Divorce Financial Planning: Take Control of Your Finances
Do you know your credit score or the details of your Social Security report? Can you find the deed to your house, mortgage, life insurance policies, car title, car insurance policies, tax returns for the past 5 years, brokerage and bank statements for the past year? Do you know what your spouse earns or how much is going into a 401k plan annually?
Getting divorced is often a wake up call when it comes to finding out what you know and don’t know about your family finances.
Managing your finances is not about knowing which stock, bond or mutual fund to buy. It’s about knowing what you own (assets); what you owe (liabilities); what’s coming in (income) and what’s going out (expenses). It is about paying attention to where your money is going and being organized.
You’re going to be asked to produce a lot of financial paperwork and documentation for the court, your attorney or mediator and for your soon-to-be ex spouse. So, let’s get started:
Clear off a workspace and gather all your statements: bank, brokerage, credit cards, etc. Other supplies to gather: paper, pen or pencil, 3-ring binder, hole punch, index dividers, highlighter and sense of humor.
First, we’re going to tabulate your net worth (difference of what you own versus what you owe): make a list of everything you own: house, car, brokerage accounts, life insurance, retirement accounts and their value (the internet can help- try KBB.com and zillo.com). Then, list everything you owe: mortgage, car loan, credit card debt, school loans and their outstanding balance. Keep this information stored in the first section of your 3 ring binder.
Next, find where your money is going (the cash flow), or the reality of not having a clue as to where you spent all that money. The easiest way to determine your cash flow is a computer program like Quicken or QuickBooks. A useful website is mint.com. If you prefer not to use the computer, this can be done with Excel, columns on lined paper or on graph paper.
To make a budget, gather your checkbooks, check stubs and charge card statements. Give each expenditure a category and a subcategory. Example: Utilities: phone, Utilities: cell phone, Utilities: cable and enter your expenses for each month. You will get a total for each subcategory as well as a total for the whole category of Utilities. Don’t forget to enter your income, including income from child support and alimony. Print a report every month, and a quarterly report every 3 months. Put these in a Cash Flow or Budget section of your binder.
It may take you several months to get a picture of your income and expenses but it will become the foundation to manage your finances as well as negotiate child support and alimony.
With a handle on your cash flow, you can look for places where you can reduce expenses or control spending. Try taking 10% off the top of your income as savings. Then, rework your expenses to see if you can still manage. Utilize whatever amount of money you are able to save to:
• Get out of debt – pay down credit cards and loans
• Have an emergency fund not invested in the stock market. Aim for a minimum of 3 months of household expenses in savings. If possible, have an additional 3 months in a short term CD or money market account
• Take advantage of retirement plans
Put this information in your Savings Goal section of the binder.
Armed with this information, a consultation with a Certified Divorce Financial Analyst, early in the process, can help you meet the challenges of divorce with more confidence and dignity than might otherwise be the case.