Why developing a realistic budget before finalizing a divorce agreement could completely change your mind about what you’re fighting for
Although it may not initially seem so on the face of it, the divorce process is riddled with math and financial decision-making. There isn’t a magic box information can just be thrown into to derive the right property division agreement or right spousal or child support numbers. Landing on the fair and equitable outcomes is ultimately a function of a sound personal budget…and I can bet this isn’t really what you want to hear because it means that you and your spouse will need to do some real teamwork to define your expenses and put together a realistic budget—which is definitely NOT easy.
There are two very simple, yet impactful reasons why a budget should be considered as an input rather than an output to the divorce process:
Reason #1: Developing a solid budget that reflects the realities of the financial decisions you and your spouse are making during the divorce process could completely change your mind about what you’re fighting for and why you’re fighting for it
Is your idea of a triumphant post-divorce lifestyle sitting home all the time being house poor and living off peanut butter and jelly sandwiches? I didn’t think so. To avoid this, you absolutely should be considering your after-tax income and expenses that result based on the property division reached with your spouse. Otherwise you are proceeding blindly into your future and throwing caution to the wind.
As part of my divorce financial mediation services, we spend time to review each party’s budget and the resulting impact of certain property division and support scenarios and the outcome is often very enlightening for them. In some cases, before we even get to working through the property division itself we will find that an entirely new base budget needs to be developed that considers the prioritization of expenses, introduces financial discipline that hasn’t been implemented or reflects some changes in bad financial habits that will be necessary to change going forward. My goal is to ensure both parties are prepared and fully understand and acknowledge the financial obligations they will be undertaking on a go-forward basis and this can’t be done without the sometimes-painful process of developing a budget.
Another situation I often encounter with clients that outlines why a budget is so critical is when a desire exists for one party to keep the family home. In my opinion, if you find yourself in the position that one of your top property division priorities is to keep the home, building and reviewing an accurate budget that reflects the financial impact of this decision is an absolute MUST before spending any effort, heartbreak or tears fighting for it. Now I am not saying there aren’t many creative ways to successfully craft viable options for a spouse to stay in the home, but as a financial professional, I will NEVER support or encourage a decision that puts one or both parties into an immediate, unrealistic and unsustainable financial hardship. With that said, a budget helps us to identify whether certain scenarios are viable and if not, we address those challenges and constraints very early in the process so that your valuable time can be spent reaching viable and healthy agreements.
Reason #2: In California and many other states, the financial disclosures you submit to the courts contain the “guts” of your budget which are then used as inputs within spousal and child support calculations using state guidelines and other important variables
Time and time again I find in going through the divorce financial mediation process with my clients that information is either incorrect, (accidentally or not) omitted from the disclosures or the parties just don’t really understand how to fill out the documents. While the process can admittedly be very confusing and overwhelming, if reviewed in a vacuum with a presumption of completeness, accuracy and truth (for instance by the courts or a judge) when in reality it is either incorrect or misunderstood, it can be dangerous and could negatively impact the amount of support you pay or receive. As an example, influential drivers in California child support calculation guidelines include 1) income, 2) expenses (which range from living expenses to retirement contributions, etc.) and 3) number of children and physical time to be spent with each parent. So, if you’re not catching what I’m dropping yet, items 1) and 2) are in fact your budget. Additionally, in spousal support calculations the financial elements (among other elements) considered include income available to pay for support and financial needs which, yet again, translates to an accurate budget. Therefore, if your financial disclosures are completed inaccurately or without much care or effort it could have significant impact on the outcome of a support calculation.
These are just a couple major reasons why a quality budget has a direct relationship to the quality of the divorce financial outcome you and your spouse might experience. With that said, I cannot emphasize enough the importance and value added in spending the time necessary to create a budget on the front end, rather than after significant financial decisions (and potentially irreversible damage) is done. When working with couples to mediate the financial aspects of their divorce, I include a thorough budget review and ensure that it is not only front and center but is also well understood (and ideally agreed upon) by both parties. This sometimes means more time must be spent with one party vs. another (which is ok and actually very normal) which ensures everyone is very clear on what later becomes the financial obligations you must live up to and the basis of how child and spousal support guidelines are applied to derive support amounts.
To help give you some tools for a head start on the building blocks of a quality budget, I have developed an easy to use Excel working template for my clients that includes a pre-divorce and post-divorce tab. You can download this helpful template along with other helpful tools here on my website. This budget tool can be used to develop a draft budget either individually or together with your spouse. At minimum, the tool becomes a great guide for the type and detail of information that will be necessary to build a quality budget so you can begin gathering and considering the inputs. Once this template has been completed by my clients, we then use this information to have an open dialogue about the current state of their income and spending habits and whether any adjustments should be made to account for the common transitional changes a divorce brings. I work with this exact tool until we arrive on a final revised budget with my clients that is then used within my divorce financial planning software as the basis for the rest of our financial mediation discussions and analysis.
Do you have budget questions? Comment below and I’ll be happy to help! Really struggling with numbers and finding creating a budget to be an uphill battle you just can’t do? Reach out to us! We provide a la carte budget development services to help you through the process at affordable rates.