All marriages come to an end – either as a result of death or as a consequence of divorce – and it’s prudent to take steps to protect your finances against either eventuality. While an estate plan is commonly used to protect spouses from the consequences of death, putting mechanisms in place to protect couples – especially women – from the consequences of divorce is not common practice, although it should be. This Women’s Month, we take a closer look at steps women can take to protect their financial positions should divorce become a reality.
- Understand the financial consequences of your marriage contract
As trite as it may sound, it is important to understand what you and your spouse contractually agreed to at the time of marriage. Your marriage contract sets out the legal consequences of your marriage which affect almost all areas of your finances both during your marriage and in the event of death or divorce. Couples tend to pay little attention to their marriage contracts until death or divorce strikes – at which point the realities of what was agreed to at the outset of their marriage serve as a stark reminder of their contractual obligations. However, the nature of your marriage contract should remain top of mind when conducting your financial affairs and making financial decisions as a couple, particularly when it comes to incurring debt, purchasing property, investing for retirement, or choosing to become a stay-at-home parent.
For example, if you and your spouse are married in community of property, you and your spouse share a single, joint estate which is owned in equal, undivided shares, which may seem equitable on the face of it. However, what many couples fail to appreciate is that spouses in a community of property marriage are jointly and severally liable for all the debt incurred by each spouse both before the marriage and during the course of the marriage, which can have devastating effects if one spouse engages in reckless financial behaviour.
Similarly, there are inherent risks where a couple is married out of community of property excluding the accrual system, especially where one spouse chooses to stay at home to raise children. If you are married without the accrual, you and your spouse retain completely separate estates during the marriage and, in the event of divorce, Section 7(3)(a) of the Divorce Act stipulates that there will be no sharing of assets or maintenance obligations, although this section of the Act has recently been declared inconsistent with the Constitution and has been referred to the Constitutional Court for ruling.
- Build your own financial profile
Take intentional steps to ensure that you have your own financial profile independent from your spouse’s. To achieve this, ensure that you have a well-managed bank account in your own name and at least one credit facility in your name, without which it is almost impossible to obtain a credit score. Whether your marriage comes to an end as a result of death or divorce, the purpose here is to ensure that you have a strong, independent financial profile of your own and that, should tragedy strike, you have means of your own to survive financially. This extends to other areas of your life such as ensuring that your vehicle is registered in your own name, you have your own cell phone contract, and access to your own emergency fund – keeping in mind that building a good credit history and score can take several years to achieve. On this note, those who are married in community of property should bear in mind that because you and your spouse share a joint estate, you also share a credit record. This means that your spouse’s poor financial management can adversely affect your credit score and create difficulties for you later on. On the other hand, if you are married out of community of property (with or without accrual), you and your spouse maintain separate credit scores – and it is vital for women to build and protect these scores. Remember, a solid credit score is essential for obtaining any form of financing, taking out a cell phone contract, and applying for any form of credit.
- Remain actively involved in the household finances
Be sure to take an active part in the financial management of the household, regardless of earnings. There are enormous risks involved where one spouse assumes full responsibility for the family’s finances to the exclusion of the other spouse. Lack of economic empowerment is a huge barrier to exit for many women who find themselves trapped in an unhappy and/or abusive marriage, so be intentional about demanding a seat at the table. Remember, even if you’re not earning the lion’s share of the household income, it’s likely that you’re involved in many of the family’s purchasing decisions, including those regarding home and vehicle purchases, vacations, schooling, groceries, entertainment, and clothing. It goes without saying that a household’s finances are likely to be bolstered if managed by the whole team as opposed to one-half of it. Lack of knowledge and involvement in your relationship’s financial affairs can leave you financially stranded in the event of death or divorce. If you ever find yourself facing the prospect of divorce, your future self will thank you for taking steps to understand the household finances, knowing what assets you and your spouse own, how your bank accounts and debit orders are set up, what insurances and investments you have in place, and how your respective estates are structured.
- Have a financial strategy if you plan to be a stay-at-home Mother
If you choose to stop working in order to raise children, make sure that you fully understand the implications of doing so, keeping in mind that while you are not earning an income it is very difficult to build wealth in your own name. While you are generating an income, there are significant tax incentives to invest towards a retirement fund in order to secure your financial future. In the absence of an income, however, most women have no means with which to generate their own wealth. As such, before you stop work, ensure that you and your spouse have a financial strategy in place to ensure that you can remain financially independent during your childbearing and child-raising years. This should include access to and management of your own bank accounts, an appropriate emergency fund, and discretionary savings in your own name. If you have contributed towards a retirement fund in the years leading up to the birth of your children, take steps to ensure that those funds remain invested and exposed to compounding growth. Remember, while you are at home raising children, your spouse has the economic advantage of furthering his career, investing towards his retirement, increasing his earning potential, and building his professional reputation – all of which you are sacrificing for the benefit of your children – and it is important that you develop a joint strategy to protect your own financial position.
Have a wonderful day.
Sue
