In collaborative divorces in College Station and Houston, we look at post divorce cash needs to help us see options for splitting investments, property, etc. Wives are fine with listing their expenses. They want to show their husbands that their needs are authentic and accurate. These husbands are glad to see that I am going to show their wives – in black and white – that they can’t keep up the spending level.

You guys don’t feel you need to do a budget. You know how much you make. Your personal spending needs are modest. She’s the one who has been spending all the money. She needs the budgeting, not you.

Bingo. There’s the mistake. You need to let her see your living expenses. They may be modest, but they are not as modest as you think. In my experience, people consistently and reliably underestimate their expenses by at least 50%, many times 100%.

I worked with a couple a few years ago. The husband wanted me to work with his wife on her expenses. He told his attorney we didn’t need to look at his expenses. He said he made enough money that he was going to be just fine. He said he had modest expenses. We got well into the collaborative divorce process when he started to put his own numbers on a spreadsheet. He stayed awake that night thinking that he was offering a settlement he couldn’t afford.

The next morning, I showed him that he wasn’t worried enough. He was underestimating his living expenses. The divorce went on pause while I nailed down his true expenses. He backed off his settlement offer. You can imagine how well that went over with his wife and her attorney.  After all, he had been saying for months that his expenses were modest. His mistake and the aftermath of it slowed down that divorce by about three months.

Guys, you need to show your living expenses early in the collaborative divorce process. You need to show, in black and white, that you are not an endlessly deep pocket. Listing accurate living expense is time consuming and boring. If you don’t want to do it yourself, let your financial neutral do it. Be accurate. Be honest. Don’t guess.

#1 If your bank and credit card statements include expenses for people who won’t be in your household next year, such as soon-to-be-ex-spouses, you need to avoid listing those expenses. Either estimate the costs that are only yours or tag the ones you know are not yours and cross them off.

#2 How do you estimate only yours when the costs on the statements are for both of you? Example:  Look at your monthly grocery costs. Think about who eats at home the most. If there are just two of you, allocate more than 50% of the grocery bill to that person. If there are more than two of you, estimate what percentage each person consumes. Subtract out the amount that is for the person who will not be in your future household. Do this for all expenses.

#3 If you think you are going to live in a different place after your divorce, use new information for certain household expenses. Use your current housing expenses as a springboard to your estimated future expenses. Example: Your cable internet bill may not change, but your yard care costs could.

#4 If you know you are going to move but you don’t know where yet, do some research and, aackk!, guess a little.  Find homes or apartments that look like a possible option for you. Ask the landlord for the annual utility costs. Find people who live in similar places and ask them about their annual lawn care costs.

I have created a good spreadsheet for budgeting. If you want a copy, send me an email with the words “Budget Spreadsheet” in the subject line. I’ll send you one – free.

Here are some tips to correctly figure out your cash flow needs whether during or after your divorce or even if you are not getting a divorce.

#1 Create a list of 12 months of expenses. You can get the number for monthly expenses by dividing that by 12. Always start with a whole year to capture everything.

#2  Your list needs to include expenses that repeat every month, items that repeat only a few times a year, items that occur only once a year and  items that occur only once every few years.

#3  Get copies an entire year’s worth of all your bank statements and credit cards. Use every item to add up your expenses in various categories.  This is a long and tedious task. But it results in the most accurate information.

#4  If tip #3 made you shout “No Way!” then take the dangerous short cut and use 3 months of statements. But know your risks. You will multiply your monthly expenses by 4 to get a full year. Watch out for those twice a year expenses that fall into those 3 months you chose. Don’t multiply them by 4. I had a client who did that and her budget ended up way, way too high.

#5  If you use less than 12 months of data, comb through your statements and find the expenses that did not fall into those 3 months you chose. Add those missing costs in.

#6  Remember to budget an amount for monthly savings. Stuff breaks, stuff falls apart. You will need that savings to avoid charging car repairs on your credit cards.

I have created a good spreadsheet for this exercise. If you want a copy, send me an email with the words “Budget Spreadsheet” in the subject line. I’ll send you one – free.

Glossary moment:

Monied spouse = the spouse who controls the money, investments, income. He/she has the bank statements, credit card statements, investment statements. He/she established or was given control over the finances early in the marriage for whatever the reasons.

Non-monied spouse = the spouse who has not participated in the family finances. She/he has not seen the statements and has signed but not read the tax return. Typically this spouse has not asked questions.

Note: In any partnership, there is a division of duties. Marriage is a partnership. Early in the marriage, couples divide the duties. I am not judging this arrangement, but I wish more Americans were financially literate.

So long as the monied spouse is doing the right thing, this can work well for a very long time. But, if this couple finds themselves in divorce, it creates some interesting aspects to the divorce process.

In the beginning of the case, when I start to gather financial information, the monied spouse is laden with all the financial homework. During a divorce, everyone is living under stress at home and at work. Piling this homework on top causes more stress and is time consuming for the monied spouse. One such spouse called this homework phase his “other job”.

The longer it takes the monied spouse to gather all the required documents, the longer the divorce will drag on. When this spouse is particularly eager to get to the end of the marriage, the irony is that his/her own inaction can be the cause of the delay.

This is the flip side of having control of the family finances.

Financial issues is one of the top two reasons couples divorce. (The other is lack of communication.) Differences in spending habits is one of the most common types of incompatible financial attitudes. And money is very difficult for many couples to talk about. So there is the double whammy of financial issues and lack of communication.

