Preparing financially for divorce: essential steps & advice
Going through a divorce is an emotionally taxing experience, and it can also be financially draining if not managed carefully. Proper financial planning can help mitigate the economic pitfalls of dissolving a marriage, ensuring a smoother transition to post-divorce life for both parties.
This guide will walk you through key considerations for financial preparation.
How much does a divorce cost?
The cost of a divorce in the UK can vary greatly depending on the circumstances. The average cost is often cited as £15,000, although this can be misleading as costs will vary from case to case depending on whether child arrangements and/or finances are disputed and the extent to which professional assistance is therefore required.
Opting for divorce mediation, which helps clients to make decisions regarding children and/or the division of finances, rather than battling it out in court, can often help save costs. Mediation can significantly reduce the amount spent on solicitor and court fees – which can be significantly costly aspects of a divorce.
How to prepare financially for a divorce: 7 Tips
1. Assess your assets, debts, and expenses
Understanding your full financial picture is critical when you're preparing for a divorce. Start by listing all your assets, such as property, vehicles, savings, and any investments.
Here are some common examples of assets to consider:
- Property: Whether it's your primary residence or any additional real estate holdings, property often comprises a significant portion of a couple's assets. A professional appraisal can give you an accurate valuation.
- Vehicles: Cars, boats, or any other vehicles should be counted among your assets. You'll need to know the make, model, and year, as well as the current market value.
- Savings: Include all savings accounts, not just the ones that are easily accessible. Knowing the exact amount in each will assist in deciding how funds are divided, which can be useful when considering financial settlements.
- Investments: This can include shares, bonds and any other investments - for example, cryptocurrency. You may need to consult with a financial advisor to ascertain their current and future value.
The value of some of these assets may require professional appraisals, such as real estate or valuable collectibles.
Similarly, make a comprehensive list of your debts. Here are some common examples:
- Mortgage: If you own property, a mortgage is likely one of your most significant debts. Knowing the outstanding redemption balance (which may include early repayment charges) is crucial for any settlement discussions.
- Car Loans: Any vehicles that are not yet paid off should be listed here, along with the remaining balance and terms of the loan.
- Credit Card Debt: This can be a contentious point in any divorce. Both parties need to be aware of all active credit card accounts and the debts associated with them.
- Personal Loans: Any personal loans, whether from a bank or an individual, need to be accounted for, along with repayment terms and interest rates.
- Overdrafts:As with the other debts listed above, the balance of any overdrafts should be disclosed.
The objective is to have a detailed snapshot of your financial standing, which will help you navigate the complexities of asset division and financial responsibilities during and after the divorce.
Financial discussions with your spouse can often be causes for contention, consider family mediation as a means to navigate these often tricky discussions and share information between you in a structured and supported manner.
2.Gather relevant documentation
Financial documentation is a crucial part of the divorce process and one you should start compiling early on. This will help ensure that you have all the necessary information to move forward with the divorce.
Documentation you’ll need to gather can include:
- Bank statements: Gather at least a year’s worth, if not more. These statements provide a clear record of income, spending, and saving habits.
- Investment accounts: Documentation for any investment accounts should be obtained. This could include quarterly statements or annual summaries.
- Payslips: Keep a year’s worth of payslips, if available. These records may be particularly useful when considering potential maintenance payments.
- Utility bills: Although not often considered, utility bills can provide additional context to your monthly expenses and standard of living.
- Property records: If you own property, gather all relevant documents, including market appraisals, mortgage statements, and details of any secured loans.
- Vehicle titles and valuations: For any vehicles owned, the titles should be readily available to establish ownership and online valuation sites can be a useful resource for establishing the value.
- Loan agreements: Whether it's a mortgage, car loan, or personal loan, having the original agreement and current statements can clarify outstanding debts.
- Credit card statements: Collecting statements for all active credit accounts will confirm the current balances and payment history.
This collection of financial documentation will serve two important purposes. First, it will be essential for full financial disclosure, a requirement during most divorce proceedings. Second, it forms the basis of your new financial life, aiding in more effective budgeting and planning post-divorce.
3. Avoid big financial commitments
While you might be tempted to make significant financial changes during this challenging time—like purchasing a new car, or putting down a large deposit on a new home—it may be advisable to avoid such large financial commitments.
