Building a Budget - Making Sense of Your Expenses

The cash flow analysis focuses on the foundational question – Do you make enough income to meet your reasonable budget? In order to sufficiently answer this question, you need to thoroughly examine your financial need and create a comprehensive budget. This budget should be realistic and complete.  It should be future-focused outlining what your financial needs will be moving forward in a separate home and with all your potential individual expenses outlined.  This includes expenses for yourself and for children if you have them.

Building a Budget Can be Challenging

This can sometimes feel like an overwhelming exercise. If you haven’t tracked your expenses historically or if you are not particularly good at managing your day-to-day finances, it can be especially tough. It’s okay to pause and take some time to work through this process.  Know that people often come at this analysis from different perspectives.  You may still be living with your spouse and have not considered any separate financial scenarios. You may have your own source of income that contributes to or sustains the household income or that may not be the case. You may have a clear understanding of the expenses needed moving forward or that may be an area you need to learn more about. Regardless of your historical role and your level of financial awareness to date, you will be able to create a comprehensive and realistic budget.  

Think Ahead

As you think about your expenses, for divorce purposes, you want to create a budget that is future-focused – it should outline your anticipated expenses.  While your historical spending may provide some guidance, the final numbers should realistically estimate what you expect to need moving forward. Once the divorce is complete and you are on your own, what will your financial need look like?  How much will you need to make things work? Some future expenses may be easy to estimate.  For example, your car payment is likely to be the same after the divorce as it was during the marriage.  But your housing expenses will likely change.  Some expenses may need to be separated out – like a shared cell phone plan may need to be separated out into two plans. You may need to do some research to work through all the elements of a comprehensive budget.

Common Processes for Budgeting

There are a few common ways that people go about building a budget.

• First, if you have a really good understanding of your monthly expenses, you may be able to easily pull a budget together – go for it!  A small number of people can outline a budget without research or historical information – you just may have a good sense of what you anticipate spending in the future.
• Second, historical information can be used to estimate future expenses. If you track your expenses in an App or some other format, this is a good place to start. If you don’t track expenses, often your credit card company can provide a summary of categories of spending for a specified period of time.  You can also go through spending by hand and review bank accounts and credit card bills to categorize past expenses. If you look at 6-12 months of historical spending, you can then often average out the categorical expenses to determine how much you typically spend. Once you know what you used to spend, then you need to determine how you much of the historical spending would be attributed to you alone moving forward. Sometimes historical spending categories, like gas or groceries, can simply be divided in half assuming you will each spend half as much moving forward. Other expenses, like auto insurance, may actually cost each of you more than half once separated so you will need to do some research.
• Finally, research will likely be needed in some categories. You should go look at houses or apartments to determine what your home-related expenses will be. Call your insurance broker to find out how much individual auto insurance policies will cost and find out how much individual cell phone plans will be. Some expense categories can be easily researched and others may need educated guesses.

Some clients work together to build budgets for each of you and other times you may be working through the budgeting process independently.  Either way, you want the budget to be realistic and reasonable in light of how you lived during the marriage.  For the first draft of a budget for this analysis, you should have reasonable expenses that are not inflated above spending during the marriage.  Later in the analysis, once you are comparing your budgets against income, you may need to cut back on spending but the first budget should be in line with the standard of living during the marriage.  

Kids' Expenses

If you have kids, there are two types of expenses you want to include in your budget.  First, there are inherent kids’ expenses that are built into your individual budget. For example, you will need a bigger house and you will buy more groceries because you have children.  But you don’t typically separate out these expenses and think about “kids’ groceries” and “your groceries” – they are just the total groceries for your home.  You should include these inherent kids’ expenses in your individual budget and make sure your numbers include these expenses for both you and the kids for the time they are with you. On the other hand, direct kids’ expenses can be separated out and are clearly only for the children.  Clothes, daycare, extra-curricular activities and school expenses are examples of direct expenses for children that should be separately budgeted.  Because these direct expenses are not built into your individual budget, they should be looked at separately and may be addressed differently than your general needs.

You can find a Budget Template (both PDF and Excel versions) on PartWise that should help you navigate this process. But let’s walk through the specific categories of expenses and some details to keep in mind.

Fixed Costs

Fixed costs are essential living expenses that stay relatively stable month-to-month and annually. There are four main categories of fixed expenses.

