While a comfortable post-divorce financial life may not be possible for everyone going through a divorce, the intent of this posting is to provide a comprehensive and systematic approach to evaluating your financial resources and needs so that you can make the best financial decisions given your circumstances.
The following information is meant as guidance. I hope you find it beneficial. You may see this and other related posts on my website.
Before You Begin
Mapping out a budget is crucial as you aim for the divorce settlement you want. Forging ahead, to make the journey easier, I suggest you set aside two things: your emotions and the past.
I encourage you to think of this budgeting endeavor as an opportunity to look straight into the present. If necessary, remind yourself that budget numbers are not about the past. They are about right now and about the foreseeable future.
Next, let’s try to make this economic planning more palatable. I suggest you call the spreadsheet a “Spending Plan” rather than a budget. After all, the intention is to identify your most immediate needs, such as housing, utilities, transportation, food, and clothing. Then, to allocate what you must spend, to meet these needs. After needs have been met, attention can be given to your wants.
Step 1: Start with Your Income
A good starting place is to have the last two or three years of tax returns handy. Examine all the sources of income that flow into the household. Transfer your individual income numbers from your tax returns onto your Spending Plan spreadsheet. This is your starting place.
While married, you probably filed income taxes jointly with your spouse. Going forward, this will no longer be the case. If you do not yet have individual income, leave the income entries blank until anticipated individual income amounts and/or sources are confirmed.
Step 2 – Think About Your Expenses
Now the real homework begins. Take a look at every category on the spreadsheet below. Fill in each blank that pertains to your own lifestyle. Make these entries either on a monthly or an annual basis—whatever seems more user-friendly to you.
Remember, you cannot just identify the monthly expenses you had while married and divide them down the middle. Going forward, when you and your ex-spouse live in separate households, each home will incur its own set of expenses. This means it will likely cost more to live post-divorce than when you were married and living under one roof.
This homework assignment will illustrate quickly, at a glance, how much it costs for you to live. The expenses framework shows you how much you need at a minimum, on a monthly basis, to maintain your lifestyle after divorce. Taking the time to get the numbers right may enhance your well-being for years to come.
Step 3: Prioritize Your Expenses
With that task completed, you may be ready to tackle other aspects of your divorce negotiation. If you discovered an income shortfall—now that two households require funding—it’s time to “sharpen your pencil.”
“Sharpen your pencil” means to evaluate each expense and trim or eliminate any that is not essential. Generally speaking, you do not want to spend down retirement savings for current income. There may not be time to replace such funds before you are ready to retire.