Taking Control
Excerpted from an article by Diana Shepherd, CDFA
Posted by Michelle May O’Neil on August 8, 2011
Do you have a written, detailed, up-to-date budget detailing all your daily, weekly, monthly, and yearly expenses and income? If you’re like most people, your answer to this question will be “no.” The lack of a budget may have caused financial problems during your marriage, but it could be ruinous post-divorce.
The first step to gaining control of your finances—and life—during divorce is to prepare an accurate current budget and a post-divorce budget. You will need to gather documentation to ensure that your budget is objective and not the product of guess-work.
Identify your sources of income, which includes revenue from full- and part-time employment, investment return, and self-employment income. Add up all the income from different sources to come up with total income. If you’re clueless about what your spouse earns, obtain or make copies of his/her tax returns for the last three to five years.
After you have an accurate picture of what’s coming in, you need to create an equally accurate picture of what’s going out. You should review your check register and credit-card statements—or your online banking records if that’s how you usually pay your bills. Remember that not all your expenses are paid monthly; some insurance premiums or tax bills might be payable quarterly or annually, so make sure to account for those as well.
Don’t forget about cash withdrawals using ATM cards; you’ll be surprised how quickly taking $50 here and $100 there can put you in the red if these withdrawals are not included in your budget. Also, you need to be able to account for where/how you spent the cash: was it taking taxis to work, going out to restaurants, on a new outfit, or paying the babysitter?
After you’ve completed a “first draft” of your budget, ask a reasonable and financially-savvy friend or family member to review it and question the expenses that seem unreasonable. If you’re going to ask for help with your budget, you’ll have to agree to keep an open mind and not to become angry or defensive if he/she questions one of your items. This person is trying to help you, and he/she will probably be a lot easier on you that a judge would be!
If you’re like most people, your number-one financial concern during divorce is maintaining positive cash flow—in other words, being able to pay the bills on a monthly basis—not only on the day after divorce, but five, ten, 15 years into the future. In order to meet cash-flow needs, there are three sources of money that may be available to you as a result of your divorce: child support, spousal support, and marital property. Let’s take a quick look at all three.
Child Support
In the US and Canada, a parent is obligated to support his or her children, regardless of the parent’s marital status. All states and provinces have child support guidelines; you should review the guidelines in your area to get a rough idea of what you might be entitled to receive or have to pay. Generally speaking, child support is based on factors such as the ages of and number of minor children, the amount of time they will reside with each parent, and the income of each parent. These factors are plugged into a formula, which then supplies a recommendation for the Court. In a divorce situation, the non-custodial parent is usually ordered to pay child support to the custodial parent, from which the custodial parent pays the child’s expenses.
However, the child support formula does not take into consideration your child’s actual expenses. For example, extra-curricular activities, private school tuition, and college funding are not factored into the formula. These are considered “extraordinary expenses,” and they are often an area of great discussion and/or argument. One of the ways in which a Certified Divorce Financial Analyst™ (CDFA™) can help their clients is to determine which costs may not be addressed by the guidelines and then to help them find alternative solutions to cover these expenses. Since child support is such a complex area of the law—and because it can be a very contentious issue between divorcing parents—you should ask your lawyer for guidance regarding the child support amount.
Spousal Support
Another source of income (or an expense) for many divorced people will be spousal support. Spousal support is based on different factors, and it’s a very gray and subjective area. However, the two most heavily weighted factors are need and ability to pay; the length of the marriage is another factor that is considered when awarding spousal support. Unless you have prepared an accurate budget, you will not know how much spousal support you need—or, if you’re on the other end of the equation, how much you can afford to pay.
Property
The third potential source of money in a divorce is property. Many states and provinces call for an equitable division of property. “Equitable” does not always mean “equal”—it is, however, supposed to mean “fair.” If the spouses can’t agree, the judge is the final arbiter of what constitutes fair. Although most divorces settle 50/50, it can make a huge difference which 50% you get; in other words, all assets are not created equal. The first thing to know is that there are two kinds of property: Marital and Separate. Anything that is marital will go into the marital pie that’s going to be equitably divided; anything that’s separate property will not. The distinction between the two is a gray area and should be discussed with your lawyer. To read more about the types of property, click here.
The Last Word
You need to create an accurate budget today, and you need to understand how child support, spousal support, and property division will impact your ability to cover your cash-flow needs. Remember, you only get one chance to negotiate your property settlement. Can you really afford to make a mistake?
Click the link to read the entire article and find our more about how a CDFA can help you take control of your finances during and post divorce.
