CHAPTER 3: Money and Budgets
Why You Need a Budget
One big concern most couples have as they separate is how they will manage to pay the bills. Money worries can cause significant anxi- ety and can contribute to more conflict between you and your spouse. Conflict is bad for your children and bad for your divorce. The antidote to financial anxiety is information.
Early on in the divorce process, you need to develop a budget. Financial awareness is essential to reducing stress and putting you in the problem-solving state of mind necessary to achieve a satisfactory settlement.
A budget is an essential step in your divorce because:
- Courts require both spouses to disclose all their assets, liabilities, and income.
- The budget can be used to determine one spouse’s need for alimony and child support payments during and after the divorce and the other spouse’s ability to pay.
- The budget will show whether either spouse can afford to keep major assets such as the family home.
- Finally, the budget will reveal the overall financial condition of the spouses. Sometimes financial counseling is advisable. If the couple have more debt than they can repay, negotiation with creditors or even bankruptcy may be necessary.
Two Budgets for Each Spouse Are Needed
A current budget is used for your income and expenses during the divorce. A future budget estimates your anticipated post-divorce financial situation. If you will be in financial distress during the divorce, your budget will make the situation evident. It may be possible to establish temporary support payments to meet your needs. If the divorce will put both spouses in financial trouble, then protection from creditors can be sought through bankruptcy.
Accepting the Financial Reality of Divorce
During your marriage, you and your spouse were supporting one residence with your incomes. During the divorce and for a while after it that same amount of income will be supporting two residences. In addition, you and your spouse lost economies of scale when you separated. There is some truth to the saying that, “Two can live as cheaply as one.” In the huge majority of divorces, the standard of living of the parties goes down.
-You may not feel that this is a fair result, especially if you did not want the divorce. But you must face the reality of the situation regardless. Resources are limited and you both must adapt to match costs to those resources. Your standard of living has to adjust.
How to Handle Financial Distress
If your budget reveals that you don’t have enough income to cover your monthly expenses, you need to decide what to pay and what to not to pay. People who are accustomed to paying their debts on time and being financially responsible may have a hard time adopting the survivor mode often required by a divorce. Embarrassment and fear of being labeled a deadbeat or poor credit risk may lead you to some irrational choices. For example, parents have been known to pay credit card bills even when they don’t have enough money for food.
In deciding what to pay for, think of it this way: first take care of your family; next your possession; and finally your credit rating. You cannot replace your children or other people who depend on you financially, and you most certainly do not want them to suffer. You can replace assets if they are lost by failing to make payments on them. And credit ratings can be rebuilt if destroyed.
The physical, emotional, educational, medical, and mental condition of all parties, including the children should be protected first. Food, shelter, and clothing come before any other consideration.
The protection of possessions comes after the protection of people. These expenditures include payments on the home mortgage and vehicles. Credit cards and other unsecured debt should be paid last.
Of course, sometimes the decision isn’t so easy to make. For example, you may need a car to get to work and make a living. In that case, you may want to consider replacing a newer luxury vehicle with a used car that you can buy for cash. Public transportation or car pooling may also be an option.
CREATING YOUR BUDGETS
You can use the Budget Worksheet in §3:26 below as guides to creating your current and post divorce budget. The discussion below follows and explains each line item on the Budget Worksheet.
Income Line Items
Include your total earnings before taxes and other deductions. These comprise your gross income.
Alimony (as an income item)
Alimony will be an income item in your budget if your spouse pays alimony to you. Initially you won’t know the amount. When your needs are determined, this line is completed.
Child Support (as an income item)
Child support will be an income item on your budget if your spouse pays child support to you. Initially you won’t know this amount either. Once your attorney has the income information for both you and your spouse, this item can be computed in accordance with the child support formula.
This line is for income from other sources, such as investments, pensions, social security, trusts, annuities, unemployment compensation, and others. The Income Statement in §3:25 below will help you identify all your sources of income. It is useful for both budgeting and determining your income for child support.
Expense Line Items
The Three Cost Components
Your budget expenses will be based on three basic components: historical costs, current costs, and anticipated future costs.
