Getting Your Financial House in Order During Divorce

About a month ago, I was asked by to write a chapter for an upcoming book on divorce. I’ll announce when the book comes out, but I thought I’d provide a draft of the chapter text. Enjoy.

Let’s take a moment and have an honest discussion about money and divorce.

How Money Problems Lead to Divorce

To start, money fights is one of the most common reasons for divorce in America. It might be that a couple doesn’t have enough money to pay bills, so they fight. (Being poor is super stressful.) It might be that one spouse committed financial infidelity and hid credit card spending for years. And it might be that one person tries to save money, but the other simply won’t stop spending every penny.

Whatever the underlying money problems might be, the effects are the same: stress, fights, and, if not corrected, divorce.

So, is it a given that if you have money problems you’ll get divorced? No, but the likelihood goes way up. You can’t expect to play with fire and not get burned.

The Situation Most of our Clients Find Themselves in When they Come to us for Help

Since we’re divorce attorneys, we tend to see people at the most difficult time of their lives. Their marriages are ending and their families are breaking apart. They’re scared. They worry about not having enough money, and about losing friends.

As you can imagine from what I’ve said so far, we often serve people who don’t have enough money because there’s almost never enough to go around in divorce.

The reason for this is because (1) people with money problems tend to divorce, and (2) you use more resources when you get divorced because you give up economies of scale and specialization.

More resources means more money, and since there wasn’t enough money to begin with, there certainly isn’t enough during divorce. You see, most people live right up against their financial precipice, so there’s no slack in their money system. One thing goes wrong — and divorce definitely meets the criteria — and they’re over the edge financially.

In fact, many of our clients don’t know the basics about their financial situations. They usually have a general sense things aren’t going well, but they don’t know specifics.

For example, they don’t know the full extent of their debts. I can’t tell you how many times I’ve heard someone respond to the prompt “Tell me about your debt,” with the following: “I’m not sure. I know we have credit card debt, but I don’t know how much. Maybe $10,000 or something like that. Then there are the cars, but I’m not sure how much we owe on those. And the house, I think we owe maybe $200,000 on it. I just don’t know. My husband took care of the finances.”

Many people don’t even know what they make per month at their jobs, much less what their spouse makes at his or her job. They’ve never had to think about the answer, I guess, because they make ends meet by using credit cards.

When People Come to You for Help, What Plan Do You Give them for Getting their Financial House in Order?

When people come to us, they don’t know what to do. They’re lives are falling apart and they need a plan.

We provide our clients with three different plans. First is a legal plan to help them accomplish their goals in divorce (e.g., obtain primary physical custody of the children). Second is a plan to help them and their families deal with divorce on an emotional level. Third is a plan to help them get their financial houses in order.

What I’m about to share with you is our seven-step plan for helping our clients get their financial houses in order.

Step #1: Determine Your Yearly Family Income

I’m amazed at the amount of people who don’t know what their household income is.

To get a handle on your money, you need to start by laying out every source of income that comes in to your family every month and every year.

For an average family, this process is straightforward. You look up your pay stubs and see what your yearly salary is, and then you do the same for your spouse’s pay.

Sometimes, though, a family may receive income from many different sources, like: rental properties, trust fund disbursements, investment dividends, stock options, royalties, child support payments, alimony from a prior marriage, etc.

Whatever your family’s situation, and whatever your incomes sources, lay them all out so you know exactly what the source is and exactly what the amounts are.

This is the foundation for your financial house.

Step #2: Inventory Your Assets and Debts

Immediately after figuring out your income situation, sit down and do a deep dive in to your assets and debts.

Before I go on, I want to define what I mean by “asset” and “debt.” An asset is anything you own free and clear. A debt is anything you make a payment on. So, if you own a home, but you are making payments on the mortgage, then that home is a debt. It only becomes an asset after you’ve paid it off in full.

With those definitions in mind, start by inventorying every asset you have. Make a spreadsheet and write it all down. Do your best to assign values to each asset. For example, if one of your assets is a car, find the value on Kelly Blue Book. Total everything up at the end so you can compare it to your total debts.

(Note: when it comes to personal property items like clothes, jewelry, kitchen appliances, it’s okay to use categories and estimate values. It takes too much time to value every single item.)

After inventorying your assets, do the same thing for your debts. I’m talking every credit card, every car payment, every mortgage, everything you owe money on. Get current balances so you know what your debts are right now.

