Three ways to hold on to your wealth during divorce

Three ways to hold on to your wealth during divorce

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In many cases, divorce has more impact on a person’s current and future financial well-being than any other event in their life. Sound financial planning may be the last thing on your mind, but it is critical to give it some thought.

Divorce happens in an emotionally charged environment, and you have a relatively short period to make financial decisions that will affect you for the rest of your life.

For everyone but the very wealthy, divorce will hurt your standard of living. Two households cost more to maintain than one, and if one person in the marriage has been a stay-at-home parent, there is less money to pay for it all.

Three ways to hold on to your wealth during divorce

1. Settle disputes out of court

A divorce settlement reached by agreement has significant advantages over a contested divorce dragged in the court. It costs less and is quicker than disputed settlements.

More importantly, it can save you from the emotional damage that comes with disputes in divorce court.

“Begin with the end in mind” is a mantra I say over and over to my clients. If you go into divorce with a clear objective of keeping your legal costs down, you are less likely to get blown off course when you have a bad day with your ex. Even the most amicable splits have their ups and downs, and one false move in the heat of the moment can send an amicable split into a costly legal mess. 

In a recent Daily Mail interview I recommended that separating couples settle disputes out of court because a disputed financial divorce settlement will cost both spouses about £15,000 to £25,000 each in legal costs.

People make mistakes in the divorce process that causes them long-lasting financial damage. We hear so much about student debt but seldom hear about the number of people saddled with divorce debt. With so much at stake, we urge our clients towards a collaborative approach, whether between themselves or via mediation.

2. Work out your budget

It’s crucial to work out your living expenses to determine what level of divorce settlement you can afford to live with. Budgeting is particularly important for parents who will be the primary caregiver for the children.

Rent and mortgage payments, council tax, utility bills, and groceries are all basic requirements. But be sure to factor in other costs such as transportation to work and school, clothing and childcare.

While it’s easy to become overwhelmed when focusing on the perceived or actual enormity of the change in the short term, don’t lose sight of your long-term needs too. Do you have adequate pension provisions in place? There is often an imbalance in pension provision between separating couples that need to be addressed through a pension sharing order.

3. Be aware of taxes

Divorce settlements can have significant tax implications. Understanding how and when assets are taxed is crucial when dividing up assets. The home is often the most significant capital asset, and any transfer could potentially give rise to Capital Gains Tax.

Understanding how this works and how liability may be avoided is essential to hold on to your wealth.

Building your wealth after divorce

Divorce is one of the greatest transitions we make in life. As with all change, the perception you have of it and the actions you take as a result will determine whether divorce becomes an agent of positive or a negative change.

There is no question that your standard of living will dip in the short term in most cases. If you’ve been out of the workplace for a long time, thinking about returning to it can be daunting.

Many stay-at-home parents find it a bitter pill when being told they should go back to work, but most of the time, they eventually should. Often a person’s most important asset is their earning capacity, as this helps them build rather than eat into their retirement fund.

While divorce settlements seek to even out inequalities between separating spouses, it is safe to say that current earning potential is going to be a strong indicator of the amount of wealth you’ll gain post-divorce.

Someone who already has a good career that has paid for a house and a sizeable pension has a better chance of building on that than someone starting from scratch. 

Gaining wealth after divorce takes effort, but for many, divorce can actually increase their focus and drive in their chosen career. Being divorced is expensive. Not only do you have divorce commitments such as child maintenance and the higher cost of maintaining a single-person household, but you have new life costs to consider too. 

I see divorce as an opportunity to stop and look at your life and work out what it is that you really want. Taking up activities and hobbies that give you joy is an important part of this process and comes with a cost. And eventually, the pain of the divorce leaves us all, and we start thinking about new relationships. This often drives a renewed interest and increase in spending on our appearance, not to mention the cost of dating.

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