Your Post-Divorce Spending Plan (Guest Blog: Julie Quick, CFP®, BFA™, CDFA® )
One of the biggest concerns surrounding divorce is how to maintain a positive cash flow after the divorce. In other words, how will you be able to cover your needs and expenses on a monthly basis?
Many people facing divorce fail to properly budget for their next chapter. A budget serves as the foundation upon which important financial decisions around property division and support payments are based. It’s a critical first step to ensuring your short and long-term financial success.
First, it’s helpful to reframe what it means to “budget”. Personally, I find this term to sound very restrictive. (Kind of like a “diet”. I don’t know anyone who enjoys thinking in terms of what they can and can’t eat.) Rather, a “spending plan” has a more deliberate connotation. Instead of feeling prohibited as to how we spend our money, we shift our mindset to proactively determine what we want our money to do for us. A simple change in perspective could make this task seem more manageable.
A carefully crafted post-divorce spending plan will help you establish your need (or ability to pay) support payments as well as address questions such as:
● Will child support cover all of my kids’ expenses?
● Can I afford to keep the home?
● Do I need to find a higher paying job?
● What kind of lifestyle can I afford since I’ll be the one making support payments?
To know where you’re going, it’s smart to first understand where you are. When developing a spending plan, start by examining your current expenses:
● Fixed and recurring expenses are usually the easiest to determine. It seems like everyone knows their monthly mortgage payment and cell phone bill off the top of their head.
● Be sure to also include expenses that aren't paid on a regular basis such as insurance premiums and property taxes.
● Variable expenses are items such as groceries, dining out, clothing, vacations, and home maintenance.
● “Small” expenses add up fast so don't underestimate the cost of hobbies, entertainment, streaming services, or splurges on your favorite coffee drink.
● Anticipate expenses that are seasonal in nature such as back to school shopping, summer camps, graduations and weddings, and new healthcare deductibles at the beginning of the year.
● Even when birthday and holiday gifts are remembered to be included in the spending plan, other special occasions are commonly overlooked such as Mother’s Day, Easter, teacher appreciation gifts, or all the birthday parties your kids get invited to.
To come up with estimates for how you spend your money, you can comb through six to 12 months’ worth of bank account and credit card statements. However, I prefer services such as mint.com or ynab.com to link all of your bank and credit card accounts. Many financial planners also have similar tools built into their financial planning software. These aggregation tools allow all income and expense transactions to feed into one place. When you first link your accounts, 90 days of historical information will come over to help you get started. You can categorize each transaction to get a true sense of where your dollars go. (Talk about holding you accountable!) If you tend to pay for things with cash, consider documenting these purchases in a journal or notebook. Refer to your checkbook register for bills paid by this method.
Enter the total amount you spend in each category into a Spending Plan Worksheet. But you’re not done yet. Two households inevitably cost more than one so it's a given that there will be changes to your current living expenses. You’ll want to brainstorm any new expenses that you may not have incurred while married.
● For example, child care, health insurance premiums, lawn care and other home maintenance may be expenses you’ve not had to pay for in the past or may increase post-divorce. The worksheet above can help you identify costs you otherwise might not consider.
● Many people don’t include savings as a line item within their spending plan. Ideally, your expenses will be less than your income and allow you to put some funds aside for an emergency, a specific goal, or big-ticket items on the horizon such as a car purchase or roof replacement.
● Think about costs associated with major milestones your kids have yet to reach. For example, a car and insurance when they get their driver's license, their senior year and high school graduation, going off to college, weddings, etc. Consider talking to your attorney on how these expenses can be addressed in your judgement so that you can begin making preparations for any portion you plan to cover.
It’s very common to overlook the effects of taxes and inflation but these can have a huge impact on your cash flow over time. This is where working with a Certified Divorce Financial Analyst® professional can provide tremendous value. In addition to helping you with your spending plan, they can project your income and expenses out into the future to illustrate the impact of taxes and inflation and help you evaluate the short and long-term effects of various settlement scenarios. If you’re working with a poor expense assumption and not factoring in the effects of taxes and inflation, it becomes incredibly difficult (if not impossible) to understand how your divorce outcome could affect you financially - until it’s too late.
Keep in mind that we aren’t going for perfection here. There’s no way to anticipate every possible expense after your divorce. Instead of stressing over it, consider the 80/20 rule. If you shoot for 80% accuracy the remaining 20% will be so much easier to handle.
Once you’ve taken the time to go through this exercise - don’t stop! Your spending plan in an evolving practice. Review what you’ve spent compared to the amount you allotted on a regular basis (preferably no less frequently than monthly) so that you can make adjustments along the way. Give yourself some grace if you overspend while you’re figuring things out.
I often get initial pushback from clients on developing a spending plan. Some confide they’re afraid to find out what they actually spend. Ultimately, though, they gain a sense of clarity and empowerment. Developing your spending plan allows you to make more educated decisions during your divorce process. Refining it over time provides an opportunity to be more intentional with your money as you pursue confidence in your new financial future.
NOTES FROM BANFIELD COULING LAW & MEDIATION and OUR GUEST BLOGGER:
1. Thank you to Julie Quick, CFP®, BFA™, CDFA® of Cultivate Financial Wellness, LLC.
2. Ms. Quick is a CERTIFIED FINANCIAL PLANNER TM and Certified Divorce Financial Analyst® professional with over 20 years of experience working with a wide variety of clients. As founder of Cultivate Financial Wellness, a fee-only Registered Investment Advisor, her practice focuses on helping women navigate the financial challenges associated with big, emotional life changes, such as the death of a spouse and divorce.
Julie understands that women, in particular, face unique financial challenges. These may include the long-term effects of the gender wage gap, time out of the workforce to care for family members, and longer life expectancies; all of which can be compounded by a death, divorce, and other major life events.
Julie lives in White Lake, Michigan, with her firefighter husband, Jeff, and their two dogs, Sullivan and Luger. When she isn’t working, she enjoys yoga, running, traveling, and working on home-improvement projects.
3. Cultivate Financial Wellness, LLC is a Registered Investment Advisor authorized to provide advisory services in the State of Michigan and where otherwise exempt from registration. Access to this tool does not constitute financial, legal or tax advice. Please seek out the appropriate professional(s) for your needs.
4. PLEASE NOTE: This blog is not intended to constitute legal, financial or tax advice. We do not recommend making important decisions of the type addressed in this article without specific legal or professional financial advice in advance. We at Banfield Couling Law and Mediation PLLC are here to help navigate your legal matter at any stage of your divorce.