Don’t let your divorce be a financial catastrophe
Tying the knot inevitably comes with intertwining your finances. You plan your life and financial futures together, so when things go wrong, the financial fallout can be as painful as the emotional one. Stats SA paints an agonising picture of the people this is affecting: in 2014 (the latest figures available), over 24 000 divorces were processed, a 3.4% rise from the year before. Digging a little deeper, there were more female than male plaintiffs, and their median age was 40.
The big “four-oh” is a crucial time in your financial life – at this point you should have 15 years of savings and investment behind you, and should be starting to benefit from the growth of compound interest. To put your investment plans on hold as you scramble to pay for rent, school fees and life as a single can be daunting. But where there’s chaos, there’s also opportunity. Here, some things to consider when divorce rips a tornado through your finances:
- Are you getting a cash settlement? Once an agreement over who keeps the primary residence is settled, there is often a payout from one ex to the other. While it may be tempting to use the cash to jet off to Mauritius, lie on a beach and lick your wounds, you should instead ensure that this windfall works hard for you, particularly if you will have to readjust your investments until you find your feet again. Maybe you’ll no longer have a mortgage to worry about, but rent is also a big monthly obligation. Speak to your financial adviser about short- and long-term investment options this nest egg gives you. Unit trusts meet a wide variety of investment goals and risk appetites, all on very flexible terms.
- Don’t ignore tax consequences… Sadly, the tax man always wants his cut. According to SARS, divorce orders by the court may affect your tax situation – especially relating to any jointly held property, any joint business or partnerships from which you have had an income, and any pension arrangements. Separating assets at the time of divorce also has capital gains tax implications. Make sure you are familiar with how your new status affects your tax commitments. The introduction of tax-free investments may be worth exploring for a portion of the money you receive.
- Re-examine your budget and financial plan. The plans you had – like where and when you wanted to retire – will have to be rethought. However, once you have scrutinised your budget, and reassessed it based on your new lifestyle, you really will know where every cent is being spent. For some, this may be the first time they have truly had to stick to a strict budget. By identifying financial commitments that are no longer “must-haves”, you can free up money that could be used to reduce your debt or invest in education for your children. This may not make a huge dent in your lifestyle now, but will go a long way to securing your financial future.