When you’ve pieced together all your debts, subtract them from your total assets. This figure will give you your total net worth — keep in mind that you might have a negative net worth. To be honest, your total net worth, while interesting, is not nearly as important as having put together an item-by-item asset and debt list.

There is real power in knowing exactly what you have and exactly what you owe.

Step #3: Determine Your Average Monthly Expenditures when You Separated from Your Spouse

One very important number you will use again and again during divorce is your average monthly household expenditures at the time of separation. (Separation is usually the date you and your spouse stopped living under the same roof.)

You’ll use this number to calculate alimony, as well as asset and debt allocations. It can also sometimes be used as evidence regarding child support obligations. It is, perhaps, the most important single number in a divorce case.

To do this correctly, you will need to figure out what you normally spent per month on food, mortgage, gas, utilities, and everything else. It’s no easy task and it can take a long time, but, like I said before, this is an incredibly important number you’ll use throughout your divorce.

So, take your time and get it right.

Step #4: Put Together a Bare-Bones Budget

This budget is completely different from the step #3 budget. The step #3 budget is a representation of your standard of living during the marriage. This budget is all about figuring out the lowest amount you can live on if you had to.

The reason I have our clients put together this budget is because there’s almost never enough money to go around during divorce. Our people have to face the real possibility there won’t be enough money to go around, even if you receive child support and alimony.

In the end, if you know what you can survive on, it helps relieve stress and create a realistic financial plan for your family’s future.

(Hint: I use everydollar.com to put together our family budget. It’s incredibly easy to use and takes only minutes per month. Just keep in mind that to build an accurate bare-bones budget, you need to account for every single dollar coming in andgoing out. This will take time in the beginning, but you’ll get the gist of it within a couple months, and then it’ll become second nature.)

Budgeting Success Story

As part of our commitment to helping our clients succeed with money during and after divorce, we offer a free budgeting and finance 101 class. Clients can come as often as they would like, and we encourage them to attend as much as they need to catch the vision.

I remember one lady — let’s call her Lois because I’ve been watching Superman lately — who came in for a Roadmap and Recovery Session.  Lois ended up not hiring us, instead she hired an attorney she went to high school with, but wanted to attend the budgeting and finance 101 class we offer.

Lois needed some help with budgeting because she, like many, let her spouse handle the finances. She had never put together a monthly budget before because she never had to. Now, everything had changed and she had to take control of her finances, otherwise it wouldn’t be pretty.

During Lois’s class, we discussed family budgeting and how to pay off debt. She took to the training like a fish to water. I explained the system my family and I use to budget, which cut our family spending by at least 25%. We talked envelopes and cash storage systems. We really got lost in the weeds; it was great.

After the class, Lois went home and implemented the system. She’s had good success with it ever since. In fact, Lois still emails me every few weeks to ask questions about the system and how to run it more effectively.

Lois is succeeding with money during divorce, which means she’ll be successful after divorce. And it all started with her monthly budget.

Step #5: Create an emergency fund

As you go through this journey of getting your financial house in order during and after divorce, you’ll need an emergency fund.

An emergency fund is nothing more than some money you set aside for, you guessed it, emergencies. Stuff happens. Bad stuff happens. And when it does, you need some cushion to pay for it.

In our experience, if you don’t have an emergency fund, you tend to get sidetracked and off the plan. And when you get off the plan, inertia tells you to stay off the plan. That ain’t good.

Start with an emergency fund of $1000 if you can. It’s that just too much, start with $500 and move up to $1000. The point is to put money aside so you can stay on the plan.

Step #6: Pay Off Your Debt

This step might seem ridiculous in the context of going through a divorce. I mean, how is anyone supposed to pay off their debt during divorce?

Look, I’m not going to lie, paying off debt in the best of times is tough (or we tell ourselves it is), and it’s super tough during divorce. That said, I’ve seen lots of people pay off their divorce debts.

The nice thing about our system is we set the stage for paying off debt in steps 2 and 4. When you know your debts, and you have a bare-bones budget follow, you will almost certainly have slack in your system that you can use to start paying off debt.

But which debt should you pay off first?

I suggest, as does Dave Ramsey in his fantastic book The Total Money Makeover, that you list your debts smallest to largest (smallest principal due to largest principal due), and then you pay the smallest debt first, working your way up to your largest debt.

(Hint: one thing I’ve seen many people going through divorce do to jumpstart their debt payments is use their share of the equity from the sale of the marital home to pay off credit cards and the like. I think this is an incredibly good idea since getting out of debt after divorce is so much better than buying a new home and burying yourself and your family in new debt.)

