Author and Netflix superstar Marie Kondo says, “When you put your house in order, you put your affairs and your past in order, too.” Nothing could be closer to the truth in divorce— When you put your financial house in order in divorce, you put your affairs and your past in order, too. Here are 5 steps to getting your house in order:
Step 1: Be Knowledgeable About Finances
In a previous blog post, I emphasized that “knowledge is power.” Whether you have managed your family’s finances, or your spouse did, it is critical that you both understand your finances. Here are the categories to identify and understand:
- Income: Identify each spouse’s incomes. Understand what the gross income (before tax) is and net income (income available after tax).
- Assets: Identify the assets held in your name, your spouse’s name, and assets that are jointly held. List when and how the asset was acquired. Assets include but are not limited to real property, vehicles, financial accounts including checking, savings, investment, and retirement accounts, personal property in the home (furniture, furnishings, art, etc.), stock and stock options, and life insurance that has a cash value.
- Liabilities: Identify the debts that you and/or your spouse have (individually and jointly) including mortgage(s), HELOCs, credit card debt, student loans, business loans, and other liabilities.
- Insurance: Make a list of your family’s insurance coverage including medical, dental, home/property, auto, and life insurance.
- Prenuptial or postnuptial agreement: If you and your spouse signed a prenuptial or postnuptial agreement, make sure you have a copy to provide to your attorney.
- Estate planning: Gather copies of your estate planning documents including any will, trust agreement, power of attorney, and/or health directive to provide to your counsel.
Step 2: Understand Monthly Expenses:
It is important to understand what you and your spouse spend each month for your basic needs and discretionary expenses. For an accurate and realistic picture, it will be helpful to review six to twelve months of your bank and credit card statements. Create a spreadsheet of each expense (mortgage/rent, utilities, food, clothing, travel, etc.) and then average your spending for each expense and month. It is extremely important to have a clear and accurate picture of your spending so you can compare that with your net income. This is especially important to determine if ongoing spouse support/alimony will be needed. It will also provide a guide to where you can adjust your spending post-divorce if that becomes necessary.
Step 3: Gather Financial Records:
Locate and make copies of bank statements for the past twelve months including cancelled checks, tax returns (personal and corporate/partnership) for the past three to five years, deeds to real property, titles to vehicles, paystubs, insurance policies, credit card statements, loan statements, closing records from mortgages, recent appraisals, etc. The sooner you do this the better in case the documents disappear. Keep the copies in a safe place, whether that be in your home, a friend or other family member’s home, or a bank safety deposit box.
Step 4: Open Your Own Bank Account:
It is important that you have funds available in case of emergency.
Step 5: Pay Attention to Your Credit Card:
It is important that you build your credit before filing for divorce. If you do not have a credit card in your own name, you will want to apply for one prior to filing for divorce. You will then want to use it and pay off the balance each month. This helps build credit in your own name.
Having an accurate and thorough understanding of your finances prior to filing for divorce is an important step toward easing the fear and anxiety that often accompanies divorce. It is an affirmative step toward putting your financial house in order.