I recently spoke to a client preparing to divorce who confided that her husband came from a wealthy family, that she had been out of the workforce raising the kids, and he had always paid their household bills. She used a credit card for everything, but didn’t really have a sense of what came in or went out.
She had no idea how much spousal or child support to ask for, and found the idea of having to manage her own bank accounts and bills to be overwhelming. I gave her some hints about how to get a handle on it, which I thought it might be helpful to share here.
1) Figure out how much you are currently spending and bringing in:
a. What do you spend when you are running around town?
Start noticing what you spend day to day for yourself and for the kids. How much are your receipts at the grocery store, at the pharmacy, and for your lunch? That latte? Mark it down. The afternoon candy? It counts. Nothing is too big or small. If you use a debit or credit card, you can get a lot of information from reviewing your monthly statements. If you use cash, collect receipts and keep a log, or enter the data into an app such as Mint or Spending Tracker.
b. What bills do you pay each month?
Do you pay the bills? If so, perhaps you have an idea already. If not, take a look at them and get a handle on what the expenses are. How much is the family currently spending for housing, utilities, cell phones, etc. Make sure to also look at recurring costs that may not be paid each month, like real estate taxes, car insurance, etc. You should also include expenses like health or life insurance or union dues that your employer takes out of your paycheck before you receive it. And debt repayment – like student loans, credit card bills, mortgages, medical costs. These can add up!
c. Now look at what your monthly income
What is your take home pay? Your spouse’s? Is it the same from paycheck to paycheck, or does it vary (for instance, if you work on commission)? How much can you rely on receiving? If you are not working, look at your household income. Do you receive payments of interest or dividends? Or a regular gift? A year end bonus? If your income varies a lot, estimate your annual income and divide by 12 to get your monthly average.
d. Compare them.
Think of the budget as a bowl of water – is it filling up or draining out? Is your income more than your expenses? Less? If your income is more than your expenses, are you able to save? Are you paying down debt? If your expenses are more than your income, remember that you are not alone. How do you make ends meet? How do you stretch what you have to meet your monthly minimums? If you are using credit cards to bridge the gap, you might be paying a high cost (in terms of interest) to do so.
2. What is your credit rating?
This is an indicator of how lending companies might see you. You have to have debt in your name and repay it on time to start building it up. Companies want to know that you are trustworthy – that you will do what you say you will do. Therefore, the person who has never taken a loan (read: never made a promise to pay), will have a lower score than the person who borrows and repays at least the minimum each month. You can get your credit score for free once a year from each of the top 3 largest credit rating companies – Equifax, Transunion, and Experian . It is a good idea to check periodically to make sure there aren’t any mistakes on your credit record, even if your score is excellent. Strengthening your credit score is an important part of building your financial independence.
3. What is your net worth?
Make a list of your assets (things you own, including bank and brokerage accounts, retirement accounts, your home, etc.). (You can use websites like Zillow.com or Trulia to get a rough idea of the value of your home.) Are these items in your name or your spouses? Or both?
Then make a list of what you owe (e.g. student loans, mortgage, credit cards).
Note that this list is more static than your monthly budget.
Your net worth equals your assets less your debts.
4. Look into how you can live within your means.
Can you pare down expenses? Can you increase your income? Are there lower credit card interest rates available to you? Can you build up your credit score? Consider working with a divorce financial planner or an investment manager or a financial coach – they often know about resources that can help, and can help you face your worst fears.
Money can be a source of terrible fear or financial security, but it is possible to get a handle on your situation, no matter what it is. You have more control than you think!