Note: This article is part of Morningstar Canada's Women in Investing Special Report
Divorce is a tough topic to tackle, but it’s a harsh reality. According to the latest Statistics Canada data, approximately 38% of all marriages end in divorce. And with figures like that, it helps to keep in mind a few fundamental pieces of advice to both fortify your finances and fix any financial follies left in the wake of ‘happily ever after’.
Of course, the best advice around divorce and finances is to avoid any finance-related relationship tensions in the first place. Experts say building clarity and compromise at the start of a relationship can pay dividends down the road.
Honey, let’s talk about money
Approximately 68% of divorces stem from conflicts regarding finances, says Alan Desnoyers, Senior Vice President at BMO Private Banking. And many can be avoided by simply opening a financial line of dialogue.
“Money is personal, and approaches to finances differ from one person to another,” says Desnoyers, “what couples need to admit, right out of the starting gate, is that they are different.”
Ideally this is done before marriage. The trouble is that so many couples are in a state of blissful ignorance that they aren’t aware of any emerging issues, and finance doesn’t exactly fit in a cozy conversation. Desnoyers said this applies especially to younger couples.
“Make the relationship functional before emotional”, says Jackie Porter, Financial Planner at Carte Wealth Management and co-author of the book Single by choice or chance: the smart woman’s guide to living longer, better. “Things will change in your relationship, so you need to set the stage.”
Porter says that she sees too many partners trading money for love. And those that bring up the topic, especially earlier into a relationship, are seen as greedy. “But there’s too much to lose,” adds Porter.
“Frame it as a positive talk,” adds Desnoyers. And go into the conversation with an open and respectful approach that accepts different partner perspectives. “Focus on being an active listener, instead of having the goal of bringing someone to your viewpoint.”
Preventing financial fissure lines
Desnoyers says there’s a natural tendency for couples to delegate household duties, but there’s one chore that needs to be shared whenever possible. “It’s important to make sure that both partners are involved in financial planning.”
And the need is always there. Not only is there a need to keep differences in approaches out in the open, but there are factors that might not be given the opportunity to surface without both partners involved. “What happens if one partner has or encounters an expensive medical need?” adds Desnoyers. Both sides need to be crunching the numbers in real time.
There should be a shared budget that captures where money is being spent from both sides and incorporates how any pay increases might impact the overall budget as well.
And big purchases of cars and homes, and major events like inheritances should not be taken lightly – couples should be having conversations around each item.
A budget, as part of a financial plan, is a critical tool, says Desnoyers, however couples also need to have a wealth plan. A wealth plan provides a broader view of a household and family’s situation and addresses future life events.
A wealth plan incorporates items like wills, estate and investment planning for children or siblings. As life is unpredictable, it will never be 100%, but it will prove to be a useful guidepost along the way, adds Desnoyers.
“Less than 50% of people have a valid will. And if you have a family, things could get more complicated. Some children may want that family cottage but can’t afford it, while other children don’t want it” says Michelle Munro, Director of Tax and Retirement Research at Fidelity Investments Canada.
And things can change Munro adds. “It’s also important to update that estate plan to avoid challenges arising in the future. Five years from now the family situation could be different and you need a document to reflect that”.
At meetings with the financial planner – with both members of the couple whenever possible – ask for help identifying the financial implications of each life event and then work back from your wealth plan to your financial plan, and then to your shared budget.
And in the unfortunate circumstance where one partners passes away – or you do divorce – you’ll have a familiar roadmap to refer to. Prepare for the roadmap to include a detour if you’re headed for divorce, however.
Financial management A.D. (after divorce)
First, take a deep breath and focus on your comfort first, says Amy Dietz-Graham, Portfolio Manager and Investment Advisor at BMO Nesbitt Burns. It’s a very personal matter and you’ll need to be in the right state of mind to have some tough conversations.
The Canadian Mental Health Association has a list of things you can do to support yourself.
“When you’re facing divorce, everything is in upheaval – and there are similarities between going through a divorce and facing the loss of a loved one”, says Munro.
Everything is on the table at this point, says Porter. And there may be immediate to-dos to consider. Is there a joint account? Break it apart. Supplementary credit cards? Cut them off. It’s important to immediately scan your financial surroundings.
Take an inventory of the assets and liabilities that apply to your former half of the relationships, says Munro, recommending it be done with a planner. “You could be in for a few tweaks, or a major overhaul.”
And there are key questions to ask, adds Porter. “Who supported who throughout periods of career growth? Are there income disparities? Is there a family home that needs to be sold? Will spousal or child support need to be budgeted for?”
Depending on how amicable the ending is, the answers to these questions that might come in handy when meeting with a lawyer.
