The Gray Divorce Podcast: Episode 34 The Two Key Financial Tools in Divorce
In Episode 34 of the Gray Divorce Podcast, we’re talking about divorce finances, specifically what I consider to be the two most important personal financial tracking tools you should be using in divorce. And these are your personal budget and the net worth statement.
Budgeting is a very important tool in helping you navigate divorce before, during and after the process. Essentially your personal budget lists all your sources of monthly income minus all your monthly expenses. After doing that simple arithmetic there's either money left over (which you can add to savings or spend or a combination of the two) or you're in an overspending situation (not good) and may find that you're taking on debt to meet expenses.
The other tool is the net worth statement. Your statement of net worth is essentially a list of all your assets (the things you own) minus all your liabilities (these are your debts.) The net worth statement typically doesn't take as long to compile as a detailed budget. And tracking your net worth is easy. I started doing it on a quarterly basis in 2017 and still do it to this day.
Your Budget
The key steps in creating a post-divorce budget.
First, you're going to need to look at your income. Of course, your income is likely to have been reduced after divorce as you may be moving from a two-income household to a one-income household. And of course, that implies a certain change in your living standard. You're going to have to look at which expenses you may need to cut back.
Next, your expenses. This requires a little more work. I suggest that you do your best to list all of your diverse expenses on a spreadsheet like Microsoft Excel.
Make your budget based on monthly income and expenses. Most people get paid every couple of weeks and most of our expenses are monthly.
It's important not to take your married expenses and just divide them in two. You're going to be living in a separate household and have your own set of unique expenses.
Prioritize your expenses. What are the absolute necessities that need to be paid? What are expenses that you can eliminate or at least reduce? Immediately after divorce there may still be lingering divorce expenses like attorney’s fees, for instance.
Determine which of your expenses you could live without, or perhaps reduce. These we call discretionary expenses, or simply put, items you want but don't necessarily need.
Expenses that fall into this category of wants rather than needs are restaurants, sporting events, spa treatments, golf outings, concerts.
Once you've compiled all your monthly income sources and subtracted all your monthly expenses you'll see if there's any money leftover or whether you're overspending. If there's any money left over, my suggestion is to use it to pay down any high interest rate debt.
Now, if you find your monthly expenses exceed your monthly income and you're overspending, well then, adjustments need to be made.
This is where perhaps we may need to revisit priorities. If some of those unnecessary expenses can't be cut for whatever reason you're going to need to find more sources of income. Everybody's different. Some people might be willing to take on a couple extra hours a week’s work to ensure that they can go to their favorite restaurant a couple times a month. Other people are willing to make that sacrifice and slash their dining out budget so as not to have to work any more hours.
Once you've created your post-divorce budget it's important to monitor it periodically.
It's important to remember that a budget isn't a static thing, it can change and should change over time. When you emerge from divorce and put together a budget you might cut out streaming services like HBO or the Disney network, whatever, but as time goes on and maybe you get a raise at work or pay off various debts you may find that you’ve now got the income to reinstate some of these things that you cut.
Net Worth Statement
Your net worth is the value of all the things you own (your assets) minus the total amount of your debts (which are your liabilities). The good thing about tracking your net worth is that it’s easier than doing a budget.
The beauty of the net worth arithmetic is that your net worth can go up even if your bank account or your retirement account or your home equity are flat or even go down somewhat. If your debts or liabilities are decreasing faster than your assets your net worth is still showing improvement.
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