How to Minimize the Financial Harm of a Divorce

Paper cutouts representing a man and a woman are arranged on either side of a dollar bill that's been folded into the shape of a heart and cut in jagged pieces
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While some divorces may be better than others, divorce is tough. Even if it's necessary and the right thing to do given a bad situation, it's never easy.

Back when I was working with clients, I saw firsthand the financial wreckage that can be a byproduct of divorce. So while I can't change the nature of the breakup, I set out to tackle it from the perspective of minimizing financial harm.

Here are seven ideas that could help do just that.

1. Get Help

Who has your back? The very nature of the adviser relationships you and your spouse have leveraged over the years -- financial planner, lawyer, accountant, etc. -- may necessitate change. For example, a fiduciary may not be able to continue to represent you and your spouse.

And, of course, you should have an attorney focused on what's best for you. That's especially true if you're going through a military divorce. In some cases, you may even need help getting a clear picture of what, financially, is at stake during the divorce.

A divorce likely increases the importance of putting your team together, but it also may mean building a new team of advisers.

2. Protect Your Credit Reputation

Over the years, I've been surprised at how often I've run into couples who don't both have access to credit. Establish your own credit lines to make sure you don't get caught in this type of situation.

Along the same lines, you should separate your "credit ties" with your spouse to ensure you're not penalized for any of their bad credit behaviors or the debt they may accumulate as your marriage winds down and post-divorce.

3. Take the Long View

Retirement plans and individual retirement accounts (IRAs) offer some special access to funds and rule exceptions in the event of a divorce. While taking advantage of these exceptions may be necessary, don't lose sight of the long term. An eye to the future could help head off the long-term implications of potentially damaging short-term moves.

4. Liquidity Matters

Liquidity is simply the idea of accessing a particular asset quickly. Perhaps the biggest liquidity trap I have seen during a divorce is the home. There can be a lot of appeal to maintaining your residence. However, an outsized payment in the context of a new financial circumstance can quickly turn a haven into a trap.

As you evaluate your post-divorce cash flow and division of assets, be realistic and recognize that a fresh start could be more practical than hanging on to the familiar.

5. All Dollars Are Not Created Equal

A traditional IRA with $100 in it is not the same as $100 in a savings account. Depending on your situation, accessing the money in the IRA or other traditional retirement account may require you to pay a significant amount of federal and state income tax.

Similarly, you may have investments in your portfolio that are subject to surrender charges or include other limitations or specifications (timing, valuation, etc.) that might affect their overall utility to you. Working with a certified divorce financial analyst or accountant that is committed to what's in your best interest will help ensure you don't get shortchanged.

6. Map Out Your New Cash Flow

As I alluded to earlier, getting a firm -- and very realistic -- grasp of your income and expenses is essential in making solid financial decisions. For most people, everything begins here.

7. Commit to a Cooling-off Period

This is solid advice to heed during most of life's transitions. While it can be tempting to make a splash with a big purchase, once-in-a-lifetime trip or other major move, I'd encourage you to hold off, if only for long enough to ensure your move makes sense and is not just a knee-jerk reaction to provide relief during a difficult time.

None of these ideas will ease the pain of the process, but they could help you minimize the financial impact of your divorce. Good luck.

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