Money is very logical. You earn it, you spend it, you invest it. However, understanding Behavioral Finance, which is an economic theory that ascribes the irrational behavior of individuals making financial choices to psychological factors or biases, is very important for every decision involving money. Now, when it comes to divorce, where emotions are running higher than at possibly any other time, this knowledge is crucial. Additionally, expert negotiators will tell you that operating from a position of Fear, feelings of not having enough, or losing your financial stability, which put people on their heels, is DEFINITELY NOT the position you want to be in. You should always try to negotiate from a position of strength, or at the very least, from a position of equal footing.
A person’s childhood relationship with money affect their adult life when it comes to how they spend, save, and invest? We all know that kids are sponges. They learn things when we’re not even aware, by listening and watching the adults in their lives. It’s a well-known fact your ideas about money form before you hit double-digit ages and these ideas stick with you for the rest of your life. Being aware of this can help you and the financial professionals you work with to form a plan that works for you and your unique perspective. For example, my dad lost his business when I was 8 and my mom had to go to work full time. This had a profound effect on me and my sister which was completely different than our two eldest siblings. We have an inherent bias toward “loss and lack” which is one of the reasons we both buy and own lots of shoes! Understanding this as the reason behind my pattern for spending, saving and ultimately investing money is enlightening. The childhood ”story” that we tell ourselves has a great deal to do with our resulting adult money behavior.
The differences that people have in their money behavior is usually one of the factors that ultimately leads to divorce. These differences will continue to play themselves out during the divorce process. Becoming clear on what is most important to you will help you move forward. For example, do you worry more about current cash flow or future retirement? If yes, then opting for more “support” would be better vs a possible larger share of the cumulative retirement accounts. Is the house you live in the thing that draws a line in the sand for you? Before you answer that, you need to analyze if you a) have the income to maintain that house and b) have the financial ability to either assume a mortgage and/or buy out your spouse for their share of the equity. Do you have your own retirement accounts or future pension? Is this your make or break point? What are you willing to negotiate for?
Can a person divorce-proof their finances? This is a hard question to answer because it is really very specific to each individuals situation. Who is the bigger earner in the marriage? Who has been in control of the finances? Who initiated the divorce action? The person who answers yes to all three of those things is more likely to be able to “divorce-proof” their finances than the other simply because they have the knowledge and wherewithal to do so.
As a Certified Divorce Financial Analyst I ask my clients this question … “what does money mean to you”. The answers are different for everyone but it gives me a clue into identifying their “triggers”. I also talk to people about the difference between “want” and “need”. We have become a very immediate gratification, delayed reaction society when it comes to money. Using credit and debit cards can be a dangerous thing for someone who doesn’t have a handle on their cash flow. Doing an inventory of inflows and outflows is the first tool that needs to be in place for a successful relationship with money.