Advice on planning your way forward from a financial perspective from Martin Bamford, Chartered Financial Planner, Informed Choice
Money is one of the three key parts of the divorce process, along with the legal dissolution of the marriage and dealing with childcare arrangements. The financial aspects of divorce can often pose the greatest challenges, as money has the capability to be such an emotive subject, sometimes even more so than children.
Rather than look at the division of assets or agreeing on maintenance payments, this article considers the Financial Planning aspects of a divorce.
What is Financial Planning?
Financial Planning is best defined as the process of developing strategies to help you manage your financial affairs so you can build wealth, enjoy wealth and achieve financial security. For these reasons it is pretty important.
Unlike many other developed nations, we don't always take Financial Planning as seriously as we should. Our interaction with professional financial advice typically comes at a time when a specific action has to be resolved, such as taking out a mortgage or starting a pension. Financial Planning is strategic rather than tactical, and therefore requires a slightly different approach.
A good prompt to consider Financial Planning is when you experience (or you are about to experience) a 'life event'. Divorce is definitely one of those. The separation of two combined sets of finances can lead to major upheaval and often a need to completely reassess your life goals, aims and priorities. Money plays a major role in being able to achieve the things you want in life.
Some Steps to Follow:
Proper Financial Planning usually revolves around six key steps. Whether you are taking the DIY approach or using the services of a professional adviser, it is important to follow these six steps to ensure the job is done properly and nothing is overlooked.
Financial Planning should always start with a proper understanding of your goals and objectives. An appropriate level and structure of financial resources can only be determined once you know what it is you are trying to achieve in life. After divorce this might be unclear, at least for a while.
Financial Planning on divorce is certainly not about trying to rush you into making important lasting decisions. In fact, a Financial Planner should recognise that you could need some time to reassess your priorities in life and work out what is important to you. This might result in putting in place an interim Financial Plan, to ensure you cover all of the important short-term goals, and then revisiting your longer term goals in the future.
Step two is all about gathering information and data. You might have already completed part of this step as part of the financial disclosure required by the court. Sharing with your Financial Planner a completed copy of Form E will make this step in the process much easier and should form a good basis for working out what other information will be needed.
If you do work with a Financial Planner, they are likely to have a specific process they follow to gather this information. This might involve the use of financial questionnaires or other forms, but at all times they will guide you to provide the appropriate facts and figures. Paperwork that might look daunting at first glance always has a purpose and will usually lead to a much clearer understanding of your financial position.
The third step is to process and analyse all of this data. If you are mathematically minded then this step should be a breeze. Even if you are not, it is important not to over complicate things. The use of a simple set of spreadsheets to track your expenditure and make some longer term projections is a great starting point. If working with a Financial Planner they are likely to make use of complex software tools for this analysis, but the results they present should be in a plain English format.
Step four involves drawing up a comprehensive Financial Plan. This needs to be written down. It does not need to be a lengthy report, but at least get all of the facts and figures on paper for future reference. A plan is so much easier to stick to if it is in writing. A Financial Planner might produce a draft Financial Plan for you to discuss, and this will include a summary of your various options for achieving your goals. After that meeting they should then make any necessary changes to the written plan and present to you a final version for your records.
The fifth step involves the implementation of the plan. Putting a Financial Plan into action can range from incredibly simple to quite complex, but you should have a checklist within your documented Financial Plan so you have a clear understanding of action points and you can monitor progress. If the implementation of your Financial Plan is quite complex, you might want to ask someone you trust to hold you accountable or arrange a follow-up meeting with your Financial Planner after a month or so, to keep you on track.
Step six is also very important; you must review your Financial Plan on an ongoing basis. Financial Planning is not something you should do once and then forget about. The best Financial Plans are those that are regularly reviewed and updated in line with your changing circumstances or objectives. Either put a date in your diary now for the first review of your Financial Plan or ensure that your Financial Planner will proactively contact you to arrange this.
Timescales for ongoing reviews vary, but should never be more than one year apart. In the first year of your new Financial Plan, particularly after a divorce, you might want to arrange an interim review to ensure nothing was missed during a hectic period in your life or make immediate changes to your plans if your circumstances have radically altered.
Divorce specific considerations
The life event that is divorce can pose some specific and immediate Financial Planning considerations. These are often ‘fire fighting' rather than the sort of strategic planning described in the steps above, but they are equally as important to put in place as soon as possible.
Your immediate financial concerns are likely to include things like budgeting (ensuring your expenditure each month is affordable), debt management (including restructuring existing debts or acquiring money to purchase new property) and cash management (particularly if you have been awarded a financial settlement in the form of cash).
Whilst these are reasonably short-term concerns, the decisions you make in these areas can have a lasting impact on your financial planning. It can be difficult to consider these issues in the context of longer term plans, especially when you are going through so much else in your life at the time, but gaining some perspective is very important as it will enable you to make the right decisions.
You should also be thinking about financial protection at this early stage. The financial impact of death, contracting a critical illness or being unable to work due to sickness or accident can be substantial. As well as thinking about financial protection for yourself, you also need to think about protecting the life of your ex-spouse if you are dependent on him or her for either maintenance payments or a contribution to the care of your children. From experience, sadly solicitors overlook the important of this sort of financial protection, leaving their clients dangerously exposed should the worst happen.
Where to get professional help
There is nothing wrong with the DIY approach to Financial Planning. In fact, we always encourage clients to at least take a keen interest in money management and always to fully understand the course of action that is being recommended.
The best place to seek professional advice on your Financial Planning is from an independent financial adviser (IFA) who is either a Chartered Financial Planner or a Certified Financial Planner (CFP). These are the two professional qualifications which represent the most stringent assessments of technical competence and practical application of skills respectively.
There are several ways to find a Chartered or Certified Financial Planner. You could ask your solicitor for a referral. Make sure that they do not simply pass you on to their in-house or local IFA if this individual does not hold either of the professional qualifications mentioned above. Word of mouth is another very good way to find a competent Financial Planner. Ask friends, family or work colleagues for a recommendation, making sure it is someone they have personally worked with rather than a loose connection.
Alternatively, there are several very good online search engines you can use to find a Financial Planner. The main three are www.unbiased.co.uk, www.findanadviser.org and the CFP professional search at www.financialplanning.org.uk.
Martin Bamford is a Chartered Financial Planner and Certified Financial Planner (CFP) professional for Informed Choice (www.informedchoice.ltd.uk); the award-winning firm of Chartered Financial Planners who work with individuals, trustees and small business owners to build, manage and protect their wealth.
He is site editor of the personal finance information and education website BrilliantWithMoney (www.brilliantwithmoney.co.uk) and author of several best selling personal finance books.