Carol Remy is a Certified Financial Planner, CFP®. Her professional experience is in comprehensive financial planning with a strong emphasis on life planning strategies, retirement planning and portfolio management. She is a Registered Representative and Investment Adviser Representative with LPL Financial. Carol has a genuine commitment to working with women as their lives evolve and change to help plan and protect their financial futures. She can be reached at email@example.com.
AZ asks: What is the best way to figure out my expenses?
The biggest challenge when itemizing expenses is being honest with yourself about how you spend money. The best place to start is with bank statements, reports from online bill payment systems and credit/debit card statements. Start with your largest monthly expenditures such as mortgage or rent, auto, life, health, homeowner’s insurance, auto gas and maintenance, utilities, property taxes, groceries and dining out.
Another solution is to find an online service that connects your credit cards and bank accounts. These services automatically categorize some expenses and may allow you to add your own categories. After several months you will have a good idea of your spending patterns. Remember not to overlooked expenses such as gifts and miscellaneous cash. Do you pick up coffee or a newspaper on your way to work several times a week? Do you play the lottery? Do you treat the kids to drinks on the way home from school? These miscellaneous items add up!
AZ asks: Do I need a budget?
The answer is absolutely yes! When going through a divorce, budgeting is a three step process. First there is the review of spending patterns while married. Then you must determine income and expenses while living apart. You may have additional expenses such as therapists for you and the children, in addition to temporary housing situations. These figures may be used by the court to determine your temporary alimony order. Your final budget is your plan for life after divorce. In each step, make sure you separate your expenses from your children’s expenses. And remember, the more detailed the better.
A budget starts with estimated income decreased by basic living expenses – mortgage/rent, utilities, food, property taxes and auto expenses. Your income is further decreased by discretionary expenses – clothing, dining out, entertainment, gifts and vacations.
AZ Asks: How do I deal with getting reimbursements from my ex for the kid’s expenses?
By itemizing your children’s expenses in the financial affidavit and continuing to maintain adequate records, you have some leverage for reimbursement from your spouse. Ultimately, how these expenses are handled should be defined in the divorce agreement.
AZ asks: How much money should I keep in an emergency fund?
An emergency fund should cover your basic lifestyle expenses for 6-12 months. My definition of basic lifestyle expenses is the ability to pay the bills which support essential living costs, such as mortgage, utilities, groceries, insurances and property taxes. This does not include discretionary expenses such as vacations, clothing or entertainment.
A rule of thumb is 3 months net income for a 2 income household and 6 months net income for a 1 income household. If you are retired or approaching retirement, I recommend a minimum of 12 months lifestyle expenses and an additional 6-12 months invested in a fixed income portfolio.
As an example, if you earn and live on $45,000/year and your basic lifestyle expenses are $28,000/year, you should have a minimum of $14,000 in an emergency fund.
AZ asks: How much money should I have in retirement vs. taxable accounts?
A recurring finding in my financial planning experience is that there is a tendency to maximize retirement savings and neglect savings in taxable accounts. Taxable accounts are the funds we generally use for life’s unexpected emergencies such as a major appliance replacement or home improvements such as a bathroom or kitchen renovation. An emergency fund is one “bucket” of your taxable savings. The exact proportion of retirement to non-retirement savings should be determined by a Financial Planner as it depends on your particular situation. There are advantages and disadvantages to both types of accounts.
AZ asks: Should I pay off the mortgage and credit card debt?
The answer again is situation dependent but a resounding YES if there are sufficient joint savings to pay off debt and provide sufficient cash reserves to go into this new post divorce phase of your life.