When you were engaged in your marriage (we were going to say “happily married” but you may have not been), you most likely had some type of a financial system. Perhaps one of you paid all the bills while the other spouse was hands-off or perhaps you both handled the budget and finances as a team. There’s a pretty good chance that you fell into one of the above categories or something similar.
We are huge supporters of following a budget, whether someone is single, married, or divorced. Over the years, as we have helped our clients navigate through the divorce process, we realized just how important it is for them to follow a budget after they are divorced. However, too many people do it all wrong because they either don’t adopt a budget or the one that they do follow is extremely limited in scope.
Taking Control of Your Financial Health
You probably have a good idea of how much money you earn every week, bi-weekly, or every month – a budget won’t teach you anything new here. But when you create a budget, it can help you better-understand and reign-in your spending. It can help you analyze your spending behaviors, and it can help you take control of your financial health.
Many people have a mental block about their finances. They can mistakenly believe that what they don’t know won’t hurt them. But by developing a budget, you can be a lot better at managing the money that you do have rolling in. Whether you track your budget on a notepad, apps, websites, or spreadsheets, it’s critical that you understand your cash flow, which refers to the money that’s coming in and going out.
You know that you need a budget, but realize that you need more than a traditional budget that takes into consideration what’s coming in and what’s going out. What you need to improve your finances goes much deeper than that.
Ideally, you’ll develop a deep understanding of your expenses, and this includes your essential and non-essential expenses, your discretionary spending (think dining out, alcohol, tobacco, entertainment expenses, Starbucks, etc.), and so on. You also want to take into consideration your short and long-term goals, for example, if you want to save for the future and you’re self-employed or a freelancer, you may need to open up an IRA account.
Post-Divorce Budgeting Tips
Traditionally, when someone created a budget, they’d take into consideration their income, expenses, and taxes. They may have included a Christmas or vacation stash and then hoped they’d have something leftover for “fun activities” like going to the movies or Disney Land. While it’s satisfying to leave “money on the table,” you have to remember that it also leaves money in your wallet where you can spend it on non-essential items.
When you budget, you want to do it both realistically and responsibly. This means planning for your monthly expenses like the rent or mortgage, utility bills, the cellphone bill, auto insurance, life insurance, health insurance, credit cards, and auto loans, but it also means planning for things like college, vacations, investing, and retirement. When you plan for these long-term, bigger goals, it increases the likelihood of you meeting your future financial needs.
What is the key here? It’s to understand your spending behaviors and to learn how to monitor your income and expenditures in a responsible way that helps build a strong financial future. No matter your financial circumstances (whether you’re struggling, just getting by, or have plenty of money to live on), you should create a healthy and realistic budget after your divorce is finalized.
Tip #1: Write Down Your Essential Expenses
The first step in the post-divorce budgeting process is to write down all of your essential expenses – that’s it! Which bills are essential for your survival? These typically include housing, utilities, cellphone, insurance, food, gasoline, and childcare so you can work, etc.
Your essential expenses do NOT include cable, alcohol, cigarettes, Netflix, dining out, Starbucks, magazine subscriptions, and other non-essential expenses. Trust us, you can survive quite well without any of them! To really improve your financial health and wellness, you want to get a grip on these unnecessary expenses – it’s a crucial step.
Tip # 2: Know Exactly How Much is Coming In
Too many people look at their total income before taxes and deductions and think that’s what they’re going to live off of, but that’s not how it works. For W2 employees, taxes, Social Security, sometimes child support, health insurance, etc. are taken out of their checks before they are paid.
When creating a budget, you have to know your net income (what you take home after all of these deductions); this is vital. If you have an additional source of income, like a side hustle or selling things on eBay, that can help you out.
Tip #3: Talk to a Pro
One of the BEST things you can do to improve your financial situation is to meet with a financial professional for guidance. Not only will he or she keep you accountable, but they can help control your spending and direct your funds to retirement and investments that will build your financial portfolio over the long-term.
Here’s some more good advice: “We recommend the popular 50/30/20 budget. In it, you spend roughly 50% of your after-tax dollars on necessities, no more than 30% on wants, and at least 20% on savings and debt repayment.
“We like the simplicity of this plan. Over the long term, someone who follows these guidelines will have manageable debt, room to indulge occasionally, and savings to pay irregular or unexpected expenses and retire comfortably,” according to NerdWallet.
We hope you found this article helpful. If you’re looking for divorce representation, contact Claery & Hammond, LLP for a free case evaluation!