His column reminded me of the shrinkage I see in my business. Bank accounts shrink. Patience shrinks. Lifestyles shrink. What surprises me is the frequently unrealistic optimism of people in divorce.

Sure, everyone is hurt and angry and scared. But they are strangely optimistic (or blind) about their financial future. They really don’t grasp how much their financial security will shrink when they create two households from one.

Nobody likes to cut back on their lifestyle. Not even the wealthy. It’s hard to do. I have come to the conclusion that we humans have great difficulty accurately imagining negative change. We can talk about it. We can rationalize the change. But we can’t seem to feel it until it hits us between the eyes.

So, how does this relate to divorce financial planning? I recommend that if you are considering divorce, you financially pretend you already are there. First you have to figure out your post divorce cash flow. Then you have to actually live on less income for a while. Try it out for a month. Eat out less. Don’t buy those shoes. Shop for store brand items. Clip coupons. Live the shrinkage. It will make your divorce just a little bit easier to handle. You will be better prepared for financial reality.

Recently, Wall Street Journal Getting Going columnist, Karen Blumenthal, wrote an informative column, How to Wreck Your Credit Score. Karen notes, “The severe consequences underscore that you shouldn’t shrug off even an accidentally missed [mortgage] payment… Being 30 days late on a house payment – even if it is an accident – can knock 100 points off a pristine 780 credit score, moving you from qualifying for the very best interest rates to the edge of subprime territory.”

So, how bad can that be? She explains that if you have a 620 score, you would pay almost 12% on a four-year $25,000 care loan. If you have a 780 score, you would pay 5% on that same loan. The difference is almost $4,000 over the four-year loan. I’m sure you can think of something better to do with $4,000.

Where would you rather spend $4,000?

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.

One of the tricky steps is to remember to add lines for those expenses that do not occur every month. The cost of gifts is one that people frequently underestimate. To get it right, make a list of the friends and relatives you give gifts to each year. Birthday. Holiday.  And then start listing the not-so-regular gifts such as graduations, weddings, hostess gifts, dinner party gifts, etc. Remember the cost of cards, gift bags, wrapping paper and bows.

Other occasional costs are tires, auto insurance, vehicle registration, insurances, holiday decorations, holiday groceries. And the list goes on.

I have worked with hundreds of people in Houston and College Station. Most of them want to estimate their expenses. All of them underestimate the number. And, even at that, all of them have been shocked at the amount of money they spend – in their estimates. The truth is that they spend much more than they estimate. I’d say they spend about 30% to 70% more than they estimate.

The problem with estimating too low is that you will wake up one day – maybe 7 months after the divorce – and wonder why you can’t afford to pay off your credit cards each month or sock away some savings.

To get a real picture of your spending you need to haul out 12 months of credit card and bank statements. Enter each and every credit card charge and check and debit and ATM transaction in Quicken or QuickBooks. Don’t double count your credit card charges by entering credit card payments shown on your bank statements after entering the credit card charges.

Tedious? You bet. Accurate? Totally.

In my experience, living expenses are easier and more pleasantly dealt with in collaborative cases, than in traditional litigated cases. In collaborative cases, the cash flow needs are a potential agenda item at every team meeting. This ensures that both parties are addressing their cash flow needs to the extent that the family finances can handle the dual households.

There are a number of ways to handle cash flow needs during a divorce.

Divide the cash up front. This process works well when both parties have similar income levels. Each deposits their paychecks into their own bank accounts (established during the divorce if necessary) and uses that cash to fund their living expenses. When one party has a greater income than the other, funds are allocated to the less monied party on a periodic basis. In collaborative cases, the two attorneys, the neutral financial professional and the couple will discuss and conclude the appropriate amount to allocate.

Allowance. This process arises when one party makes the majority or all of the income while the couple has two households. I have seen this method work and I have seen it have problems. The problems arise when the earner spouse wants to control the non-earner spouse’s spending habits. While, I understand why one party might want to control the other’s activities (although I do not condone it), this usually results in frustration and unpleasant feelings for both parties. In my experience, the allowance method works best when both parties are realistic about their cash flow needs and neither party wishes to alter the existing spending patterns of the other.

I have seen each method work depending upon the spouses’ relationship and personalities. I have also seen each method cause problems. Sometimes one spouse wants to maintain control of the money and the spending. This is prevalent when that spouse has historically played this role. However, doing this may evolve into the situation where the non-money spouse treats the source of funds as a deep pocket without limits. Again, results depend upon personalities and communication.