Dan Reiter, CFP®, CPA
Divorce can be an emotional rollercoaster, and on top of everything else, it can leave your finances feeling like a tangled mess. If you haven't managed the household finances before, it might seem like an insurmountable task. But hold on! Creating a budget is your key to financial stability and building a future you call your own. Here's a detailed guide to walk you through creating your first post-divorce budget.
Before you get started, you will want to grab a good budgeting template or worksheet. For the first budget, we typically recommend that you avoid the use of any budget software or special tools. These might be great for later, but it is important to focus on getting your budget in order first without having to learn another tool.
If you do not have a preferred worksheet, you can download our budgeting worksheet here. Our worksheet provides guidance for each step that follows the method described here.
Step 1: Gather Your Financial Information
Think of yourself as a financial detective about to crack the case of your own financial well-being. To get started, gather all the evidence you can find. This includes:
Bank Statements: These are your financial transaction records, showing debits (money going out) and credits (money coming in). Look for recent statements (past 3 months) from checking, savings, and any investment accounts you might have.
Pay Stubs: These documents detail your gross (pre-tax) pay, deductions (taxes, insurance), and your net pay (what actually hits your bank account).
Legal Documents: If your divorce settlement included alimony, child support, or any division of assets, find the paperwork outlining the details and payment schedules.
Once you have all this information, save (if electronic) or put it in one place before you get started building your budget.
Step 2: Know What's Flowing In – Identify Your Income Streams
Now, let's get a clear picture of the money coming into your life. On your budget worksheet, list all your regular sources of income:
Employment: This is your primary income from your job. Calculate and record the average monthly net income you expect to receive from employment after taxes and other withholding amounts. If you are paid every other week, you may need to multiply your check by twenty-six (to get an annual amount) and then divide by twelve. If twice per month, you will multiply by twenty-four.
Spousal Support/Alimony: If your divorce settlement includes spousal support, record the monthly amount you receive.
Child Support: If you have children, child support payments may contribute to your income. Record the monthly amount of these payments as well.
Social Security/Pension Income: If you have any Social Security or pension income, list the net amount deposited to your bank account each month.
Withdrawals from Savings or Investment Accounts: If you are already taking a regular and fixed withdrawal from your savings or investments to help cover your living needs, include that here. If you typically withdraw from these accounts as needed in irregular amounts, skip any estimation of that amount for now.
Once you have all your income sources listed, you should be able to add them all together to have a Total Income calculation. This is the amount we will start with that is available to cover your living expenses. Next, our goal is to give each one of these dollars an assignment or “job”.
Step 3: Essential Expenses – Building Your Financial Foundation
These are the fixed, unavoidable costs you need to cover each month to keep the lights on and food on the table. On your budget worksheet, go through and list every essential expense:
Housing: Rent or mortgage payment, including homeowner's or renter's insurance.
Utilities: Electricity, gas, water, trash collection, internet.
Groceries: Estimate how much you typically spend on food and household items.
Transportation: Car payment, gas, car insurance, public transportation costs.
Minimum Debt Payments: List the minimum monthly payments for credit cards, student loans, or any other debts you have.
Insurance: Health insurance, car insurance, and any other essential insurances you carry.
Many of the above expenses such as utilities, gasoline, and groceries may be variable from month-to-month. In these cases, you should review the past 3-6 months and come up with and record a reasonable average that you expect you will need to spend each month.
Once you have everything listed, add up the total amount for all these essential expenses. This is your baseline regular monthly expense amount – the minimum amount you need to function each month.
Step 4: Not-So-Regular Expenses – Accounting for the Extras
Life isn't just about bills! There are occasional expenses that can throw your budget off track if you're not prepared. These categories tend to be slightly “lumpier” in nature. Meaning, you may go many months without a single expense and then spend a significant amount at one time. As such, it is likely easier to think about these expenses on an annual basis. Once you have an annual number, you should add that to your worksheet and come up with an equivalent monthly amount.
Common examples of expenses in this category and key questions to consider are noted below:
Car Maintenance: Oil changes, repairs, unexpected car troubles. Questions to consider: How often do you need to get an oil change? How much does each one cost? How often do you feel your car will be in the shop, and how much does each repair tend to cost? One common example is tires. If you expect to replace them every two years at a cost of $1,500, these alone will cost about $60/month per vehicle.
Holidays: Birthdays, Christmas, gifts for friends and family. Questions to consider: How much do you typically spend on Christmas each year? How many birthdays do you have to buy for? How much do you spend for each gift?
Clothing: New clothes, shoes, seasonal changes in wardrobe needs. How often do you typically shop for clothes in a year? How much do you spend on each trip on average?
Travel: Vacations, weekend getaways, visiting family. How many vacations do you typically take per year? What’s the cost of each vacation on average?
Insurance Premiums: Do you pay your homeowners, automotive, or life insurance policies on an annual or semi-annual basis to save some money? If so, don’t forget to record these!
Annual Subscriptions: How many subscriptions do you pay on an annual basis? Common examples include credit card subscriptions or Amazon prime.
Taxes: Don’t forget any personal property taxes if you pay those less frequently. Also, if you are required to make any quarterly estimated tax payments.
Personal Care: Haircuts, toiletries, medications (not covered by insurance).
These irregular categories of expenses are often the hardest to quantify. It’s very likely you will forget a few things when you first start. That’s OK! If you realize that you missed something you will just want to get into the regular habit of adjusting and improving your budget as you go. By creating a plan for these expenses, however, you'll be prepared and avoid scrambling when any of these items come up.
The Final Step: Zero it Out
Now that you have input all your income and expense information, you should be able to determine what’s coming into your monthly account and what you estimate is going out.
Do you have more income or inflows than expenses? Great! On a monthly basis, set up a regular and automatic savings program to a savings or investment account for the difference. If using our worksheet, input this amount in the “Amount to Save” box. It is key that this occurs on a regular and systematic basis so that you know the amount that is in your checking account each month is the amount truly available for spending.
Do you have more expenses than you do inflows? Don’t fret! You have two potential paths available to take. First, one option to rectify this is to make some downward adjustments to those expense categories that are lower priorities. This is unique and individualized to you. Second, if you have savings or investment accounts available, you may be able to set up an automatic and regular deposit from that account to your checking account each month. If you do this, you will want to add that deposit amount as an income source as you did others in step two. The key here is that you want this amount to be regular and fixed in amount.
One Final Thought: Getting Professional Help
Building a budget might seem daunting, but it's a powerful tool that gives you control of your finances. Remember, this is your first draft – adjust it as needed. There will be bumps along the road, but with each paycheck, you'll gain confidence and build a secure financial future for yourself.
If you feel this is overwhelming, you should consider getting help from a professional financial advisor that specializes in doing this type of planning. Moreover, you may need professional guidance to determine the long-term sustainability of any spending plan you create.
If you would like to schedule a 30-minute no obligation call to discuss your situation, click here or give us a call at (816) 587-7526.
Investment advice, financial planning, and retirement plan services are provided by Prosperity Planning, Inc., an SEC registered investment advisor. The information contained herein, including but not limited to research, market valuations, calculations, estimates and other material obtained from these sources are believed to be reliable. However, Prosperity Planning, Inc. does not warrant its accuracy or completeness. The information contained herein has been prepared solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or to participate in any trading strategy. If an offer of securities is made, it will be under a definitive investment management agreement prepared on behalf of Prosperity which contains material information not contained herein and which supersedes this information in its entirety. Any investment involves significant risk, including a complete loss of capital and conflicts of interest. The applicable definitive investment management agreement and Form ADV Part 2A will contain a more thorough discussion of risk and conflict, which should be carefully reviewed before making any investment decision.