So, why is it important to pay off debt?

First, it’s important because paying off debt is almost always the quickest way to build wealth. When you don’t have interest payments, you can invest your money and start accumulating wealth. If you have personal debt, however, that debt weighs you down and takes away from your ability to create wealth.

Second, it decreases stress. Debt creates stress. I know because I had a fair amount of debt after law school, including my wife’s masters and doctorate degress. It weighed on me every day. I lost sleep because of it and carried tension in my jaw because of it. The day we paid off our debt, I felt that stress leave my body and mind. It was wonderful. That’s what paying off debt will do for you.

Third, marital debt represents an anchor weighing you down. In a very real way, getting rid of marital debt represents you moving on from your divorce and leaving it in your past. You’ll be free to create a new life without debt or your divorce holding you back.

Step #7: Invest

Once you’ve paid off your debt, it’s time to start investing heavily and creating serious wealth for you and your family.

Now, I’m not an investment guru, and I don’t pretend to be one, so I’m not going to tell you which stocks to pick to hit it big. Instead, what I will do is give some basic guidelines that have been helpful to me personally and our clients generally.

First: invest something every month.

Investing needs to become a habit, and the only way to create a habit is by doing something over and over and over again. Even if you can only invest $25 per month, do it. What you’ll find is that $25 will turn in to $50, which will turn in to $100, and so on. Get started. Create that investing inertia. That inertia will grow over time.

Second: automate your investing.

Here’s the easiest say to automate your investments: have money automatically removed from your paycheck and put in your investment account. You can easily do this with your company’s 401(k) for example. The reason automation is so powerful is you never see the money in your account, so you don’t miss it.

Third: Keep it simple.

People think that investing is some incredibly complicated endeavor. This fear of the complicated paralyzes people in to not taking action, so they end up parking their money in savings, which is about the worst thing you can do. Investing doesn’t have to be complicated. You can find very good, straightforward investing strategies in a lot of places.

For example, investing in index funds is a simple solution that helps keep investment costs down. An index fund is a type of mutual fund that tries to mirror a part of the stock market. For example, an S&P 500 index fund would try to mirror the S&P 500, so your investment returns would be about the same as the total S&P 500. These funds generally have very low costs, which is good because costs tend to eat up your investment returns over time.

Another option for keeping things simple is to use what’s called a robo-advisor. You can think of a robo-advisor is an online investment advisor who primarily uses computer algorithms to make investment decisions. Wealthfront and Betterment are the biggest robo-advisors. They’re incredibly easy to use, and they individualize your investments depending on how much risk you want to take. They also automate your entire investing process, which makes it more likely you’ll invest month in and month out. Additionally, a robo-advisor’s fees are low compared to traditional investment advisor fees.

Fourth: investing is a marathon, not a sprint.

“Get rich quick” is a euphemism for, “Lose all your money fast.”

If you want to grow serious wealth for you and your family, you have to think of the investing process as a marathon. Of course, a marathon lasts only a few hours — well, if you’re like me it might last a few days; running is the worst of human activities — but investing lasts a few decades. It’s all about discipline and vision.

Create a simple investment plan. Automate the system. Stick with that system until you and your family have created serious wealth.

That’s how you do it.

That’s It; That’s our Seven-Step Plan to Get Your Financial House in Order

When people come to us for help navigating divorce, these seven steps are the plan we give them for getting their financial house in order.

Again, implementing this plan takes effort and thought. I can tell you, though, if you follow these steps, you’ll find yourself head and shoulders above almost everyone else. You’ll change your family forever and build serious wealth for you and your children.

The Major, Unforeseen Pitfall our Clients Face when Implementing our Seven-Step Plan

Any path to success will have its twists and turns. Putting your financial house in order during divorce is no different.

The major, unforeseen pitfall we’ve seen when people implement our plan is that no matter how good your budget, no matter how well you plan and map things out, emergencies happen. Cars break down, kids go the ER, whatever.

Now, this sort of thing isn’t completely unforeseen, right? We have an emergency fund for this very reason. Still, you’ll be surprised how often stuff happens and how often you may need to dip in to your emergency fund as you get your financial house in order.

Again, the purpose of the emergency fund is to build cushion in to your financial system. If you don’t have that cushion, you’re way more likely to get off track with your budget and not get back on the plan.

