Do you live on a budget? This may not have been a question that you expected a family law attorney to ask but I think it is important for any person going through a divorce to ask themselves. I think it is especially important, in many ways, for a person over the age of fifty who is going through a divorce to ask themselves.
The reason why I think it is so important is because if you haven’t worked in some time or have become acclimated to living in a double income household over a long period of time then you may have stopped budgeting years ago. Or, you may have never budgeted in your life and instead of relied on your spouse to make sure that your bills are paid, money is being saved for a rainy day and that your retirement is being invested in.
Whatever situation you find yourself in, you should start to budget during a divorce. This is good practice for you. No matter what happens in your divorce you will either go from a two household income to a one household income, or you will be losing your spouse’s income and you will have to go out into the world and find yourself a job.
With changes in incomes and changes in circumstances comes a lot of uncertainty. Do not meet that uncertainty with credit cards and loans. It is a bad idea that may feel good to you now, but will cause you pain in the long run. In your years leading up to retirement your income should be going to pay down existing debt and save for retirement. Taking on new forms of debt in your 50s and 60s is a bad idea.
That is my advice for you today. The remainder of today’s blog post from the Law Office of Bryan Fagan will also deal with advice for people in their golden years who are going through divorces in Texas. Specifically, I would like to bring to your attention some mistakes that people make in divorces that can be especially harmful for folks aged 50+.
Don’t undervalue your living expenses
If you are working then you almost certainly know when you are getting paid each month. On top of that, you almost certainly will know how much each of your paychecks will total. Even if you work irregular hours you should be able to estimate what you stand to make in any given pay period. When our well-beings are on the line our math skills tend to get pretty good. That is not typically the problem when it comes to creating a budget that you can live by.
No, the problem that most people face in conjunction with budgeting is that they do not sufficiently consider their expenses on a monthly basis. When you don’t know how much money you pay in expenses each month, it becomes much easier to lose track of the income that you earn. Once you lose track of how a few dollars here and there is spent, it becomes easier to misspend more money than that. It is a slippery slope that can end up putting you in a position where you don’t have enough money to pay your bills on a monthly basis.
That is why I encouraged you to start to budget. However, this part of today’s blog will be spent talking with you about why you need to get an accurate assessment of what the “out-go” in your home is, rather than focusing only on your income.
I will go back and note that if you have been a stay at home parent then you are in a tougher position. Not only do you lack many skills that can help you find work (due to your being outside of the workforce for years) but you also probably haven’t been the main decision maker in the house on where your household income is spent. If you need to get on the right path as far as budgeting is concerned it makes sense that you would begin to look at your household expenses first.
Your lifestyle is going to change after your divorce. Whether it means that you have to move from your home, take on a second (or first) job or severely cut back on your spending, you are likely in a position where the money you spend is going to become very important.
Before you even negotiate the final terms of your divorce you should have a good idea about what your future expenses are going to be. Plan out what you are going to pay for rent, utilities, gas for your vehicle, costs for your kids, etc. Once you have done this estimate, add $500 per month. This is where I see many people make mistakes when it comes to negotiating their divorce. They underestimate what it costs to run a household per month.
If you were the wage earner for your family for thirty years, paid all the bills and did all the budgeting then this tip probably isn’t for you. You know your way around a spreadsheet and know pretty well how to budget out monthly expenses. This tip is more for those of you who were not actively involved in the family finances and have less of an idea of how to plan and budget.
Some costs that you will have after the divorce are not in place right now. For instance, while your ex-spouse may still be responsible for providing your kids with health insurance, you may need to find your own insurance once you are removed from your spouse’s plan. This means that you will need to have a pretty good idea about what health insurance costs you on a monthly basis and should work that into your budgeted expenses.
Once you have a solid idea of what life after divorce is going to cost you, then you are in a position to better negotiate for things like child support, spousal maintenance and your slice of the community estate. Negotiating without this knowledge would be like fighting someone with one hand tied behind your back. It is a needless disadvantage that you create for yourself.
