Managing Cash Throughout the Divorce Process & Beyond
There are many costs inherent within the divorce process from professional attorney fees, accountant fees, financial and court fees, therapy costs, and, quite frequently, the delay in payments from one spouse to another as positions are negotiated and agreed upon.
It is more important than ever to be able to manage cash flow during this time and to start planning for cash flow management post-divorce when, typically, there is less cash flow than during the marriage for both parties who now have more expenses and less income.
Each party should think about divvying up any excess cash appropriately to handle three purposes:
1. Unplanned expenses
2. Planned expenses
3. Investing
At some point, either during the divorce or after, either spouse may be faced with a major unexpected expense. To mitigate this without having to borrow or to sell shares during a down market, each spouse should have emergency savings in cash to be able to cover it. How much emergency savings? It is recommended to have 6-12 months minimum of take home income saved in an emergency fund. If a spouse is not working but receiving support, then this would be equivalent to 6-12 months of support received.
While this is an infeasible immediate sum to be cached for many divorcing couples, with diligent behavioral attention, funds can be set aside monthly to build the cash level up to the recommended sum. In many cases, this may take a year or more to achieve, but should be a prominent goal for each party going through the divorce.
Because there is much uncertainty when couples are divorcing and there is little to no control over the source of the income if received as spousal or child support, loss of employment may be a key risk factor for the supported spouse. Often, attorneys will recommend life insurance policies to mitigate the risk of death. But, there is a greater risk, today, of unemployment due to market conditions, changing technology, and overall trends toward younger workforces. Because of this, both spouses should be more concerned about having a cushion in the event that there is a loss of unemployment even for short periods of time.
Medical expenses are extraordinary in the U.S. The cost of health insurance itself is a major consideration and cost to be reckoned with if one does not have employer-provided healthcare. But the costs are rising precipitously every year, at a clip of 6-8% annually. This is cost-prohibitive if uninsured and another reason to be sure to set aside funds for medical related expenses above and beyond the premiums.
The immediate nature of a divorce is often more focused on the current state of affairs rather than the future. Agreements often do not spell out how future expenses will be handled and certainly, couples are not focusing on their future as much as their present situation given the significance of dividing up the marital estate.
However, planned expenses such as upcoming college education expenses, retirement expenses, and any large purchases that may be desired (e.g. buying a home to replace the marital home) require additional and large amounts of cash. It is too late to think about how to fund retirement expenses once retired. Even the timing of that retirement is contingent upon the nest egg accumulated and how long it will potentially last given inflation and market conditions.
If at all possible, gaining commitment from both spouses regarding potential future children’s expenses such as college should be included as part of the Marital Settlement Agreement even if not defined in detail. Otherwise, there is a potential for either of the parents not to set aside the appropriate amount of cash for this purpose. This simply passes an inordinate burden of debt to the child if it is not addressed at some level with deliberate parental consideration.
While it may be a while before either party is able to resume setting aside money for investments, this is another important use of cash. To rebuild wealth after divorce is an extraordinary effort since half of what was once held is now no longer in the possession of either party.
Wealth accumulation is not only to have the funds available for post-divorce living expenses, but rather to have financial security for the future. If one-half of the retirement funds are no longer accessible because they have been awarded to the other spouse, there is a need to rebuild funds for use in retirement that is now lasting upwards of 30 years or more.
The standard of living post-divorce is typically depressed for a few years but can be somewhat restored with conscious and diligent efforts to grow assets. Ex-spouses may never regain the standard of living to which they had been accustomed, but they may approach a more financially secure future by investing and having those funds to rely upon.
Often, people are unable to adhere to a strict budget no matter what type of budgeting system is used.
Instead, a better approach may be one of cash flow. Understanding where the money is flowing out and how to improve upon the money that flows in, is an easier approach to managing money on a regular basis. It is important to curtail any discretionary/unnecessary expenses by identifying those expenses and selecting a few to start with to reduce or restrict to a monthly cap. Perhaps setting certain limits on entertainment or eating out lowers unnecessary cash outflow and the amount saved from those expenses can immediately be redirected to build the emergency fund.
How do you immediately redirect the funds? Pay yourself first. By removing the funds from those available for spending upon receipt of the funds, there is a higher probability of growing the emergency funds, retirement or investing accounts.
Directing a paycheck into a savings account and then transferring 80% to 90% of that net pay to a checking account may be the easiest way to implement a savings strategy. Of course, this assumes that the savings account is not drawn down for any reason other than the three purposes suggested above—emergency outlay, planned long-term expenditure, or investing.
While managing cash flow during divorce is difficult at best, developing a mindset about preservation of funds for specific use, helps control expenditures and makes savings more purposeful.
Note: This article is for informational purposes only and is not intended to provide either tax or legal advice. Please contact your attorney or accountant and rely on their independent research and advice for these matters.
