Jennifer “JJ” Jank, CFP®, CDFA®
Quick quiz on saving and spending
How much do you spend on groceries each month? Clothes? If you have kids, how much do you spend on them? What is your rent or mortgage payment, and do you have Homeowner’s Association (HOA) fees? What about insurance for your home and your car? How much do you spend annually? Are there savings that you set aside? Do you know these numbers pretty well, or do you have to look at your bills to figure them out?
Whether you’re in the process of divorce or not, it’s important to know how much you spend.
If you know how much income is coming in and what spending looks like, you’ll know if you need to cut back somewhere so that you can save for your personal goals. Keeping track of purchases and payments will show you where you can start cutting back if need be. Having an emergency fund of three to six months’ expenses is important for avoiding credit card or other debt. It’s hard to determine this amount if you don’t know what your monthly expenses are.
Since Social Security is unlikely to cover all your expenses in retirement, you’ll need funds to draw on for that stage of life as well. Your portion of your spouse’s retirement account may or may not be adequate, so you probably need to save more for expenses in later life. You can search for “retirement calculators” online to give you a rough estimate of how much you might need for retirement, as long as you know what your expenses are.
You might also have some other goals, such as travel, or launching your own business. In order to reach your goals, you’ll not only need to know how much you’re spending, but what you’re spending the money on. Most people don’t have enough funds to do everything they want, so they need to prioritize what is important to them. Once you’ve identified what’s important, you can look at your spending and see what is less important than the goal that you can reduce or eliminate altogether.
In my case, I (at first) decided that I wanted to save up for a down payment on a house. I was already saving, but I analyzed my spending as I had been tracking it for a while, and determined that I was eating out a lot on the weekends. I felt that saving for a house was more important. So I cut back on eating out and was able to boost my savings quite a bit. Same with books – I was spending a lot of money on books when I could go to the library instead. I ended up changing my goal for the money I was saving, from buying a house to launching my own business. Most people probably won’t experience the same goal switch as I did, but the plan worked in either case. In order to put together the amount I wanted, I had to track where the money went, so I could figure out where I wanted and needed to cut back on my spending.
Knowing how much you spend also helps you be realistic about your finances during and after divorce.
You may need spousal support for some time, and having a clear view of income and expenses will help you determine an appropriate amount. You may need support to go back to school and get a degree or improve your skills if you’ve been out of the workforce for a while, and knowing how much spending you’ll eventually need to cover can help you decide where you want to focus your learning. If you have children, you’ll need to break out those expenses separately so the amount of child support can be calculated.
If you don’t currently have a solid grasp on your finances, your CDFA professional can give you a budget worksheet to start. Some people keep a budget the (somewhat) old-fashioned way, on a spreadsheet. (OK, this is me.) There are also websites and calculators that can help you keep track online. Some people pay for everything on a credit card that they pay off each month, and expenses can be tracked using monthly statements. If you know you’ll have trouble paying off the card every month, don’t use this method. A debit card could work for you instead. Remember to include annual expenses too, such as property taxes and car registration, in your spending plan. Whichever way sounds best to you is the one you should use.
The first step, if you don’t know your quiz answers off the top of your head, is to track spending for a few months to see what your spending amount actually is and on what. It’s best to do it for more than one month, because if you track during a month when expenses are particularly high or particularly low, your spending plan won’t be accurate. You can average out the amounts over a few months. If you find you need to cut back in order to save more toward your goals, you might be able to find relatively painless areas to cut back and you can start with those. For example, since I can get books at the library, it was relatively easy for me to reduce my expenses in this area.
Knowing where your money goes gives you a better grasp on your financial situation.
Divorce can feel like a process that rapidly goes out of control, so “owning” your finances is one way to put yourself back in the driver’s seat. If you’re confident about your spending numbers, you’ll be able to more easily assess the settlement to ensure that it’s adequate.
Having this information will also help you in the event your case goes to trial. You’ll be able to document where the money goes and substantiate the request for support. The judge likes to know the facts of the case, and it’s helpful if you know and can present these facts in an objective manner.
After the divorce is final, your spending plan will help you start the next chapter of your life in a financially healthy way.
Article submitted by: Jennifer “JJ” Jank, CFP®, CDFA®
JJ has worked in financial services since 1998. She focuses on women and their financial needs, having seen through personal experience how divorce can affect women's lives. JJ's goal is to empower women through financial education. She is a trained mediator for clients who prefer to use mediation in their divorce.