Posted by Margaret Yonco-Haines in Divorce and Money
“Why do I need to put together a budget?”
This is a question that couples I meet with as a financial neutral in collaborative divorce commonly ask – and with good reason! Here they are, in the middle of what is likely the stressful, as well as sad and emotional, experience of ending their marriage, and I’m asking them to sit down and figure out what they each spend currently, and, even worse, will spend (post divorce) in their day to day lives. The current budget establishes the couple’s marital lifestyle – i.e., how they spent money during their marriage. The budget estimating expenses post-divorce looks at how their resources will be allocated now that they have separate households.
They ask, how can I know what I’ll need for medical care in the coming years? My children’s needs change on a daily basis – how do I estimate what we will need to provide for them next year? How can I plan for the expenses my 14-year-old daughter will have for college, when I don’t even know which school she will be going to? How do I prepare for unexpected expenses? How can I estimate my income when my annual earnings are highly dependent on a bonus that changes every year, if I even get one at all. Or, I’m self-employed, so my income is unpredictable!
We all know that our lives don’t always (or ever) go along in the way we expect – there is, truly, no way to make a budget that perfectly predicts all income and expenses. That makes this a frustrating task. Add to that the fact that it simply costs more to run two households that it does to run a single household. This means there is a good chance that at least the first stab at a budget for a single life coming out of a marriage will show expenses exceeding income, which is a scary prospect.
It also is guaranteed to be tedious task, requiring a deep dive into bank and credit card statements over the last year or so (Question: do I really need to estimate how much I spend annually on magazines? Answer: probably not). And then there are the expenses that occur once or twice a year – such as insurance premiums – that are easily forgotten when planning monthly expenses, but which must be annualized to provide a realistic picture and eliminate surprises.
Well, then, if this is such a tedious, painful process, why do it at all? In summary, why are you increasing my anxiety level by asking me to focus on how I’m going to live with increased expenses and fewer resources?
All the above are excellent questions and valid concerns. There is no simple answer to any of them. But both the lifestyle (marital) budget and the future (post divorce) budget are essential tools that make it possible for the divorcing couple, working with a financial neutral, to plan the best financial path forward for them both – including their children. Unless they address both, the divorcing couple cannot form a realistic picture of the standard of living they established in their marriage and the way in which that will translate into their future as they separate and divorce. Running two households instead of one can be about 35% more expensive, so a hard look has to be taken at either reducing expenses or increasing income – or, more typically, both.
The budget will help identify expenses that can be eliminated, reduced or deferred. The budget, used in conjunction with a detailed inventory of marital assets, will allow for a plan to reduce debt, and control it going forward. Putting together a budget also identifies unusual, but predictable, costs coming up in the future (such as college expenses) that need to be taken into account, now, as part of the overall plan. Part of looking at the budget will include, as appropriate, looking forward to what to expect when there are changes in both income and expenses, such as during the retirement years.
Putting income and expense amounts on paper in all the relevant categories – even if the bottom line is a negative for now – helps bring the challenges of living as a single person with what, at least initially, may be fewer resources, into focus. At the same time, it is the only way to transform that challenge into a manageable problem.
In many situations, the financial decisions going forward are based on a step by step progression. There can be a short term interim plan – which includes separation prior to divorce, followed by, in some cases, a transition plan and finally, a plan for the longer term. The transition plan is relevant in the case where one spouse has been either out of the job market for an extended period, or works at a volunteer or low paying job. The transition period will generally include at least one spouse going through training or further education, or it may simply require planning for a long time period for a job search in a difficult economy. Either way, there will likely be a need for a rigorous look at expenses during this period.
The role of the financial neutral in collaborative law is to work with both couples to help guide the divorcing couple through this process. By looking at both current and future income and expenses, the basis for a financial settlement starts to take shape.
The bottom line is that there is no “one size fits all” process. Each couple going through divorce has a unique set of circumstances and needs. The purpose of the budget is to help clarify their specific facts and specific resources – both human and financial – so that the best plan for both their futures and the futures of any children will be taken into account.
Margaret Yonco-Haines, Esq. has a private practice as a family and divorce mediator and acts as a financial neutral in collaborative divorce matters. Her office is located in Cold Spring, NY. She can be contacted at email@example.com.