Impact of Divorce on Wealth Creation

Impact of Divorce on Wealth Creation

For the last decade the divorce rate has lingered around 50%, leaving millions of couples dividing assets and debts each year. Dozens of studies have been completed and they all draw the same conclusion. For the fastest and most effective path to wealth creation: Stay Married.

Let’s face it, the cost of running two households on the same income costs more than supporting one household. This fact alone creates the obvious assumption that staying married is less expensive than getting a divorce. Studies have also shown that the reduction in wealth and increase in debt loads can be as much as 40% over a long period of time. (http://peacemaker.net/project/the-effects-of-divorce-on-america/)

Beyond the cost of maintaining a second household, there are a few key factors that impact wealth creation and the reduction of assets when it comes to marriage and divorce.

1)    The costs of getting a divorce is a 50 billion dollar industry. Between the costs of attorneys, court fees, mediation, moving, buying and selling homes, the cost for a couple to get a divorce can drain funds that might be earmarked for other long term needs. If assets are not available for liquidation this may mean accruing debt to pay for the divorce.

2)    Division of assets may not maximize profits. A divorce filing rarely takes market conditions into account. The result is the division of assets may not be finalized during peak markets resulting in unintended losses or lower gains. Retirement accounts, homes, and other assets are generally divided before the divorce is final, which covers a relatively short time period.

3)    Credit suffers when there are disputes over who pays what. A court decision may not be in line with lending contracts. This may result in one party being responsible for a bill that is either in the other spouses name or held jointly. Lenders do not care about a divorce agreement. They still have the legal right to collect from whomever has signed the contract. Failure by either party to pay can result in damaged credit for both. Lower credit often results in higher costs.

4)    Financial deterioration can begin up to 4 years before the divorce is final. When parties begin to think about divorce, they might begin separating assets which leads to lower savings rates and reduces wealth accumulation. The distractions of marital issues can also impact work and social life, leading to lower incomes.

5)    Cohabitation does not build wealth like a marriage. Studies have shown that couples living together still maintain separate finances and grow wealth independently, instead of together. This separation leads to smaller growth of assets than when a couple combines assets and is joint in goals and aspirations. Marriage creates a cumulative effect when it comes to the growth of assets.

It is estimated that after a divorce, it requires 30% more income to maintain your standard of living among both men and women. While traditionally women maintain custody of children, men can still see a reduction in standard of living due to the reduced household income from the former spouse and the requirements of paying child support. Women tend to carry the burden of lower wages and the financial demands of raising children alone.

The economic impact of divorce on families of all income levels is enough to have you rethinking a divorce. For those who are unable to make it work, taking steps to minimize the damage will help you recover over the long term.