Historical are past costs that were incurred before you and your spouse separated. Historical costs are used to estimate some of your current and future costs. For example, if you are staying in the family home with the children after the separation, the utilities costs for you will probably be similar to the costs before your spouse moved out. These past costs can be used to anticipate current costs that will be incurred during the divorce process and future costs for utilities if you remain in the home after the divorce is final.
Costs incurred for one spouse but not the other are not included in the budgets of both. For example, the costs incurred for your spouse’s hobbies that you don’t share (a golf club membership or arts and crafts supplies) are not included in your budget.
Mortgage Payment / Rent
Your biggest housing cost is your monthly mortgage or rent. If you and your spouse own a home with a mortgage, the mortgage expense should be included on the budget of just one of you. It is usually best to make one party responsible for the payment (as opposed to splitting it) to avoid confusing the lender and to easily fix responsibility and consequence if the payment is not made. Your post-divorce budget will estimate future rent or mortgage payments.
Utilities (heat, electricity, water, other)
If you remain in the family residence, you should use the historical costs for utilities in your current budget figures. The post-divorce utility figures will be the same if you are going to keep the house. If you will be moving into a different residence, you will need to estimate utility costs. Utility companies can often provide information on costs on prospective rentals or houses that are going to be purchased. They may also be able to provide general averages for homes or apartments in your area.
The costs for basic telephone services are usually about the same within the same locale. However, variable costs associated with phones can vary significantly from user to user depending on long distance charges. For example, if you have family living on the other side of the country, your long distances charges (at least for a land line), will probably be higher than your spouse’s.
Historical phone usage can be a very good indicator of current and future phone costs. Taking some time to determine who needs the more costly services can make the budget figures more accurate.
The pervasiveness of cell phones and the seemingly infinite number of associated plans can add a layer of complexity to budgeting for this item.
Historical maintenance figures for the house may not be adequate if one spouse actually performed most of the maintenance and no longer will be doing so. For example, if a husband had performed all of the maintenance on the family residence during the marriage, his annual maintenance costs could be obtained from charges or checks written to the local hardware store. However, if the wife will stay in the home and she isn’t able to do this maintenance herself, her budget figures would include both the cost of materials and the cost of someone to actually perform the maintenance.
Costs to repair significant physical defects to the home are not usually included in the budget. Instead they are used to adjust the value of the home for purposes of dividing the marital estate.
Housing costs that are not addressed on other summary lines can be entered on this line. Examples can include property taxes if not included in a mortgage payment, Internet costs, and neighborhood association dues.
Child Support (as expense item)
As indicated above, child support is an income item to one spouse and an expense item to the other. Amounts entered on this line are expenses of the party who is paying child support.
The most common source of budget figures for this category is your historical costs. Quick, but not necessarily the most accurate estimates of cost entail determining the total cost of food for your entire family and simply dividing the cost by the number of people in the family. For example, if your family spent $6,000 on groceries and meals during the year preceding separation, and you are budgeting food costs for yourself and your two children, then the formula would be the total cost divided by the total people times the number of persons being budgeted for:
$6,000 ÷ 4 × 3 = $4,500.
A factor that can complicate this estimate process is an individual who consumes on the average more than the rest of the family (e.g. quantity, expensive food, liquor). The budget process can also be affected by individuals who are unable to cook for themselves and must eat in restaurants. It should also be noted that some suppliers of food and beverages also supply personal care items, beauty products, and car maintenance. Consequently, it is very easy to get hopelessly lost in the minutiae. To avoid this, keep in mind what you are trying to do: provide a budget that is fair and reasonable by the use of averages and generalizations. Budgeting for every expenditure that has happened in the past or might happen in the future and estimating the associated expense is a hopeless endeavor.
Averaging historical daycare costs might be the best means of deter- mining current and prospective amounts for budgeting purposes. However, children’s needs change. If changes in circumstances of the children, such as going to school, are imminent, they should be taken into account in the budgeting process. If you have been at home with the children but expect to return to the workforce as a result of divorce, you should con- tact daycare providers to anticipate costs in this area. Daycare can be an extremely significant cost. Make sure that you include a realistic figure.
