Divorce is an unpleasant topic and one most people avoid discussing. However it is a reality for many people and one that could leave you reeling financially if you’re not prepared. If you’re in the midst of a marriage breakdown understanding your financial position is vital but not widely understood.
To delve into this tricky subject I spoke to Cathryn Gross, who is a member of ASIC’s Financial Advisers Consultative Committee and the founder of Twelve Wealth, a boutique financial advice business committed to helping women achieve their goals in life.
Cathryn shares what you need to understand about your joint finances before getting married and the steps to take to prepare yourself financially in the event of a divorce.
Tell us a bit about yourself and why you’ve chosen to focus on this area of finance
About 5 years ago my own relationship broke down. I was forced to confront a future raising 3 young kids, with half the assets and cash-flow our family had always had. To say I was daunted is a MASSIVE understatement.
At the time I was running a sales team that distributed products to over 600 financial advisers, I knew I needed help to get my own finances in order and plan for a new future. But none of the 600 advisers we spoke to ran a business with a service model that I wanted to pay for!
I sat down and brainstormed the list of services the perfect financial adviser would provide for me. Then created that business. I was drawn to helping women because I was building a service offering what I, as a woman, could not find. Also, I had worked for a number of years as an executive coach and facilitator for women on a leadership journey. This gave me the frameworks I needed to coach women to get clear on their goals and then work with them to achieve these goals.
I also know the majority of women put themselves last and put their “financial chores” at the bottom of the to do list. This causes a persistent low level of anxiety. I want to get women more engaged in their finances, and improve the financial confidence so they can thrive in all areas of their life!
Finance can be a sticky topic for a lot of people, why is it important to understand your individual and joint finances before you get married?
An understanding of your partner’s assets, liabilities, income and expenses is crucial before you commit to a life together. At a base level, in order to plan for the future you have to understand where you are at right now.
More specifically, on the asset and liabilities side you need to understand: is there credit card debt? Tax debt? Personal loans? Car loans? These sorts of loans are usually what I call “bad debts” and need to get paid down as fast as possible as they are not funding assets that could grow in value.
As a couple it will be hard to move forward to grow your wealth with these sorts of debts, so you both need to know about them and focus on getting them paid down ASAP.
For income and expenses, do you know what your cost of living is and whether you could afford to live on one salary if you plan to have children or if one of you got sick? Do you know what your borrowing capacity is based on your joint incomes? This will help you work through where you can afford to buy your first home and what changes to make to your lifestyle to live off a tighter budget?
What should people do to prepare themselves financially (women and men) if they want to get a divorce?
Some people might think being prepared is cynical or underhand but in my opinion being prepared is pragmatic. By removing some of the fear associated with not understanding the financial consequences of divorce, you are more likely to come to an agreement outside the court system and that should save everyone money.
1. Gather your financial documents
Your file should include bank account details, mortgage and credit card statements, tax returns, details of shareholdings etc. Gathering this information together now makes all the difference if you have to start negotiating finances during emotional times.
2. Create your own annual report
You are your own greatest asset so understand your worth (and your potential) by creating a balance sheet and profit and loss overview for you and your family. This is much easier than it sounds. List all the assets your family owns and all of the debt. Then work through your family’s income and expenses. This means creating a budget, which will give you a real feel for your cost of living in your marriage. It will also provide the first step towards drawing up a budget to live on outside your marriage.
3. Establish your own bank account and credit card
Many married couples share all their finances. Come separation, you will probably want financial independence and might also decide you do not want your soon to be ex to know how you are spending your money.
4. Set up private ways to communicate
Once your divorce is underway you will want all of your correspondence with your advisers to be private. Consider setting up a new email address and perhaps a private post office box so all your official documents are not sent to your home.
What advice would you give to women about achieving financial independence?
For me financial independence is about confidence. It’s about not being afraid to make decisions around money, and not abdicating responsibility to someone else, be that a parent, husband or a financial adviser! By understanding our finances and being financially independent we are more in control of what our futures might look like which allows us to worry less and dream more.
If you have your head in the sand about finances it is never too late to start. It could be paying $20 a week of credit card debt, or not buying new clothes for 6 months and saving that money in an emergency fund. Lots of small steps made now will make a HUGE difference in 2, 5 or 10 years time. Just do something!
What’s the best advice you’ve been given about saving and accruing wealth?
One of the best pieces of advice I’ve read is to “spend what is left after saving, not save what is left after spending”. This is a Warren Buffet quote and the one true way to build wealth. Practically speaking this means setting up an auto payment every month into a saving or investment account, so that you save before you even see the money.
The other great piece I got early in my career was never to grow your spending as your salary grows. This means you save more and more as your salary grows. It also highlights the importance of ensuring that you use your ‘human capital’ well. We are, ourselves, one of our greatest sources of wealth, so make sure you are pushing for pay rises and negotiating a great salary for yourself whenever possible!
And finally, don’t put all your eggs in one basket! This means not putting all your wealth in one share or all your wealth in one asset class like property.
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Cathryn Gross is the founder of Twelve Wealth, a boutique financial advice business committed to helping women achieve their goals in life.