Don’t let yourself get into a position where you are cash-poor
I’ll take a second to explain what I mean by “cash-poor.” It is always helpful to have come cash available for you to use. Whether that cash is going to be used for paying your attorney, fixing up your home or paying down debt, cash is king for a reason.
Texas is a community property state. This means that assets and debts that were acquired during the course of your marriage (with some exceptions) will be divided between you and your spouse in the divorce. The significance of this in relation to our discussion today is that you are not in a position to negotiate the division of your community estate unless you know what your living expenses will be after your divorce has completed.
For instance, suppose that in the divorce you negotiate for your family home, ¾ of your spouse’s 401(k), and a portion of his pension. All of these things amount to over $1 million in value. You think that you’ve done well in your negotiation. How could it be that this method of negotiating does not work out to your advantage?
Simply put, if you are in need of cash in the time period immediately following your divorce (and you will be), this is a potentially devastating settlement for you. Let’s go through the assets you were awarded. Your family home, even if it doesn’t have a mortgage attached to it, is not an asset where you can get cash out whenever you would want. For those of you who are knowledgeable in things relating to finance, your home is an illiquid asset. This means that you cannot readily exchange the asset for cash. Your home may be worth $500,000 but it’s not like you can walk up to the mail slot and grab a twenty dollar bill for groceries. That money is locked into the home until you choose to sell it.
Next, consider that you were awarded two retirement accounts in the divorce. A 401(k) will allow you to take money out of it, but you will be penalized 10% for having done so and will have to pay taxes on the amount you take out on top of that. So, if you need money to pay your attorney’s fees or money to complete a repair to the house your 401(k) is not a great place to pull the money from. However, if you don’t have money anywhere else it may be the option that you select. You pay the cost to pull the money out. Surely not as advantageous as having cash available to you.
Finally, that pension is even trickier. Instead of having an account to draw from like you do with a 401(k) you would have to wait until your ex-spouse retires to even collect money from the pension. Technically a pension is not an account that you own. You would be paid a portion of your ex-spouse’s monthly pension payment. This, too, is an illiquid asset that is valuable but not in the short term.
I say all this to point out that it is a wise move to negotiate for some liquid assets and cash in your divorce. Do not expect to be able to just figure your budget out on the fly after your divorce. Instead, go into the divorce with the assumption that you will need to negotiate hard for everything that you can. Child support, spousal maintenance and cash are sometimes preferable to illiquid assets. If you will need time to find a job and have no savings then remember to keep an eye on your short term cash flow.
Be wary of keeping a small business after the divorce
An asset is only valuable when you can sell it for cash. If you have a house that is worth $500,000 but can’t find a buyer for it then the functional value of the home is what it provides to you in shelter each month. Otherwise, it’s not worth anything.
The same thing can be said of a small business. Suppose that you and your spouse owned a business together and he has offered to have you keep the business in exchange for allowing him to keep other assets worth the same amount of money. If you are in your mid to late 50s, then you probably want to retire at some point in the near future. Despite this, you accept the business not wanting anyone else to have the responsibility of running it. After all, it’s been your baby for a decade.
Well, the problem with that is selling a business can be quite difficult. You may have to pay someone to look around your area to find a buyer. At best you may find a person who is willing to pay for your client list, another who is willing to pay for your equipment and another who is willing to pay you for the land that you own. Otherwise, finding one buyer to purchase your entire business can be quite difficult.
Again, this is a situation where you own a valuable asset at the conclusion of your divorce, but where the value can be difficult to turn into actual dollars. When you are negotiating inside of the divorce be aware of these factors and talk to your attorney about what your options are before the end of the case.
More financial tips for 50+ divorces to be posted tomorrow
If you have any questions about the material that we posted today, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys are available six days a week to speak to you about your case and your issues. We will provide you with direct feedback about your circumstances and do our best to give you options to consider as far as your case and possible representation for you and your family.