The Second Biggest Financial Mistake You Can Make

We all know that the biggest financial mistake you can make is not saving for retirement. You’ve probably read that hundreds of times. If you’re here reading this blog, then I think we are safe to assume you are at least somewhat financially savvy and are saving for retirement. Now that we have that out of the way, this begs the questions – what’s the second biggest financial mistake you can make?

Many would say it’s buying an expensive car, not investing in yourself, etc. But, I have got a slightly different take on what the biggest financial mistake could be. This of course assumes that we are all above average intelligence here and we are following some basic personal finance tenements… Read on to find out what I think the biggest financial mistake is.

Assumptions Before the Biggest Mistake Reveal

As mentioned above, I wanted to assume for the sake of this article that you are at least saving something for the future years (IRA, 401(k), etc.). This article is really aimed at people that have the basics of personal finance down and are looking for a major pitfall they may not yet have considered. Or perhaps they have considered it, but not taken a full assessment of the damage this event could have in your life as it relates to your personal finances.

Tell Me the Second Biggest Financial Mistake You Can Make Already!

OK, here it goes – in my opinion the second biggest financial mistake you can make in your life is getting divorced. There are hundreds of reasons why people may choose to get divorced, and I don’t really want this article to be about that. I want to look at divorce from a personal finance angle and show just how damaging this can be from a personal finance angle.

Getting married can be one of the happiest days of your life. Conversely, divorce can be one of the worst journeys that someone will have to go on. I have never been divorced myself, so I cannot really speak on detail there. For those of you that have been divorced, you’ve experienced first hand just how bad it can be.

What Do the Numbers on Divorce Say?

According to the Huffington Post, divorce costs run an average of $15,000 – $20,000. That doesn’t sound so bad in the grand scheme of things does it? To me, this is under estimating the real cost by several orders of magnitude!!! I decided to put my hunch to the test and actually calculate the real cost of divorce. Let’s look at some possible “hidden costs” of divorce that aren’t measured in this headline number by coming up with a fictional couple that decides to get divorced.

Example Divorced Couple Financial Details

Here are the example details. I’m not a divorce attorney or divorce expert, but I’ll assume everything is split right down the middle. For this example, let’s pretend we are the husband and calculate the costs:

The couple is ~35 years old and has been married for 10 years
Savings of $300,000 (401(k), IRA, cash)
Husband makes $80,000 a year, wife stays home and takes care of two kids – assume ages 5 and 7
$250,000 home with $50,000 is equity

Cost of splitting the assets

This is the cost of splitting up the assets 50/50:

$300,000 savings and $50,000 in home equity – loss of $150,000 + $25,000 = $175,000

Alimony

This is the amount the husband needs to pay the wife for a period of time until she can get a job. I assumed 5 years here.

various calculators suggest about $20,000 annually in this type of scenario – $25,000 annually for 5 years

Child Support

This is the amount the husband needs to pay the wife to support the two children.

various estimators suggest about $15,000 annually if you watch the kids two nights per month – $15,000 annually for 13 years

The Total Cost of Divorce

Let’s add all of these divorce costs up to see what we come up with:

Lawyer fees + Asset split + Alimony + Child support = $20,000 + $175,000 + $125,000 + $195,000 = $530,000

But wait, there’s more! This whole analysis assumes that you didn’t take this cost money and invest it in the stock market to receive a return on your investment. If we assume a 4% return ABOVE INFLATION on your investment, the new number looks like the following:

Year	Asset Split	Fees	Alimony	Child Support	TOTAL	Invested Total (4% return)
0	$175,000	$20,000	$25,000	$15,000	$235,000	$244,400
1			$25,000	$15,000	$40,000	$295,776
2			$25,000	$15,000	$40,000	$349,207
3			$25,000	$15,000	$40,000	$404,775
4			$25,000	$15,000	$40,000	$462,566
5				$15,000	$15,000	$496,669
6				$15,000	$15,000	$532,136
7				$15,000	$15,000	$569,021
8				$15,000	$15,000	$607,382
9				$15,000	$15,000	$647,277
10				$15,000	$15,000	$688,768
11				$15,000	$15,000	$731,919
12				$15,000	$15,000	$776,796
13				$15,000	$15,000	$823,468
				TOTAL =	$530,000	$823,468

Yep – that’s over $800,000 you would be out if you get divorced! This is just for the fictitional example given above. Your numbers could be a bit better or much, much worse. It’s no wonder that with a such a high divorce rate in the US people cannot get their finances straight!

How to Avoid the Costs of Divorce

Don’t get divorced in the first place!!

Obviously this is easier said than done and some divorces are avoidable I guess… I’m by no means a love expert and I don’t proclaim to be. In fact, sometimes I am a huge jerk – I’m pretty sure I’m probably below average in terms of husband material :-). So, I won’t give any real tips on how to be a better spouse maybe other than the obvious idea to send flowers from time to time (especially if you get in hot water). I’ll leave it up to you to figure this one out :-).