Liz Koh: Don't make these financial mistakes if you separate
OPINION: Separation and divorce are never easy, no matter how long you have been together.
It is especially difficult when there are young children involved and it can be very hard later in life too, close to retirement.
Along with the end of a relationship comes the end of hopes and dreams that were built on the premise of a future together, as well as a sudden, dramatic shift in the financial situation of each partner.
Minimise the financial impact by avoiding these common mistakes:
Bringing emotion into sorting out your separation agreement. It is natural to want revenge against someone who has hurt you or let you down. Being spiteful or unwilling to compromise creates delays in the settlement process and can result in protracted and expensive legal negotiations. While you might not accept the reasons for change, acceptance of the need to let go and move on makes the separation process much smoother.
Guilt can get in the way of a fair settlement. Let go of the thought that initiating or causing a separation means you have to take a lower share of joint assets than you are entitled to.
Taking too long to sort out your affairs. A property agreement requires a definite date of separation, at which time all assets and liabilities are valued and agreement reached on how they will be divided. If the actual and agreed dates of separation are as close as possible to each other and to the settlement date, this process will be a lot simpler. Time delays mean that finances continue to be intertwined, requiring more unravelling later.
Being emotionally attached to assets. Wanting to keep the family home at all costs is a trap that many fall into. The usual reason is to protect children from too much disruption, however children are remarkably adaptable and even in stable relationships it is common for families to move house.
By all means, stay in the family home if possible, but if doing so causes huge financial strain, let it go and buy something more affordable. A child's physical environment is far less important than their emotional environment.
Wanting to keep the same lifestyle. As the saying goes, you can't have your cake and eat it too. Unless you have significant wealth, the end of a relationship usually means the end of one lifestyle and the start of another more modest one. It is important to prioritise and choose what you are willing to sacrifice. Trying to maintain your former lifestyle on a reduced budget is likely to cause extreme stress.
You may need to let go of luxuries, such as a holiday home, planned overseas travel and a private school education for your children. That's just life! Find your pleasure in other, more affordable things and set new goals and dreams.
Signing an unfair property agreement. Be aware of what your combined financial situation is and make sure no assets or income are being hidden from you or undervalued. Get good legal advice on what you are entitled to. A property agreement should be detailed and it should take care of your needs not just at the time of signing, but in the future. Find the right balance between compromising in order to come to a quick solution and fighting for every last dollar you are entitled to, but at great emotional and financial cost.
Not reviewing your life insurance. Separation and divorce bring about a change in your financial risk; that is, the losses you or your dependents may incur if you die or if you are too sick to work. You need to be aware of what your risks are and decide whether you wish to pass them on to a third party by taking out insurance. Review the ownership of your policies – they may be owned by your partner. For single people with no dependents, the possibility of loss of income due to illness is a risk that is often overlooked.
Not doing a budget and long-term plan. Household income and expenses change markedly after a separation and without careful management, it can be a struggle to make ends meet. Understand what your financial situation will be now and in the future before you sign a separation agreement so the needs of you and your family can be taken into account.
The end of a relationship is traumatic and there are many issues to be resolved at a time when you are least able emotionally to deal with complexity. Take your time to make important decisions and get professional help along the way.
* Liz Koh is an authorised financial adviser and author of Your Money Personality; Unlock the Secret to a Rich and Happy Life, Awa Press. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free of charge by calling 0800 273 847.