These decisions not only tie up liquid assets that might be needed during the divorce proceedings but also can create complications when assets are being divided. Furthermore, these commitments could affect your credit rating and financial stability, influencing future borrowing capability or even the terms of the divorce settlement.
Therefore, try to maintain financial equilibrium; it can be helpful to think of your financial life as something that shouldn't be drastically altered until your new post-divorce financial landscape becomes clear.
4. Creating a post-divorce budget
Planning your financial life after divorce is as important as navigating the financial aspects of the divorce itself. A well-thought-out budget can serve as your financial blueprint moving forward.
Start by estimating your monthly income, taking into account any maintenance payments or other income streams you might have post-divorce. Then list your monthly expenses, which might differ significantly from what you are used to.
Health insurance, for example, might be more expensive if you were previously on a partner's plan. Also, factor in costs like rent if you need to find a new place to live, or moving expenses if a change of location is in your future.
The aim is to arrive at a realistic understanding of your post-divorce financial standing, which will allow you to live within your means and avoid unwanted debt.
5. Start your own retirement plan
If you and your spouse had joint retirement plans or savings, the divorce may result in these assets being divided. As such, it's essential to start thinking about your individual retirement plan. In your new circumstances, you'll be solely responsible for your financial future, and that includes preparing for retirement. Begin by considering the value and benefits associated with any pensions and whether it would be helpful to obtain independent financial advice.
Consulting with a financial advisor to discuss your long-term goals and to help you decide on the best retirement savings options for your situation may be useful. You may also need to adjust your risk profile and investment strategy to better align with your new financial reality. Starting your retirement plan early will give you the best chance for a secure financial future and peace of mind.
6. Decide what to do with the house
Owning property is usually one of the most substantial assets a couple has, and deciding what happens to property in a divorce can be a complex process. There are a few options to consider. Selling the home and dividing the proceeds is often the simplest way to ensure an equitable split, but the housing market can influence whether this is the right time to sell.
- Selling and splitting proceeds: Sell the house, divide the money. This is often the most simple option, but market conditions, and the needs of the family are usually factors to consider.
- Buyout by one party: One buys out the other, usually by refinancing. In the absence of other assets or sources of finance, this may require qualifying for a new mortgage.
- Co-owning the property: Both keep joint ownership, for various reasons. Ongoing cooperation is needed, which may be complicated for some ex-partners.
- Renting out the property: Transform it into a rental for continuous income. This comes with landlord responsibilities.
- Deferred sale: Delay selling or a buyout by one party until a future date. This can offer short-term or mid-term stability - in particular for any children, but financial ties may linger.
Whichever path you choose, keep in mind that the decision can have long-lasting financial consequences, so it may be beneficial to speak with a financial mediator to understand your options.
7. Consider child maintenance
Another consideration when financially preparing for divorce is the costs of child maintenance.
Firstly, it's crucial to understand that child maintenance is not optional; it is a legally mandated commitment. Failure to meet these obligations may result in legal consequences.
The Child Maintenance Service has responsibility for child maintenance and has an online calculation tool that can help parents. Alternatively, a parent can refer themselves to the Child Maintenance Service and ask them to undertake a calculation. The Child Maintenance Service’s calculation is based upon a range of factors including the payer’s income, the number of children, and the amount of overnight stays that the children have with that parent.
Regardless of whether you are making or receiving the payments, child maintenance will have a significant impact on your monthly budget. If you're the payer, this is an additional ongoing expense that needs to be prioritised.
Long-term financial planning
Because child maintenance is a long-term financial commitment that can last until the child turns 18 or even longer in some cases (such as continuing education), it's important to incorporate it into your long-term financial plans. Whether you’re budgeting for payments or relying on them for child-rearing costs, this is a financial obligation that will persist for years.
Given the long-term nature of child maintenance, you may find it necessary to adjust your post-divorce budget or financial goals. For example, if you are the payer, you may need to reallocate funds from other categories like savings or discretionary spending. Conversely, if you are the recipient, you may want to outline how the additional funds should be used most effectively for your child’s needs.
Divorce is a challenging life event that requires careful financial planning. By proactively preparing and being aware of all the costs involved, you can navigate this complex situation with a clear financial roadmap. Our divorce and financial mediation teams are here to help you navigate complex discussions, and help ensure a mutually acceptable solution for all parties involved.