A divorce signifies a new chapter in life. That includes your personal finances. After a separation, your income will likely drop – but ongoing costs remain the same. You have to figure out how to make it all work.
Giving yourself the best foundation starts well before the divorce is actually finalized. The priorities you lay out during property division can set you on a solid path or lead you off the road. One big reason for this is liquidity.
What is liquidity?
Liquidity is all about financial flexibility. Essentially, if an asset is liquid, it can easily and quickly be converted to its value in cash. A robust checking account, for example, is one of the most liquid assets available.
If an asset is illiquid, it’s not only harder to convert to cash, but it can be difficult to receive compensation in line with its value. Real estate is certainly valuable, but it is commonly considered an illiquid asset. That’s because:
- It can take months to finalize a property sale
- You may not get fair value
- It is susceptible to market conditions
Maintaining ownership of the family home might sound like a good idea. In reality, it may be problematic.
How this applies to property division
When negotiating property division as part of a divorce, it is important to keep the liquidity of items in mind. If you end up with too many illiquid assets, you could easily fall into a stressful financial situation – unable to cover needed expenses because your worth is tied up in various pieces of property.
The California courts website provides a good example. Say there are two shared bank accounts from the marriage. One of these accounts has significantly more money in it than the other. You could allow your former spouse to keep everything in that higher-worth account. In exchange, you take the other account, and receive other items to make up the difference in value.
This might look equal on paper when comparing the value. However, if those other items are illiquid, your lessened income and insufficient liquidity could mean you quickly run out of funds to pay for bills and necessities.
During divorce property settlement discussions, you want to strike a balance. It’s important to hold on to those treasured items, but maybe not at the expense of your overall financial stability.