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Tracy Stewart, CPA

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Peace of mind through financial clarity.

4 Tips to Estimate Your Divorce Living Expenses

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These are a few more tips to help you get an accurate budget. I use these with my College Station and Houston clients. The basic steps are in my last blog post.

#1 If your bank and credit card statements include expenses for people who won’t be in your household next year, such as soon-to-be-ex-spouses, you need to avoid listing those expenses. Either estimate the costs that are only yours or tag the ones you know are not yours and cross them off.

#2 How do you estimate only yours when the costs on the statements are for both of you? Example:  Look at your monthly grocery costs. Think about who eats at home the most. If there are just two of you, allocate more than 50% of the grocery bill to that person. If there are more than two of you, estimate what percentage each person consumes. Subtract out the amount that is for the person who will not be in your future household. Do this for all expenses.

#3 If you think you are going to live in a different place after your divorce, use new information for certain household expenses. Use your current housing expenses as a springboard to your estimated future expenses. Example: Your cable internet bill may not change, but your yard care costs could.

#4 If you know you are going to move but you don’t know where yet, do some research and, aackk!, guess a little.  Find homes or apartments that look like a possible option for you. Ask the landlord for the annual utility costs. Find people who live in similar places and ask them about their annual lawn care costs.

I have created a good spreadsheet for budgeting. If you want a copy, send me an email to stewart@TexasDivorceCPA.com with the words “Budget Spreadsheet” in the subject line. I’ll send you one – free.

Six Tips to Figure Out Your Cash Needs in Divorce

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As a divorce CPA in College Station and Houston, I often help clients estimate their cash flow needs for their new normal life after divorce. When I do this, it is accurate. (But, of course, you would expect that from a CPA!) When they create their own budget, it is often wrong.

Here are some tips to correctly figure out your cash flow needs whether during or after your divorce or even if you are not getting a divorce.

#1 Create a list of 12 months of expenses. You can get the number for monthly expenses by dividing that by 12. Always start with a whole year to capture everything.

#2  Your list needs to include expenses that repeat every month, items that repeat only a few times a year, items that occur only once a year and  items that occur only once every few years.

#3  Get copies an entire year’s worth of all your bank statements and credit cards. Use every item to add up your expenses in various categories.  This is a long and tedious task. But it results in the most accurate information.

#4  If tip #3 made you shout “No Way!” then take the dangerous short cut and use 3 months of statements. But know your risks. You will multiply your monthly expenses by 4 to get a full year. Watch out for those twice a year expenses that fall into those 3 months you chose. Don’t multiply them by 4. I had a client who did that and her budget ended up way, way too high.

#5  If you use less than 12 months of data, comb through your statements and find the expenses that did not fall into those 3 months you chose. Add those missing costs in.

#6  Remember to budget an amount for monthly savings. Stuff breaks, stuff falls apart. You will need that savings to avoid charging car repairs on your credit cards.

I have created a good spreadsheet for this exercise. If you want a copy, send me an email with the words “Budget Spreadsheet” in the subject line. I’ll send you one – free.

What Will New Normal Life Cost?

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I advise my College Station divorce clients to create a list of their anticipated new normal cash flow needs. Do a monthly expense list for your repeating and regular living expenses. Multiply them by 12 to get your annual total.

One of the tricky steps is to remember to add lines for those expenses that do not occur every month. The cost of gifts is one that people frequently underestimate. To get it right, make a list of the friends and relatives you give gifts to each year. Birthday. Holiday.  And then start listing the not-so-regular gifts such as graduations, weddings, hostess gifts, dinner party gifts, etc. Remember the cost of cards, gift bags, wrapping paper and bows.

Other occasional costs are tires, auto insurance, vehicle registration, insurances, holiday decorations, holiday groceries. And the list goes on.

Estimate at Your Own Peril

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Will you be able to make ends meet in your post-divorce life? Unless you have a wealthy new spouse waiting in the wings, you should be asking yourself that question. The first step to finding the answer is to know how much you spend now. Exactly how much you spend now.

I have worked with hundreds of people in Houston and College Station. Most of them want to estimate their expenses. All of them underestimate the number. And, even at that, all of them have been shocked at the amount of money they spend – in their estimates. The truth is that they spend much more than they estimate. I’d say they spend about 30% to 70% more than they estimate.

The problem with estimating too low is that you will wake up one day – maybe 7 months after the divorce – and wonder why you can’t afford to pay off your credit cards each month or sock away some savings.

To get a real picture of your spending you need to haul out 12 months of credit card and bank statements. Enter each and every credit card charge and check and debit and ATM transaction in Quicken or QuickBooks. Don’t double count your credit card charges by entering credit card payments shown on your bank statements after entering the credit card charges.

Tedious? You bet. Accurate? Totally.

Does Over-Spending Cause Divorce?

