Clients in the middle of the divorce process are dealing with an array of complex issues, from personal to practical. As in most situations, the better they understand what is happening around them, the more in control and confident they will feel and the better decisions they are likely to make. Here are some important financial areas that every client should consider early in the divorce process.
Build a Budget
Knowing where your client stands financially, especially when it comes to cash flow, starts with a budget. Even if there was never a formal budget during the marriage, it may be useful to create a pre-divorce budget. At the most basic level, a comparison of income and outflow can assist with measuring changes in lifestyle that will be affected by divorce. An accurate pre budget can be a valuable negotiating tool and can be used in evaluating alimony and child support needs. At a more comprehensive level, a budget can have dozens of line items. Th e more time spent preparing a budget, the less likely to overlook sources of income and expenses. The budget becomes an excellent cornerstone to a personal financial plan which each spouse should have during and aft er the divorce process.
Request a credit report from any of the three major credit reporting agencies, Equifax, Experian, or TransUnion. A good credit report translates into financial flexibility. Credit scores are used by many organizations for purposes that extend beyond credit. For example, insurance companies and prospective employers may request authorization to review credit reports as a qualifier for employment or coverage. Joint credit is usually not appropriate aft er divorce, since there is a chance that a credit rating can be changed by the actions of a former spouse. One of the first things you can advise your client to do to establish credit is open a bank account and investment accounts in their name. A financial advisor may be able to help establish credit as part of the relationship.
Decisions involving a home should not focus solely on the value. A client must consider liquidity, cash flow, and the cost of maintaining the assets. Th at can be a significant financial burden that may preclude other opportunities or needs, like a sound retirement plan. Again, the financial advisor can help with these decisions by bringing in the budget and working with a qualified mortgage broker should refinancing become necessary. Th e financial plan can help to determine what the client can afford and protect their standard of living.
Going through a divorce can feel like a lonely process which is all the more reason not to go through it alone. A strong team of confidential professional personal advisors – a personal board of directors – can provide critical guidance and support. Th is team includes a lawyer, an accountant, a financial advisor, and a personal counselor. When you have comprehensive, accurate information, your attorney can represent you more effectively and you will be able to shape your own financial life more quickly.
Weathering a divorce is very difficult for clients as it affects one’s personal and financial life. Assembling this information as early as possible can offer some relief to an overwhelming process, which in turn can assist in the legal process.
Although she has compensated Attorney at Law Magazine to have this article featured in its publications, this is not a solicitation nor intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors. The views expressed here in are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC. Member SIPC Certified Financial Planner Board of Standards Inc. owns the certification marks CFP, CERTIFIED FINANCIAL PLANNERTM and federally registered CFP (with flame design) in the U.S. CRC1520919 06/16