Divorce significantly changes both partners’ financial scenarios. This might include paying monthly spousal or child support. It is important for both parties to trim budgets as much as possible and streamline support payments.
Here are the basics: One party will be paying money to the other party. The person paying money thinks the amount is too high and the person receiving it thinks it’s too low.
They’re both right. As a couple, you used to have a specific amount of money in the bank, one house to pay for, and one set of expenses. When you divorce, you split that same amount of money, but everything is duplicated—two homes means double the expenses. There’s simply not as much money to go around.
Though it may not always feel like it, the divorce code in your state is designed for each party to live at the same marital standard they enjoyed during the divorce. Unfortunately, because of those new, redundant expenses, that’s impossible to pull off. You can get close, you’ll never get all the way there. As a result, you’re almost certain to begin this new chapter of your life with money worries.
Redesigning Your Financial Life After Divorce
Traditional Financial Support Scenarios
During your divorce proceeding, you will have to discuss both spousal support and, potentially, child support. Almost every state has a different formula for who has to pay support to whom and how much gets paid. Most boil down to what the higher earner makes on a monthly basis, gross or net. If you are the highest earner, your payment amount will be one-third of the difference between your two incomes. Why one-third? Simply put, one-third of the difference will be paid to taxes, a third will go to you, and the final third will go to your ex-spouse.
In 99 percent of cases, this formula is the most efficient way to even out the money between parties. Generally speaking, my advice is that you take whatever the divorce attorneys figure you need to pay or receive, get familiar with that number, and start planning for tomorrow. Whether you’re making the payments or receiving them, your job is to determine what you have to work with each month.
The Higher Earner’s New Financial World
When people determine those numbers, they’re often surprised, and sometimes appalled. Especially the higher earning party. At first, they can’t believe they have to pay X amount every month. The number always seems extra-large on paper. When they balk, I ask them to think back on how much of their paycheck went to expenses related to their partner or their family—usually, it’s nearly all of it. Then, I explain that now they will only pay 33 percent of those expenses, so they’re actually saving money and have more control over it. It’s not as bad as it looks at first.
Once they have accepted the numbers, I encourage them to set up automatic support payments. That way, they don’t have to think about that expense every month. Payments are made on time, and the receiving party enjoys the same peace of mind. Of course, it is important to remember to balance payment dates. Rent or mortgage will always be there, so be sure support payments fall at a strategic time each month. In the end, automatic payments help relieve some of the stress of the situation, and that is always welcome.
The Lower Earner’s New Financial World
If you are the lower income earner, you face a different sort of surprise: the money received from support will not be adequate to cover everything you used to pay for or became accustomed to.
In addition to monthly financial support, the lower earner receives half of the other party’s assets. Many make the mistake of relying on that. Let’s say you split a bank account, and your portion is $40,000. If you start using that money to make up the difference between expenses and monthly support, it’ll be gone in a few months—setting you up for a big problem.
If you look closely at all expenses and create a budget, those expenses will likely exceed what you have coming in. First, you’ll have to decide what to cut and what to keep. Then, you’ll have to decide how to supplement your income.
Create a Budget Today to Save Tomorrow
Parties on both sides of divorce need to create budgets. Since many couples don’t keep budgets when they’re married, this task might be something they’re unfamiliar with. Most married couples spend and save in a somewhat unstructured manner; when money comes in, they spend some of it and save some of it, and everything generally works out at the end of the year.
After a divorce, when suddenly there’s not enough money to go around, you have to look carefully at all expenses.
Most home bookkeeping software like QuickBooks offers customizable forms to guide you through the budgeting process. Look at whatever account you use to pay expenses and determine how much you spent and how you spent it. Then, start deciding which of those expenses you need and which you can do without.
Start by comparing money coming in to fixed costs such as rent, mortgage, groceries, and car payments, to determine your needs. Then, look for ways to trim the budget to meet your goals. Most people’s budgets will reveal glaring expenses that can be slashed or eliminated altogether. If, after trimming, you’re still short, it’s time to think of ways to supplement your income.
Ditch the Financial Ballast
Unfortunately, you will probably have to start with the fun stuff. Lifestyle pleasantry expenses add up fast. Those Starbucks coffee runs, out-to-lunch on work days, and deluxe cable TV packages make for a big outflow of cash every year. Start with expenses like that when you’re looking to slash your budget.
With modern commerce so geared toward card and digital payments, you rarely see money physically leaving your hands anymore. As a result, the cost of all those comfort items you allow yourself doesn’t seem real. Until you look at a budget, you have no idea where your money is going.
Automatic payments certainly have their value. Earlier in this chapter, for instance, I recommended making automatic support payments to your ex-spouse. However, when it comes to paying your bills, I recommend the opposite. The more you force yourself to actively pay your bills every month, the more aware you’ll be of how much you’re spending and where that money is going.
Divorce significantly changes both partners’ financial scenarios. This might include paying monthly spousal or child support. It is important for both parties to trim budgets as much as possible and streamline support payments.
This article has been edited and excerpted from Moving On: Redesigning Your Emotional, Financial and Social Life After Divorce (Lioncrest Publishing, 2019) by David J. Glass, a Certified Family Law Specialist who holds a Ph.D. in Psychology. The book is a clear and helpful tutorial on how divorcees can effectively cross the bridge from the newly-divorced status to the brand-new-life status. www.movingonbook.com,
Good advice, especially with the effects of the 2017 Tax Act.