Clothing / Personal Care
Estimating the costs of clothing and personal care can be difficult because the expenditures reflect components of necessity and also stan- dard of living. For example, if you have been spending $1,000 per month on clothing for yourself, that might not be feasible during or after your divorce. The general theory of budgeting in this circumstance is to include a figure that would meet necessity first. It can be adjusted later if resources allow a higher expense.
Auto Lease / Note Payment
These costs usually include a car loan payment or lease payment. If a car needs to be replaced, the anticipated replacement costs can be used. Car payments and purchases can raise standard of living issues. That is, while someone in the throes of a divorce may need a car, he may not need a $75,000 Corvette to support his midlife crisis. The budget may reveal that neither party can afford an expensive vehicle so a more modest car should be purchased. A court will be less than sympathetic to a spouse who purchases a luxury vehicle and tries to avoid or reduce support payments.
In lieu of private vehicle ownership, public transportation may be an alternative, especially in urban areas where public transportation is readily available. If public transportation is readily available, and a spouse is regularly using it, the question might arise as to whether vehicle ownership is a luxury or a necessity.
The determination of a budget cost for fuel may be difficult if gas prices are fluctuating. Even so, the best estimates of current and prospective costs are still historical values. Costs for fuel can be determined from credit and debit card charges or checks. If you and your spouse buy gas with separate credit cards, estimating fuel costs for each of your vehicles is relatively simple. If you charge gas on the same card, you can use a ratio of the total costs to estimate a split. For example, if the vehicles get similar gas mileage and are driven a similar number of miles then a 50/50 split might be appropriate. Another way to estimate gas costs is to figure out how many times you fill up per month and multiply that figure by the approximate cost. This type of estimate may be close enough for the budget process.
Maintenance / Repairs
Routine care of a vehicle usually includes oil changes. However, it should also consider replacement of components that routinely wear out such as tires, air filters, windshield wiper blades and others. Budgeting for the costs necessary to fix vehicles when they break is notoriously difficult. However, there are some general guidelines that may be useful. Repair costs for vehicles under warranty may be very small or non-existent. For cars out of warranty, you may consider that $50.00 to $100.00 per month may be adequate. Historical repair costs may also give an indication of the costs that may be expected to keep a particular vehicle running. However, catastrophic repairs such as ruined engines or transmissions may not be predictable and represent a real risk to the integrity of any budget.
Registration / Taxes
The cost of registration and the associated taxation of new vehicles may be significantly different (higher) than re-registering a vehicle. After the first year, however, historical cost can normally be used to predict current and prospective costs. Usually, the costs are paid annually. You can convert the annual figure to a monthly cost by dividing by 12.
Companies providing insurance for vehicles often provide discounts for multiple vehicles. Therefore, while you can use historical costs to predict current costs, costs after the divorce should be determined by contacting your insurance company for single vehicle coverage.
Other Vehicle Costs
Other necessary costs of transportation should be included in budgeted figures. For example, the costs of road tolls, parking, and ferries may be significant costs that should be included.
If you have older children, you may be financing the operation of one or more vehicles for them. To avoid future conflicts, the divorce process should indicate who is going to be responsible for these costs. The budget process of the responsible parent should include these costs.
Health insurance, hospitals, doctors, dentists, opticians, and prescriptions are some of the costs that are normally considered under medical. As might be expected, predicting the future health of family members is virtually impossible. There is no predicting when a family member will have an accident, sports injury, or fall ill. However, there are some costs that should be accounted for.
Your current budget will include the costs of health insurance. Future costs will include health insurance for single coverage for the parent who is not covering the children and family coverage for the parent who is.
If the family has regularly met its insurance deductible, then this amount should be included in the budgeted figures of the parent who will be responsible for paying the deductible.
If a family member is receiving regular medical care for any condition, historical costs can be averaged and used for budgeting purposes. For example, if a family member is on a regular drug regimen, then the associated costs should become a line item. Eyeglasses are another example. Budgeting for the replacement costs will help to ensure that the eyewear can be replaced when necessary.
Current payments for life insurance will be budgeted for whatever costs are expected to be incurred during the divorce process. Cancel- ling the policies is not usually a prudent decision. The family members whom you decided to protect with the insurance during your marriage still need protection even though a divorce is in progress. Budgeting figures for future coverage will normally be obtained by contacting an appropriate carrier.
