Often, in many marriages, one of the spouses assumes the role of “financial lead.” This person manages the couple’s money, pays the bills, works on the taxes, and understands where all of the important papers and assets are located.
So long as the couple remains together and are happily married, this arrangement can work fine. Unfortunately when there is one spouse who doesn’t participate actively in financial decisions, they put themselves at a disadvantage in a divorce situation.
The non-financial spouse can quickly feel very vulnerable, like they are at a noticeable disadvantage.
What happens to this spouse in the event of a divorce?
A divorce can be significantly more stressful for the spouse who has little knowledge about their personal finances. They might not have any idea how to picture life as a single person, or their imagination might make a lot of assumptions about what they’re entitled to that just don’t match up with reality.
Here are 5 tips to get that passive spouse started on a proactive road to financial well-being.
1. Locate the important documents
If a divorce is looming, you’ll need to get copies of all the important documents for your records.
A good place to start is with tax returns. Get a hold of the last couple of years and start to review each return. You’ll be able to identify information that you will need to know, like income sources, bank and investment accounts.
Retirement accounts don’t show up on your taxes, so you will want to figure out if there are retirement account statements that you will need copies of. Don’t only think about current employers, but past employers as well, and for the self-employed, there may be retirement accounts held at banks, mutual fund companies, or at brokerage companies. When you find the retirement accounts, you’ll want to know who the beneficiaries are.
Beyond income and investments, you’ll want to have copies of insurance policies like life, medical, home, and auto. Life insurance plans, like retirement accounts, have named beneficiaries you’ll need to make a note of. Estate documents should be located.
These documents will need to be updated in the near term. For some more amicable divorces, you may be able to wait until your divorce is settled, but if things are contentious, you may want to have them changed sooner than later.
2. Know your cash flow
Having a clear picture of your income sources and what it costs to live will put you in a better place for negotiating for your needs during a divorce.
Sit down in a comfortable chair and look at a few months of bank and credit card statements to get your arms around how much it costs to run the household. To start, break the statements down by how much income you receive every month and how much you spend every month. This will tell you at a high level what it costs to support the household.
Post-divorce, your income will be reduced. Whether you both are earning income or only one of you is in the workforce, the income available to pay for expenses will be reduced for both spouses. Keep in mind that household expenses don’t change that much; rent is not reduced when one person moves out. House payments don’t change. The reality will be that you will need to figure out how to pay these expenses on what may possibly be half the resources.
Set up a budget that makes sense for your needs; this can help you understand where the money goes by category. You’ll want to break down expenses as fixed (those that don’t change from month to month like rent, house payments, and insurance) and variable (those that are more discretionary but necessary, like food, utilities, clothing, and personal items). Also, the extra expenses like vacation, gifts, and personal care are all items to monitor. There are online tools available to help with budgeting, but even a simple spreadsheet that you build for yourself and personalize can be helpful.
3. Check in regularly
Setting up and keeping to a habit of spending time on a “money date” with yourself every month can help you address the different areas of your financial life in smaller increments, so you can slowly start to gain familiarity.
Checking in regularly on areas important to your personal finances helps you build knowledge and confidence.
There are small money moves you can execute in just fifteen minutes that can make a difference, there are introductory courses on personal finance (like our free financial fitness challenge), as well as other excellent resources out on the web to be found.
Pick one that resonates with you and get started. Small moves can make a big impact.
4. Work with a CDFA or the equivalent
Your financial professional will be able to review your situation without letting emotion play a part and help you understand what assets make sense for you based on your individual needs and circumstances. A Certified Divorce Financial Analyst (CDFA) is trained in helping divorcing couples split the marital assets in an equitable manner. This work can provide some much-needed clarity, especially for the spouse who hasn’t been in the driver’s seat of the financial matters during the marriage.
One spouse may have higher earning potential than the other; one may have been out of the work force for many years and have dated skills that hinder their earning potential going forward. A spouse or child may have special needs to consider which may affect the ability to work.
The bottom line is that both spouses need to know how they will support themselves in their post-divorce future, and for the spouse that hasn’t been the primary breadwinner; they need to know that spousal support, if awarded, will probably not be forever.
50/50 isn't always equal
In many cases, the couple will think that splitting each asset 50/50 will be a quick and easy solution. While it may be quick and simple, it might not be the best solution for you and what you need. In fact, not every dollar is created equal. Assets like a house or car carry a dollar value, for example, but offer no ability to support future expenses unless they are sold (see #2, above). You also need to be mindful of how tax-deferred assets, like retirement accounts, are valued. There is an IOU attached to every dollar in a retirement account called taxes and you will be subject to an additional penalty of 10% if you try to withdraw those assets before you are 59 ½. So when splitting investment accounts, the ability to access money today needs to be balanced with money that will be available in the future.
5. Talk with friends
While money may be the “last taboo subject” left in polite conversation, discussing personal finance with a trusted friend might be just the ticket to ground you in your new reality, and to fortify your self confidence that you can, in fact, move forward with your head held high.
If talking to friends is not something you feel comfortable doing just yet, consider joining a conversation group where you are with others going on a similar journey. Sharing similar stories with others can be helpful and reassuring. The camaraderie can be quite empowering at times. I’m speaking from experience here: my colleague and I founded and host quarterly Women’s Circles in the SF Bay Area, and you’re welcome to come if it fits your circumstances.
Financial advisors definitely recommend that both partners in a couple be “in the know” when it comes to personal finance; now that your life is moving forward in a new direction, away from the marriage you knew, it’s time to advocate for yourself and your needs.
It’s up to you now. You’ve got this.