I have seen a lot of marriages tipped to divorce because of money and debt. Those couples who have chosen to divorce in the traditional litigated pattern have fared the worst. The costs of those divorces were substantially greater than the collaborative divorces of similar circumstances.

When it comes to divorcing a spendthrift spouse, the best divorce method is the collaborative law process. In this process, as the financial professional, I am usually asked to educate the spendthrift spouse about cash flow and budgeting. The couple gives me their bank statements and credit card statements for a period of time no less than three months. I pull together an accurate, detailed picture of their expenses. They are always surprised. Everyone thinks they spend less than they actually do. The spendthrift spouse and I work together to create a cash flow plan that works in their unique living situation. The spouse chooses where to cut back on spending. This is the crucial buy-in that assures the new budget commitment. It also reduces the chances that this spouse will boomerang back to the other spouse in future years to ask for more money.

Budgeting is one of the foundations of financial literacy. The AICPA (American Institute of Certified Public Accountants) and the TSCPA (Texas Society of CPAs) have been providing educational tools on financial literacy for years. You can read more about these at http://tiny.cc/sk2zz

In a divorce, the amount to be divided is the equity amount. However, the equity amount does not take into consideration the selling costs or the fix-up costs. So, when you are trying to calculate how much money you can have after the house is sold, you need to take the value and subtract from that the debt, the fix-up costs and the selling costs.

If you call your mortgage lender to ask about the outstanding balance on the debt, you can get two numbers. One is the principal amount outstanding and the other is the payoff amount. The former includes any interest due. If you are current on your payments, just use the principal amount. It is simpler. Keep in mind that every day the payoff amount will change due to the interest on the loan. And every time you make a loan payment, both the principal outstanding and the payoff amounts will change.

Check for liens on the property. You can have tax liens or mechanic’s liens on your property without your knowledge. To find out about liens, you can hire a title company to do a search or you can go to your county records office where your deed is recorded.

Example: The balance in a bank account is not subject to income tax upon withdrawal. But the contents of a traditional IRA or 401(k) account will be subject to income tax upon withdrawal. In this example, to tax effect the retirement account is to attempt to compare apples to apples.

However, the tricky part comes in with the calculation of the future taxes on the retirement account.

Shall we assume the retirement account is drained and taxed at the time of divorce? I think not, since that is usually unlikely. Shall we assume the retirement account is drained and taxed when one spouse retires? Which spouse? And when will that be…. for certain? At what tax rate shall we tax the retirement account withdrawals? What will the tax rates be at that point in the future? What deductions and credits will be used by the spouse (which spouse?) at that future point?

If we are all in an agreeable mood, we could agree on some assumptions. But those assumptions could be wildly inaccurate when the future arrives.

The discussion over whether selling costs should be deducted can be a lively one. Couples talk about the likelihood of actually selling the house soon. After all, where do you draw the line on timing? If he/she intends to sell the house within 6 months, then they get to deduct the selling costs now? What if he/she has a change of heart and decides not to sell the house after all? What if he/she plans to sell the house in 4 years after Johnny has gone off to college?

Then there is the discussion of how much are selling costs? Are they only the real estate agent’s commission? Are they all the costs to sell (whatever those are in your geographical area). Do they include fixing up the house, such as repairs and painting? Then there is the differing opinion about whether painting the living room will produce a higher selling price anyway.

I don’t have an answer here. Just issues to consider. Every couple deals with this in their own unique manner.

1. Guess. Some couples just want to guess on the value and they actually agree to that. This amazes me. But, I have to admit, it is cheap. However, I worry that the guestimate is materially inaccurate.

2. Use the property tax value. Here, the market value of the house might be understated. However, I have seen some areas where the property tax value is very close to an appraised value.

3. Get a realtor to estimate the sales value. The risk here is that the realtor will provide an asking price, not a sales value. The asking price will overstate the value.

4. Get a real appraisal. This is the method I favor the most, despite the cost. I like this one best because I feel the parties will be less likely to regret the choice of valuation method if they hire an appraiser. The cost in my general area of Texas ranges from $300 to $700.

If this is a litigated case, there might be two appraisers or realtors because each party hires their own appraiser. But if this is a collaborative case, the parties hire an agreed upon neutral appraiser and agree ahead of time to accept the value. The collaborative attorneys or the collaborative neutral financial professional usually can provide a name or two of neutral appraisers.

Start with getting the fair market value of the vehicles. You can find that on the internet at a site such as Kelley Blue Book (www.kbbcom) or NADA (www.NADAGuides.com). Be sure to value all vehicles in the same manner. Either both at trade-in or both at private sale prices. I prefer the latter.

There can be some minor complications with vehicles.

Vehicle driven by a minor. In this case, one of the parents will need to keep this vehicle titled in their name. Hopefully, the couple can come to an agreement about this. Be sure to consider that the titled owner will need to have auto insurance on the vehicle.

Vintage vehicle in the garage. Sometimes one cannot find a fair market value of a vintage vehicle because it is not truly vintage. In this case, the couple is wise to come to an arbitrary agreed upon value, allocate the vehicle to one party and move on with other decisions.

Vehicles with interesting debt. Once in a while, a couple will finance an vehicle through a second mortgage on the home. This can get sticky when one party intends to keep the vehicle and the other party intends to keep the home. In this situation, the couple needs to look for an offsetting asset. The party keeping the home (and the vehicle debt) would get an asset to offset the amount of the debt. Presumably, that party could cash out the asset and pay of the vehicle portion of the second mortgage.