5 Financial Pitfalls Of Divorce And How To Avoid Them
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By Wendi Schuller, Featured DM Blogger - October 07, 2015

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The way assets are split during a divorce can affect one’s financial future. One pitfall is not taking a careful look at what is best in your particular situation. Consider hiring an independent financial advisor to go over the asset inventory and get a balance between cash and retirement investments. One splits the total value of assets, not necessarily the individual ones themselves.

1. Determine which investments have a greater potential for a higher yield. A money market account is safe but will not accumulate as much interest as a more diversified portfolio. I am earning 5% or more on my intermediate bond index. My investment with various stocks is more volatile, although long-term gains will hopefully make up for occasional losses. A financial expert is not working on commission and can give some guidance on which types of investments are best to receive in your divorce. I made the mistake of not taking more in a retirement account and am trying to catch up with that now. Keep in mind that investments have different tax consequences. Discover if an investment will be taxed at a later date and at what rate. Other investments may be tax-free. When there is much wealth to be split, have a tax expert working with the financial advisor right from the start.

2. A receiver is taxed for alimony, but not for child support. The payor gets a tax break for paying alimony, but not for child support. If your children are young, consider taking the bulk of your maintenance as child support, so you get to keep it as opposed to paying taxes on it. If you have teenagers and your alimony continues after child support ends, it may be better to take the bulk of it as alimony (I did this option).

3. Property is not equal. If there are some choices, a real estate agent or expert in this field can guide you. Some land or houses may be on an upward trend and others may be losing value. One divorced woman moved into a house with her daughter and was told that a small road might be built beyond the back yard. That was an understatement and they moved after a major freeway was constructed instead. In another case, a divorcee bought a nice house in a quiet, well-kept suburb. A few years later a high-density apartment complex was added nearby, resulting in a rash of break-ins and other crimes. There was a mass exodus from a previously peaceful neighborhood. Do your research to ensure getting a particular piece of property is a good idea.

4. Getting a check for the divorce settlement may be the biggest chunk of money received in one’s lifetime. Resist the urge to buy friends and family extravagant gifts. Before reacting by splurging on a dream trip or bauble, tuck the money safely away and think about how best to save it. Pay off or reduce the amount of your mortgage. Do not make impulsive decisions as many of us did. My sons and I moved into a much smaller house during my divorce. Instead of spending time in it first, I converted a porch into a family room for my sons to hang out with buddies. What a waste of money; only the cats spend time in that addition and my money could have gone into needed repairs instead. Pause and take time before making spending decisions.

5. Be careful not to live above your means. Consider making a budget or write down all of your expenditures for a month to determine where to cut out frivolous spending. Do not fall into the trap of “Well, I deserve this since I have been through so much.” A financial pitfall is keeping the same spending patterns as you did while still married when living on a double income. Enlist your children to decide how to cut costs and still have fun. Youngsters can contribute creative solutions that all can do, such as having pizza and movie nights (my sons’ idea that we did almost weekly).

To avoid financial pitfalls, sleep on decisions overnight or take a few days to think about financial dilemmas. I made costly mistakes when I felt pressured to act upon something quickly. Learn to live on a reduced budget with doing fun things like a picnic in the park or enjoying music at a free concert.

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