4. SETTING UP AN UNREALISTIC HOUSEHOLD SPENDING PLAN (4th in a Series)
Whether or not you are organized, most folks tend to underestimate their actual cost of living expenses. Too much is at stake here and mistakes may lead to future bankruptcy. You’ll be “downsizing” into a one income household and you’ll need to be aware of the need to update your lifestyle as well. To regain the confidence and clarity needed for your post-divorce life, you’ll need to prepare by reviewing your current expenses and maybe getting the help and second opinion of a financial professional who can provide an experienced perspective.
You need to get this right because it has a long-lasting impact on your bottom line. You need to consider the difference between those items that are fixed and those that are variable in the short-term. And certainly as you get set to establish a second household, you’ll need to gain control over where your cash flow is going.
With the help of a financial professional you may be able to go through and find ways to economize or downsize. This is an important exercise to be sure at any time but even more critical when you are dealing with establishing a new financial life.
By going through this exercise you’ll be better prepared to find ways to fit into your budget funding for your retirement, college costs, saving for your emergency reserves and paying off debts.
A good rule of thumb for a household spending plan before and after a divorce is to set aside 10% of your after-tax income to pay yourself in the form of retirement or other savings accounts. Pay yourself first still should be a primary financial goal.
The vast majority (70% of after-tax income) should be reserved for paying your living expenses.
That leaves the remaining 20% of after-tax income. This is the buffer to help cover other issues: child support, alimony, saving for college or paying off debts.
As a guideline then you’ll be better able to make decisions that help you determine your new lifestyle. And if, for example, it comes out that by keeping the house or the timeshare or the private secondary school that you’ll end up busting the budget, then you’ll know where or how you’ll need to make adjustments.
To help organize yourself, consider the tools available as part of your free Divorce Shield plan.