending otherwise known as retail therapy. Your world is falling apart, and a new outfit, new car, or extravagant vacation may appear as a soothing balm during these bad times.
The problem is that this temporary band-aid could adversely affect your finances for years to come. The three best ways to avoid financial ruin is to:
(1) Avoid using credit cards. Rip your cards up, if necessary. This will eliminate a lot of spontaneous spending.
(2) Ask yourself if you need a new pair of shoes or if you want a new pair. This can get tricky. If you’re buying the shoes just because you like them, then you merely want them. On the other hand, if you are facing several job interviews, these shoes could very well be a need. Be sure you know the difference before spending your money.
(3) When you see something you like, simply tell yourself to wait a day before making the purchase. With online shopping being as easy as clicking a button, delaying the gratification can keep you from splurging.
Using Your Investments to Pay Current Expenses
You may try to boost your precarious current financial situation by cashing in some assets. The problem is that you may end up paying severe tax penalties, such as when you cash in on your IRA. Cashing in your 401(k) may result in a lofty penalty. Once you lose your investment cushion, you will find it more challenging to move ahead during the post-divorce period.
If you are the recipient of a portion of your ex’s retirement funds, spending that money now could place you in a higher tax bracket. Instead, use the money to open your own IRA account and continue to defer tax payments.
Forgetting that Alimony is Taxable
If you are anticipating having to pay alimony, be aware that such payments are no longer tax deductible as of January 1, 2019. In Florida, if your divorce is finalized after January 1, 2019, and you have to pay alimony, it will not be tax-deductible. On the other hand, if you get alimony, you will not have to pay tax on it.This can place you in a higher tax bracket and raise your overall tax payments. That is not what you want while you adjust to a new life and paying for a new home, a lawyer, and possibly a new car and other necessities.
Who Gets the House?
Getting the marital home may sound good, but it can come with certain drawbacks. You may be committing to high mortgage payments. The house will require expensive upkeep and could drown you in debt. If you are not sure you can maintain the marital home, don’t get stuck with something you will be unable to afford.
Be Financially Prepared
You are entering a new phase in your life. You could find yourself in a serious dilemma without a good financial plan. Consider all your financial needs (such as alimony, child support, etc.) and develop a workable financial plan. If you depended on your spouse’s income prior to the divorce and are relatively uninformed about financial matters, it is to your advantage to hire a professional accountant who can guide you through this hazardous maze and help you create a realistic budget. Make copies of as many financial records as you are able and discuss them with an experienced accountant.
Prepare Yourself Before the Divorce is Final
If you have remained at home and raised the children, your situation is about to change drastically. You may receive alimony for a certain amount of time, but will it be enough on which to live? Prior to signing the final divorce documents, acquire the skills to get a job and start putting some money away regularly. This will help you adjust to your post-divorce situation. Be aware that you may need to scale back from your current lifestyle.
Once your divorce is finalized, the future belongs to you. You can start over any way you want. Just make sure you have your finances in working order.
The legal process can get difficult, which is why we always recommend that you seek the assistance of counsel; or at least have a consultation. Schedule a consultation with one of our attorneys today to review the issues of your case, the legal options you may have, and certain rights that pertain to your unique situation.
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