Whatever the reasons for getting a divorce, it can be an emotionally challenging process. Divorce financial planning only adds to the stress of an already difficult time, but it’s essential to take a strategic approach to protect your finances.

This article will help you navigate financial planning before and after divorce — and at every stage along the way — highlighting tips for preparing and mistakes to avoid.

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How to financially prepare for divorce

If you suspect divorce is on the horizon, taking proactive steps to manage your finances can help you maintain control. Follow these steps to understand how to plan for divorce and secure your financial assets.

Open a personal bank account

If you don’t have a bank account in your own name, open one immediately. This ensures you have direct access to funds independent of your spouse. If you receive any income, such as paychecks or benefits, deposit those straight into this account. Having a credit card in your name for emergencies is also a smart precaution. Taking these steps helps protect your financial independence.

Secure key financial documents

Gather all important financial documents and make physical and digital copies. Critical records include:

• Tax returns for the past five years
• Bank statements
• Investment account statements
• Mortgage and property records
• Insurance policies
• Credit card and loan statements
• Statements from retirement accounts

If your divorce becomes contentious over finances, you can compare your records to the financial disclosures to find any discrepancies. 

Create a preliminary post-divorce budget

Even if you continue cohabitating for the time being, calculate the cost of living without your spouse. Anticipating monthly expenses is helpful when it’s time to move on. Include your solo income and any additional income — such as spousal or child support — then deduct your living expenses. These could include rent, utilities, groceries, transportation, and child care. If you expect to pay alimony or child support, add that to your expenses. 

Emphasize documentation

Document all significant transactions and notify your spouse accordingly. This will help you avoid allegations of commuting funds from your spousal assets. If you’re working with a certified divorce financial analyst (CDFA), forward copies of your financial statements to keep them apprised of any major expenditures. 

What goes into a divorce financial settlement?

Dividing finances during a divorce can be one of the most complex and emotionally charged parts of the process. A financial settlement determines how marital assets and debts are split between spouses and shapes each person’s financial future. 

Understanding what counts as marital property and how these assets might be split can help you approach negotiations with confidence. Marital property generally includes everything accumulated during the marriage, from your retirement savings and home to any debts and business interests, but some assets may require specialized expertise to divide fairly. 

Here’s an overview of the most common types of assets and liabilities that come into play during divorce financial settlements. 

Real estate 

A house is often the most significant piece of marital property. If one spouse stays in the property after the divorce, they usually have to buy out the other spouse by offsetting the home equity with other assets. In other words, one spouse might get a larger share of joint retirement investments or savings accounts.

Bank accounts

State laws usually govern how spouses split depository accounts. One spouse may use their share of the funds in these accounts to offset other property divisions. For example, if you have $100,000 in an investment account, you are entitled to half of the cash value. If there’s also $100,000 in equity in the home, you may agree to let your spouse keep the investment account in exchange for their share of the house. 

Retirement assets 

Retirement assets can present unique problems in divorce proceedings, as the IRS often charges a 10% penalty for early distribution from tax-advantaged accounts. You may have to divide your pensions and 401(k)s under a Qualified Domestic Relations Order (QDRO) to avoid early withdrawal penalties. IRAs don’t require a QDRO but must be divided according to the divorce decree to avoid taxes and penalties.

Debt and liabilities

All marital debt, including mortgages, credit cards, and car loans, is subject to equitable division. However, that doesn’t mean each spouse is responsible for 50% of every account. An attorney or CDFA may structure a deal where one type of debt cancels out another. A spouse may also assume more debt to keep an asset. For example, you could keep your car as an asset and agree to be solely responsible for the car loan. 

Business interests

Even if your spouse doesn’t work for your business, they may be entitled to a portion of its value. Business ownership valuations are highly complex, so you may have to hire a professional appraiser. 

Insurance and annuities

Life insurance, long-term care policies, and annuities are subject to division. If you own an annuity, your spouse is likely entitled to half of the cash value. In some cases, you can split the annuity or reassign ownership to avoid surrender fees. 

It’s important to remember that each state has laws determining how to divide marital assets during divorce. Your divorce lawyer can guide you through the particulars of your state.

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Your divorce financial checklist

A clear financial checklist can help you stay organized and focused during uncertainty and avoid legal complications. Follow these steps to keep your finances on track: 

• Create a bank account: Open your personal account to establish financial independence and access to funds. 
• Gather all financial documents: This is an essential step to get organized and gain an overview of your financial landscape.
• List all marital and separate assets: In most states, the property you accumulate before marriage is a separate asset, while marital property includes any assets accumulated after marriage. Most states make exceptions for family heirlooms, inheritances, and some specific types of property. 
• Check your credit score: Monitor your credit card accounts and check your credit score — a divorce can have unexpected effects on your credit if your spouse accrues debt on shared accounts or misses payments. Regular checks help you spot any unusual activity early. You can also consider freezing or closing joint accounts.
• Create a projected budget: Estimating your income and outgoings will give you a sense of what you’ll need in the future. 
• Make beneficiary updates: Adjust your will, power of attorney, and beneficiaries for retirement savings accounts and life insurance policies. 
• Estimate housing costs: Decide whether one of you is remaining in your home. If you plan to move, research rental or purchase options that fit your budget. Take into account moving expenses, deposits, and furnishing costs. 
• Review health insurance coverage: If you were on your spouse’s plan, you’ll need new insurance coverage. Talk to your insurance provider about removing your spouse if they’re on yours. 

5 financial mistakes to avoid during divorce

Divorce can be logistically complex. It’s easy to overlook important details, and even a minor misstep can have long-term consequences. Here are five common mistakes to avoid.

1. Rushing to accept a bad settlement 

It’s easy to give into emotional fatigue or physical exhaustion during the divorce process. That’s why most spouses with complex finances hire family law attorneys and CDFAs to handle negotiations. Rushing into a settlement to get it over with can adversely affect your future financial stability. 

2. Forgetting to update beneficiary designations

If you forget to change your beneficiary designations, the money you’ve put aside for your loved ones may go to the wrong person. Ensure your pensions, life insurance policies, and annuities have updated beneficiary designations. 

3. Overlooking long-term tax impacts of asset division

Understanding the penalties and tax implications of liquidating specific assets is essential. For instance, annuities usually have surrender charges and certificates of deposit have early withdrawal penalties. The IRS charges a 10% early distribution penalty if you withdraw money from a tax-advantaged account before age 59½. You may, however, qualify for a QDRO and avoid paying the penalty. Learn about the penalties and tax implications for your assets.

4. Failing to account for future expenses 

You may qualify to receive spousal or child support, or you may be the one paying it. Either way, make sure you estimate these payments for your post-divorce budget. Think about new upcoming costs like healthcare, transportation, and educational funds. 

5. Neglecting to get professional help

Depending on the complexity of the divorce, you may need more than a lawyer for support. While a divorce attorney will guide you through the legal process, you could also hire financial professionals to advise you on specific assets. A CDFA can be particularly valuable, helping evaluate settlement options and model future scenarios.

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This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes.