Episode 76 Transcript: Organizing Your Finances - Expenses

In the last episode, we talked about organizing your income as part of the overall work of organizing your financial picture in your divorce process. In this episode, I want to talk about organizing your expenses. That’s the next component that you would need to put together in your statement of net worth, financial disclosure affidavit, whatever it’s called in your jurisdiction, but basically in the task of organizing and conveying your financial situation as part of your divorce process.

Let me just back up and say why are your expenses even relevant or important in divorce? It’s for two reasons really that are related. One is, whether or not you have children, to understand whether either you or your spouse is in need of ongoing financial support from the other, and conversely, whether you or your spouse has enough surplus income in excess of your expenses to be able to give ongoing financial support to the other person. When you explain what your expenses are and you compare them to your income, if there’s a large deficit, then you may well be a candidate for receiving some kind of ongoing financial support from your spouse. Conversely, when you lay out your income and your expenses, if you have a surplus of income and your spouse does not, you may be considered a candidate who is able to pay some amount of financial support ongoing. Not ongoing forever, but ongoing for some period of time to your spouse.

I know that the task of tallying up your expenses or your personal spending, your budget is daunting for many people. I want to suggest two ways of approaching it that can hopefully make it seem a little bit more manageable to you. The first is to approach it by building up your budget based on spending category. At least in New York, our statement of net worth in the expenses section, it lays out a bunch of different categories of spending on housing, groceries, clothing, utilities, entertainment, automobile, health-related. I could continue. I think that that is often a very intuitive way for people to do it, although the challenge that they can face is they may know exactly what their housing expenses are, but not be quite sure what they spend on eating out on average, month to month, over the course of a year, say. I would recommend you start by trying to build out your budget based on categories of expenses. To do that, you can look online for the financial disclosure affidavit or the statement of net worth in your particular jurisdiction and it will likely have some kind of draft or form for you to follow in trying to filling out, “In these different categories of spending, what do I think I spend on average on a monthly basis?”

The one thing I would say there, sometimes the forms do this for you, and sometimes they don’t, is to try to be very explicit about breaking out what specifically you spend. If you have kids, what of your spending is kid only spending? For instance, if you pay your kids an allowance, that’s kid only spending. That is not spending that’s related to an adult in any way. Or if you pay for soccer in the fall for one of your kids, that’s a kid only expense. It’s not related to the adults in the household in any way. Whereas groceries are mixed, the cost of housing is mixed because it’s for the benefit both of your kids and also of yourself. So you want to create the list of all of your expenses, but then really try to break out clearly in a subcategory a kids-only section of expenses and describe what those are. Whether it be health-related, going to a therapist or paying for summer camp or paying for private school tutors, whatever the expenses are, identify really clearly that subset of expenses that is related to your kids only.

Why is it important to do this? Well, it’s because, in the divorce process, there’s a likelihood or a solid chance that if you list out all of your kids’ expenses, you will not be solely responsible for 100% of those expenses. So you want to be really careful not to overcount them in your budget. For instance, if you determine that you spend maybe, to use a round number, $1000 a month on kid-specific expenses, so on their soccer plus music lessons plus school supplies plus seeing a therapist once a week and you ultimately decide that of that total $1000 a month expense, you and your ex are going to each be responsible for 50% of the expense. You only want to include $500 a month in your budget, not $1000 a month. Breaking out the kids’ specific expenses can help you ensure that you’re not unintentionally double counting them and the same goes for your spouse.

Once you’ve built out your expenses by category, then I recommend coming at your expenses from a different approach to double check that what you’ve built out category by category is accurate, is close to what you’re actually spending.

The second approach I recommend is to identify the different ways that you pay for things. I’m not talking about the types of things you pay for, but how do you pay for things? Generally speaking, you will pay for things on one or multiple credit cards, with cash, with checks, with some form of electronic payment, so Venmo, PayPal, Zelle, interbank transfers. You may pay for things by wire transfer. That tends to be less frequent as a source of paying for ongoing expenses, but it may be.

Then you want to think about what accounts are those things being paid out of? What account or accounts do you draw cash out of? What account or accounts do you pay for your credit card bills from? Same with checks. What accounts do you draw checks on? Same with your electronic forms of payment. What accounts are those drawn on? You then want to try to tally up, “What was my total credit card spending take a year?” It’s really pretty easy to do this digitally. Just in large round numbers, without looking at what the credit card was spent on, what was my total credit card spending in the year? What were my total cash withdrawals in the year? For checks that I wrote, what was the total amount in the year that I wrote of checks? And then you can search and sort by electronic transfers through PayPal, through Venmo, whatever, my total paid through that was this much.

Then, in adding those together, if you have added together all the different sources of your spending, it should roughly equate to what you’re predicting your budget is over the course of the year. If it doesn’t, you want to look a little bit more closely and say, “Okay, wait a minute. Am I double counting something in my budget, or have I not captured all the sources of my spending in this second approach to figuring out my budget?” For instance, if you included your kids’ private school tuition in your budget, but in fact, that was paid by your family, that’s not going to appear in your checking account or on your credit card statement, and so that would explain, “Why is my budget so much higher than what I actually spent out of my bank accounts in the last year?” So it can also help highlight other details for you that you might not have initially picked up on, like, “Oh, wait a minute. That expense has actually not been paid for by me. It’s historically been paid for by this other source of funds.”

The last thing I’ll say about expenses is that I do recognize that trying to calculate your expenses in the course of a divorce process is challenging because you’re in a state of transition. You’re moving from one household to two households. Your lifestyle, your spending habits may be changing. So a lot of people will bump up against the challenge of, “Am I supposed to reflect what I used to spend on this or what I think I am going to spend on this going forward or what I have spent on in the last three months that we’ve been separated?” The goal you want to get to is a realistic prediction of what you will be spending, what your expenses will be going forward in a way that’s reasonable in the context of your lifestyle.

It’s very common, for instance, that what you were able to spend when you lived in one household, that may not be what you’re able to spend going forward. At the same time, it’s also common that when people first separate their household, say one person moves out of the marital residence, they may be really living on a very, very slim budget just because they’re in a space of transition. They don’t really know what they can spend, so their spending is way down from what it was during the marriage. That’s not very realistic to reflect either. You want to try to reach a middle ground and basically a reasonable prediction of what you will be spending going forward once things settle down, once you’ve gotten through the transition of moving from one to two households and your spending has stabilized a bit more and is reasonable within the context of what you and your spouse are able to afford with your incomes in two households going forward.

That was a little primer on how to put together your expenses in the course of a divorce process. I hope it was helpful for you.


Episode 77 Transcript: Organizing Your Finances - Assets

Episode 75 Transcript: Organizing Your Finances - Income