Dealing with Divorce, Part 1: Avoid this Common Mistake
Part one covers the first major mistake women make in divorce, one that can cost hundreds of thousands of dollars in the long run. Laura Kuntz CPA/PFS, MBT, looks at the common reasons why women make this mistake, including overestimating the impact it will have on your family.
What we're talking about today are two of the most common mistakes I have seen when women who go through divorce, and we've helped women going through divorce for the last 20 years. In fact, about a third of our long-term clients have come to us as a result of divorce.
The first mistake that I have seen made, and it has very significant long-term ramifications and it's also a very difficult decision to make, is when a woman keeps too much house. Oftentimes, our clients going through divorce might have a house worth $800,000 or $1.5 million or $700,000. Everyone's different, and of course there's a natural tendency to want to keep that house for many, many good reasons. One might be not uprooting the kids because it's a very good idea when the kids are going through a change, like a family going through divorce, to not change other things, if one can avoid it, to keep other things the same. So that's very wise, but the problem is that in divorce, sometimes it's a good idea to move into a house that is a little smaller.
Another reason not to want to change the housing is attachment to the house. I've had clients say to me, "I get attached to my houses," or "This house is really comfortable," or "This house has so many memories for me," or "I did all the remodeling and all the decorating." So, it's easy, I think, to perhaps be attached to the house. Sometimes when our marital relationship isn't as strong as we'd like it to be, we might attach to other things or other people, and in some cases, the house might be that.
But the problem with a house—and houses are wonderful things—but a problem with a house is that it's really more of a consuming asset than it is an investment asset. So we don't often maybe perhaps hear that from a real estate agent or maybe people in our family. But, truly, it's more of a consuming than it is an investment asset because a larger house can cost more money long term as long as we own it in terms of utilities, in terms of landscaping, in terms of maintenance, et cetera, et cetera, and that can impact our finances long term.
In addition, a house might appreciate in value ... Well, over the last 70 years historically, houses have appreciated in value about 3% a year. Okay. So that's something. That's the part of a house that's an investment asset, but a moderate portfolio on the average has appreciated over the last 70 years at about 7% per year. So if an individual has an asset worth $500,000 that appreciates 3% a year for 20 years, it grows to $900,000. Sounds good, right? But if instead, it would grow at 7% a year, it would be worth $1.9 million, a million dollar difference. So that decision on housing is a really, really important decision.
In addition, I've had a number of clients downsize their housing as a result of divorce. Of course, it was a difficult decision, and I've never had a one in all my 20 years of doing this come back to me and say that that was a poor decision. In fact, what I hear is that the children thrive.