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I recently had a few divorce cases where the couples spend more than they can afford. The crazy thing is that they refused to see how dangerous this is.
I read in the news that Americans are saving more and spending less. Not divorcing Americans. Don’t these people want to retire some day?
Hello, readers! If you are facing divorce and are not a billionaire, then you are going to need to cut back on your spending. I’m sure you feel you deserve to keep your current lifestyle. Odds are that your current lifestyle wasn’t sustainable anyway.
I’m talking about people with incomes ranging from modest to a million dollars a year.
Are you socking away 10% of your income? If not then review your spending. Look for ways you can cut back. Examine your spending habits and then cut back.
Stop getting manicures and pedicures. Do them yourself. The more you do them, the better you get at it. Invite girlfriends over and make it a party.
Are you overpaying for insurance? My husband and I had our insurance reviewed last month and saved $500 a year.
Look at your summer clothes. Did you wear them all? Take the ones you didn’t wear to a consignment shop.
It’s the “I don’t need to do that” guy thing. If you have been making more money than your wife, you are particularly prone to this mistake.
In collaborative divorces in College Station and Houston, we look at post divorce cash needs to help us see options for splitting investments, property, etc. Wives are fine with listing their expenses. They want to show their husbands that their needs are authentic and accurate. These husbands are glad to see that I am going to show their wives – in black and white – that they can’t keep up the spending level.
You guys don’t feel you need to do a budget. You know how much you make. Your personal spending needs are modest. She’s the one who has been spending all the money. She needs the budgeting, not you.
Bingo. There’s the mistake. You need to let her see your living expenses. They may be modest, but they are not as modest as you think. In my experience, people consistently and reliably underestimate their expenses by at least 50%, many times 100%.
I worked with a couple a few years ago. The husband wanted me to work with his wife on her expenses. He told his attorney we didn’t need to look at his expenses. He said he made enough money that he was going to be just fine. He said he had modest expenses. We got well into the collaborative divorce process when he started to put his own numbers on a spreadsheet. He stayed awake that night thinking that he was offering a settlement he couldn’t afford.
The next morning, I showed him that he wasn’t worried enough. He was underestimating his living expenses. The divorce went on pause while I nailed down his true expenses. He backed off his settlement offer. You can imagine how well that went over with his wife and her attorney. After all, he had been saying for months that his expenses were modest. His mistake and the aftermath of it slowed down that divorce by about three months.
Guys, you need to show your living expenses early in the collaborative divorce process. You need to show, in black and white, that you are not an endlessly deep pocket. Listing accurate living expense is time consuming and boring. If you don’t want to do it yourself, let your financial neutral do it. Be accurate. Be honest. Don’t guess.
This weekend I read an interesting article in the Wall Street Journal, The Incredible Shrinking Everything by Joe Queenan. He tells us that nearly everything is shrinking. Yeah, yeah. I knew about the juice containers shrinking. What I hadn’t realized were the shorter solos by Eric Clapton and the lower basketball scores from 2000 to 2011. Shrinkage.
His column reminded me of the shrinkage I see in my business. Bank accounts shrink. Patience shrinks. Lifestyles shrink. What surprises me is the frequently unrealistic optimism of people in divorce.
Sure, everyone is hurt and angry and scared. But they are strangely optimistic (or blind) about their financial future. They really don’t grasp how much their financial security will shrink when they create two households from one.
Nobody likes to cut back on their lifestyle. Not even the wealthy. It’s hard to do. I have come to the conclusion that we humans have great difficulty accurately imagining negative change. We can talk about it. We can rationalize the change. But we can’t seem to feel it until it hits us between the eyes.
So, how does this relate to divorce financial planning? I recommend that if you are considering divorce, you financially pretend you already are there. First you have to figure out your post divorce cash flow. Then you have to actually live on less income for a while. Try it out for a month. Eat out less. Don’t buy those shoes. Shop for store brand items. Clip coupons. Live the shrinkage. It will make your divorce just a little bit easier to handle. You will be better prepared for financial reality.
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.
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.