How to Budget After Divorce

More often than not, the standard of living of both spouses drops in the first few years after divorce. This is because the now two separated people are not on the same income and pool of assets that they had been with during the marriage.

Unfortunately, most people don’t prepare themselves financially for the consequences of divorce. The best thing that one can do is simple, but not easy to put into practice.

Kevin Reardon, of Shakespeare Wealth, is a certified personal financial planner and is here to explain the financial implications of divorce and how to manage finances after a divorce.

What are some budgeting basics?

• Income = Inflows
  • Wages
  • Interest Income
    • Bonds, Real Estate Income, etc…
  • Dividend Income
    • Stocks, Mutual Funds, etc…
  • Capital Gain Income
  • Maintenance/Alimony
  • Child Support
• Tax Return (Review)
  • Your tax return is a great way to find all of your income sources, it is all on one location.
  • Although it can be intimidating, if you pull out last year's return you can find a review of your family’s recent income – Page 1 out of 1040

What are some outflows and how can someone budget for them?

• Some of the bigger outflows one might face:
  • Taxes
  • Mortgages/Rent
  • Insurance
  • Education
  • Child Care
  • Vacation
  • Credit Card Charges
  • Savings (prioritize this are you number one expense moving forward)

Savings is often overlooked, but it is necessary for a monthly savings amount as apart of a budget when considering outflows.

Smaller things are typically monthly expenses that can typically be found on one’s credit card.

• Examples of smaller items that one might face:
  • Gasoline
  • Groceries
  • Utilities

How does a person calculate spending?

• Quantifying Expenses

1. Accumulate 3 months of Credit Card and Bank Statements
   • No need to categorize spending at this time, you are just trying to figure out the amount
2. Add up the total amount of charges and checks written
3. Divide by 3
   • This is your monthly spending number
4. Multiply the monthly number by 12
   • This is your annual spending number

What are some “budgeting realities” after divorce?

• Individual Inflows are typically the same after divorce
• expenses increase after divorce (one of the biggest changes)
  • You lose shared expenses, and typically end up with a situation where one home turning into two homes
    • 1 home = 4,000 sq/ft
    • 2 homes = 2,000 sq/ft (or smaller)
      • Example:
      • Holding onto family home at the expense of your financial security will damage the children more than keeping the home
      • Paying for the home rather than trying to finance a college education for kids
    • Shared expenses are lost
      • Home furnishings
      • Cell Phone bills
      • Subscriptions

Tip: Spending needs to be reduced accordingly after divorce.

What can ruin a budget (and become a “budget buster”)?

• Taxes
  • Typically, people think of their Gross Income and they fail to back out taxes when they are planning their spending
  • Have to account for:
    • Federal Income Tax
    • State Income Tax
    • FICA Tax – Social Security and Medicare
    • FUTA Tax
    • Property Tax
    • Sales Tax
    • Capital Gains Tax
    • Dividend Tax
    • Tax on Interest Income
    • Obamacare Tax
    • Gas Tax
    • Utility Tax
    • Phone Tax

• Recurring Expenses
  • Typically, the type of expenses that creep up on people over the course of years.
    • Have to account for:
      • Cell Phone
      • Cable/Satellite TV
      • High Speed Internet
      • Netflix
      • Magazine Subscriptions
      • Health Club
      • Spotify/Pandora
      • Amazon
      • AAA

Tip: Cut as many of these expenses as possible immediately after divorce until you have a good feel for your new budget. Stop automatic component of each expense.

• Miscellaneous
  • Starbucks (or any other daily coffee shop)
  • Eating out
    • Breakfast, Lunch, Dinner, Weekends, Travel
  • Car Purchases
  • Houses
  • Vacations
  • Club Sports
  • Consumption
    • If you have a basement full of stuff, or a storage locker, it might be time to consider what things are worth keeping or not.

What are the “Budgeting Basics”?

• Pay yourself first = Savings
  • 401k, automatic investment plan, 15%+ savings rate
• Quantify Spending
• Emergency Fund
  • 3-6 months worth of salary
• Anticipate Larger Expenses
  • Cars
  • Home Maintenance
  • Weddings
  • College
  • Retirement
  • Vacations
  • Health Insurance
• Deferred Gratification/Delayed Gratification
  • Risk of not saving is financial destitution
• Compound Interest
  • Get your money working for you.
• Focus on the Big Picture by identifying the most important thing in your life and center in on it

Great.  How can clients contact you?

Kevin Reardon
Shakespeare Wealth Management, Inc.
N22 W27847 Edgewater Drive
Pewaukee, WI 53072
262.814.1600

www.shakespearewm.com

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References: Kevin Reardon, Shakespeare Wealth