Recreation / Entertainment / Vacation
Perhaps the most difficult of all of the budget items to deal with is the allowance for luxuries. Tightening the allowance may be necessary, but it can be difficult to accept. For example, you may have to replace your $350 per month health spa membership with a $50.00 per month gym membership. You may have to abandon plans for a European vacation. While it’s possible that your finances are strong enough that your lifestyle won’t change after the divorce, this is usually not the case. Normally, the standard of living of all parties goes down after a divorce. Consequently, you may not be able to use historical expenditures. Common sense, in light of the rest of your budget is a better guide.
Student loans are usually entered into budgets at their current rate of minimum payment. You or your spouse may have been actively attempting to pay off your debts and consequently you made more than the minimum monthly payments. During the course of the divorce, because finances may be strained, the amount budgeted should be the minimum. The post divorce budgeted amount can be the minimum or can be based on your ability and desire to pay the loans off early.
Gifts for birthdays, weddings, graduations, and similar occasions are expected by friends and family. Maintaining normal social contacts and relationships is important during and after divorce. Consequently, gifts should be budgeted for if possible. As with other budget items, you may need to recognize that your ability to pay for discretionary items has declined and gifts will need to be more modest.
Sometimes parents attempt to buy the affections of their children through extravagant gifts. Resist this urge. “Toy Wars” are confusing to the children and detrimental to the effective co-parenting. Solutions include capping the amount to be spent on Christmas, for example, or agreeing that all gifts are represented as being from Santa or mom and dad jointly.
Gifts to charitable, social, or religious organizations are usually discretionary. Consequently, donations are typically put on hold during the divorce. They can resume once you have a good handle on your new financial situation and what you can afford. If you have made a pledge that is legally binding and enforceable, include it in your budget.
You can’t hope to predict all necessary expenditures and you shouldn’t try. This line item is a catch-all that is provided to simplify the process. The amounts for miscellaneous items will depend on the circumstances. A single person living alone may have fewer miscellaneous expenses than a person living with two children. Don’t use this category to pad your expenses or to make up for lack of adequate research in completing the previous items.
Savings / Emergencies
Savings and/or provisions for emergencies are not normally included in the current budget. Making deposits to savings is a discretionary activity and simply may not be possible during a divorce. Emergencies occurring during the divorce will be addressed as part of the divorce process. Consequently budgeting for them is unnecessary. The post divorce budget, however, should include provisions for savings and emergencies and will be in line with your financial ability.
FICA, Medicare, federal, and state taxes are mandatory obligations that should be a part of the budget process. However, it’s best to base them on tax tables or historical amounts. Withholding for state and federal taxes can be adjusted by the income earner and may not represent the actual taxes that he or she will be expected to pay.
STATEMENT OF INCOME as of
Gross Monthly Income
|Pension and retirement benefits||$|
|Social Security Payments||$|
|Public Aid/Food Stamps||$|
|Other income (specify)||$|
|TOTAL GROSS MONTHLY INCOME||$|
Additional Cash Flow (monthly)
|Maintenance Received (payments received pursuant to Court order or voluntarily in this or other actions)||$|
|TOTAL ADDITIONAL CASH FLOW||$|
|TOTAL MONTHLY GROSS INCOME FROM ALL SOURCES||$|
Required Monthly Deductions
|Federal Tax (based on exemptions)||$|
|State Tax (based on exemptions)||$|
|FICA (or Social Security equivalent)||$|
|Mandatory retirement contributions required by law or as condition of employment||$|
|Union Dues (Name of Union: )||$|
|Prior obligation(s) of support actually paid pursuant to Court order||$|
|TOTAL REQUIRED DEDUCTIONS FROM MONTHLY INCOME||$|
|NET MONTHLY INCOME||$|
|Gross Income (earnings before taxes)||$||$|
|Utilities (heat, electricity, water, other)||$||$|
|Auto Lease / Payment||$||$|
|Doctor / Dentist||$||$|
|Food / Beverage||$||$|
|Clothing / Personal Care||$||$|
|Recreation / Entertainment||$||$|
|Gifts / Contributions||$||$|
|Savings / Emergencies||$||$|
 Applied to salary as percentage (e.g. 2,000 x .0620 = 124)