So, emergency fund. Start with $1000 if at all possible. That’s a pretty high number for someone getting divorced, I know, so maybe start with $500, then move up to $1000.

What Is the Role of Credit in Getting Your Financial House in Order During Divorce?

I have been asked more than once what the role of credit should be in getting your financial house in order during divorce.

When people ask this question, they’re really asking, “How much debt should I go in during divorce?”

As you can imagine, I’m not a fan of credit because credit is just a way of saying debt. I don’t like debt at all. I think debt allows people to live beyond their means, make poor decisions, and then pay for them for years. It increases stress levels and has contributed to more marital breakups that I can count. It’s bad news.

With that in mind, I think the priority of anyone going through a divorce should be (1) to not use debt if possible, and (2) to get out of debt as quickly as possible.

Regarding credit scores, I don’t really worry about them. I want people to focus on never using credit. I want them to pay off credit cards, lines of credit, mortgages, and all of these other debts that have caused them so much pain and stress over the years.

Focus on getting unshackled from debt, not on improving a score that will allow you to get more shackled. Only then can you build real wealth for you and your family.

What’s the Best Way to Pay for a Divorce Attorney?

With all this talk about paying off debt and getting your financial house in order during divorce, one almost inevitable question comes up: how should someone pay for a divorce attorney?

Divorce attorneys are expensive. Sure, you may find a cheap one, but is that really how you want to go? Do you find the cheapest knee surgeon for your replacement surgery, or do you find the best because it’s important to have the best? Same principle applies with divorce attorneys. Find the best attorney you’re comfortable with and spend the money necessary to secure your future and your family’s future.

And, back to the question: how do you pay for that attorney?

If there’s any way to pay cash for the attorney (i.e., not go in to debt), do that. Here are a few examples of how our clients have paid their bills without incurring debt.

Lean on family for support. Talk to everyone you can and see if they will help you. It’ll be uncomfortable, yes, but if it’s your best option, do it. Moms and dads are the most likely to help.

Sell a car or some other high-ticket item(s). It’s important to keep in mind that (at least in Utah), money spent on a divorce attorney is marital money, so there’s really nothing wrong with selling some marital property to pay for a divorce attorney.

Use savings or cash out some investments. Nothing wrong with this. It’s better than incurring debt. I will caution you, however, about taking out a loan on your 401(k). That’s an option for many, and the loan usually has a low interest rate, but it’s still debt. If you can cash out assets instead of incurring a low-interest loan, cash out the assets.

Save up. If I’ve learned one thing since becoming a divorce attorney, it’s that most people think about divorce for a long time before actually getting divorced. This means you may have time to plan and save. Figure out what the average cost for a divorce is in your area, and save up that money. When you do, you’ll know you won’t need to go in to debt to get through divorce.

And what if those options just don’t work and you can’t get the money together to pay cash for a quality divorce attorney?

Sometimes, you just don’t have the means to pay cash. I meet with lots of people who, because of domestic violence or drug abuse, have to get divorced now. They don’t have time to save, and no family member will give them the money.

In situations like this, you have a choice. Either you go with a cheap attorney (or no attorney, depending on your situation), or you incur debt to pay for a high-quality divorce attorney. The first option leaves you and your family exposed and largely unprotected. The second provides peace of mind that you’ll be taken care of.

As much as I don’t like debt, if you find yourself in a “get divorced now” situation, I would counsel you to hire an attorney and ensure you and your family are protected.

I have met very few people who regretted spending money on a high-quality divorce attorney. I have met hundreds who regret not hiring an attorney or hiring a cheap attorney.

When they have to incur debt to pay for an attorney, most people use credit cards. I would suggest finding a lower-cost alternative if possible. A personal loan at a credit union might carry a lower interest rate. A 401(k) loan is an option. Loans from family are great as well, if you can get one. Do whatever you can to minimize your debt load.

My One, Best Piece of Advice

I’m going to wrap up soon, but I wanted to leave you with my one, best piece of advice to help you get your financial house in order.

Here it is: create a monthly budget. And I mean a real budget that accounts for every dollar coming in and going out.

This may sound simplistic, but If you create a monthly budget, you will figure out what all of your debts and assets are. You’ll figure out where you spend too much and where you can save. You can use those savings to pay off your debt, and then start investing to create wealth for you and your family.

It all starts with a good monthly budget.

Thank You

Thank you so much for taking the time to read this chapter. I hope it has added value to your life, and I hope it will help you get your financial house in order.