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I keep reading that Americans are spending less and saving more these days. However, what I am seeing is different. I am seeing an increase in the number of divorcing couples with high credit card debt or lack of wealth despite a healthy annual income. Consistently, the spending has been in the pursuit of living the the lifestyle to which they want to become accustomed.

It is not unusual for me to see a couple who has been spending nearly 150% of their after-tax income. Where are they getting the funds to keep this up? They have high credit card debts on several credit cards. They have second mortgages. They have no emergency fund or savings of any size. They have neglected to save for retirement.

Of course, they can’t keep this going forever. And perhaps the realization of this fact is one of the catalysts for their spilt-up. As expected, one spouse says the other is the spender. But when I examine their spending history, it is apparent that both are very much involved in the shopping. The interesting point is that they each feel their spending is valid and necessary but perceive their spouse’s spending to be over the top. Further discussion usually reveals that these spouses were not communicating with each other about their spending and their financial goals.

Some people might think the overspending is the primary cause of the divorce. I wonder if perhaps it goes deeper than that. Perhaps their difference in values and their inability to fully communicate are more the reasons for the divorce and the financial situation is just the last straw.

Spendthrift Spouses

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I was recently quoted in an article on moneycentral at msn.com. Liz Weston wrote a great article about spendthrift spouses. You can read it at http://tiny.cc/6bzw4

Financial issues is one of the top two reasons couples divorce. (The other is lack of communication.) Differences in spending habits is one of the most common types of incompatible financial attitudes. And money is very difficult for many couples to talk about. So there is the double whammy of financial issues and lack of communication.

I have seen a lot of marriages tipped to divorce because of money and debt. Those couples who have chosen to divorce in the traditional litigated pattern have fared the worst. The costs of those divorces were substantially greater than the collaborative divorces of similar circumstances.

When it comes to divorcing a spendthrift spouse, the best divorce method is the collaborative law process. In this process, as the financial professional, I am usually asked to educate the spendthrift spouse about cash flow and budgeting. The couple gives me their bank statements and credit card statements for a period of time no less than three months. I pull together an accurate, detailed picture of their expenses. They are always surprised. Everyone thinks they spend less than they actually do. The spendthrift spouse and I work together to create a cash flow plan that works in their unique living situation. The spouse chooses where to cut back on spending. This is the crucial buy-in that assures the new budget commitment. It also reduces the chances that this spouse will boomerang back to the other spouse in future years to ask for more money.

Budgeting is one of the foundations of financial literacy. The AICPA (American Institute of Certified Public Accountants) and the TSCPA (Texas Society of CPAs) have been providing educational tools on financial literacy for years. You can read more about these at http://tiny.cc/sk2zz

Cash & Bank Accounts During Divorce

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Unless one chooses a collaborative divorce, a divorce can last for several months or even years. During that time, a couple should work out how to cover the living expenses of each party and of the family.

In my experience, living expenses are easier and more pleasantly dealt with in collaborative cases, than in traditional litigated cases. In collaborative cases, the cash flow needs are a potential agenda item at every team meeting. This ensures that both parties are addressing their cash flow needs to the extent that the family finances can handle the dual households.

There are a number of ways to handle cash flow needs during a divorce.

Divide the cash up front. This process works well when both parties have similar income levels. Each deposits their paychecks into their own bank accounts (established during the divorce if necessary) and uses that cash to fund their living expenses. When one party has a greater income than the other, funds are allocated to the less monied party on a periodic basis. In collaborative cases, the two attorneys, the neutral financial professional and the couple will discuss and conclude the appropriate amount to allocate.

Allowance. This process arises when one party makes the majority or all of the income while the couple has two households. I have seen this method work and I have seen it have problems. The problems arise when the earner spouse wants to control the non-earner spouse’s spending habits. While, I understand why one party might want to control the other’s activities (although I do not condone it), this usually results in frustration and unpleasant feelings for both parties. In my experience, the allowance method works best when both parties are realistic about their cash flow needs and neither party wishes to alter the existing spending patterns of the other.

Allocating Cash to Pay Expenses

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During divorce proceedings, bills still have to be paid, but the lines become blurred over which bank accounts are going to absorb those expenses.
There are a few options here:
1. Retain a joint bank account into which the paychecks are deposited and the bills are shared.
2. Have separate bank accounts with some amount of money being deposited to each account every month and pay bills separately.
3. Cash out savings accounts or investment accounts to fund each spouse’s checking account. This division is taken into account in the overall property division.

I have seen each method work depending upon the spouses’ relationship and personalities. I have also seen each method cause problems. Sometimes one spouse wants to maintain control of the money and the spending. This is prevalent when that spouse has historically played this role. However, doing this may evolve into the situation where the non-money spouse treats the source of funds as a deep pocket without limits. Again, results depend upon personalities and communication.