1. Housing. The budget typically starts with your housing expenses – everything related to where you live. If you have a mortgage, include the monthly repayment amount including principal and interest. Also include your property taxes and homeowners’ insurance (be careful – they may be escrowed as part of your monthly payment so make sure you don’t double count this expense). For renters, list your rent and any associated costs like maintenance fees or association costs. If you don’t know where you will be living after divorce, include estimates by researching and making your best guess. Next outline all utility bills, including electricity, water, gas, internet, cell phone and any other recurring services.
2. Transportation. Map out the costs you anticipate for your car payment or lease, monthly gas, parking or bus costs, auto insurance, licensing/registration and maintenance or repairs.  Some of these numbers are probably easily ascertainable (like your payment amount) and others may need to be estimated (like maintenance/repair costs).  Think about how old your car is and if extra maintenance is expected as the car ages.  If you don’t have a regular car payment, consider adding in car savings if you anticipate a purchase in the next few years.
3. Medical/Dental Costs. You should account for all your medical dental and vision insurance premiums and all direct expenses you pay towards your medical/dental care. Look at your historical out-of-pocket medical and dental expenses to try and estimate your budget moving forward. These expenses include co-pays, out-of pocket expenses towards your deductible, counseling, vision, prescriptions, and orthodontia.  This can be a tough area to estimate because there can be unforeseen circumstances that can cause substantial financial need in this area. It helps to research policies available to you and be conservative in your estimates building in some cushion if there are unexpected medical issues.
4. Debt Payments. Unless you have a plan to pay off your debts in the divorce, you should include all regular debt payments in your budget, like outstanding credit card debt or student loan payments. If you have any outstanding personal loans, you should include those payments in the budget as well. Think about the timing of these debts and when they may be paid off allowing for a decrease in your budget when these payments are no longer require.

*Note that medical, dental and insurance premiums are often employer provided and paid with pre-tax dollars out of your paycheck.  You do not want to double count this expense.  If you include it in your monthly budget, then it should NOT be included as a deduction to your income.  It’s most common to remove the premiums from your budget if they are automatically deducted from your paycheck and then reduce your income for cash flow purposes.  This is discussed in more detail in the next module Income in Cash Flow.

Variable Costs/Discretionary

Variable costs or discretionary expenses are more variable and potentially more controllable. They may be irregular and hard to plan for.  If you don’t have enough money coming in, you can sometimes decrease spending in these categories if needed. Because these expenses are not always consistent, it can be hard to budget for them.  You often need to look at what you spend over a period of time, like 6 or 12 months, and then average them to find monthly costs. Do your best to try and map out your monthly variable expenses because you need to plan for them.  For your first budget draft, you should try and include everything and find averages that seem reasonable in how you have spent during the marriage.  

Groceries/Household Expenses/Dining Out. Categorize your grocery spending separate from eating out, which forms a variable cost depending on your consumption patterns. This includes food for the home, household supplies, and any other essentials purchased regularly. Some people add a general “Amazon” or “Target” expense in this category for general household purchases that happen regularly.

Other categories of Variable Expenses.

• Clothes
• Haircuts/personal care (like facials, nails, massage, etc.)
• Dry cleaning/tailor
• Gifts for holidays and birthdays
• Pet expenses
• Religious obligations
• Charitable contributions
• Tax Preparation
• Life Insurance or disability insurance

Entertainment.Thinking through what you do for entertainment and hobbies can be difficult. Think about memberships/clubs you might want to continue. Identify hobbies (like knitting, collecting, or music lessons) and sports/physical activities (like golf, yoga or cross-country skiing).  Think about entertainment that you attend, such as movies or theater and then in-home entertainment, like subscription services (Netflix, Prime, subscription boxes, etc.).  And then do you ever attend sporting events or big ticket concerts?  Do you have season tickets to anything?  While all these costs can fluctuate, acknowledging them helps in managing your non-essential expenses and planning your overall cash flow moving forward.

Travel. It is often best to estimate travel by thinking about your regular travel routines.  Think about when you usually travel in a given year and where you go. Think about flight costs and/or gas if you drive. There could be rental car costs and accommodations at a hotel or rental.  Some people regularly travel to see family or spend certain holidays in a particular location. Others may do a regular camping trip or weekend away.  Some people take bigger trips less often while others may travel often.  By thinking about your regular travel experiences and the past costs, you can try and map out what you anticipate spending in a given year moving forward.  Keep in mind that past travel expense may be for a family or you and your spouse – moving forward you may be estimating travel expenses for just you or you and kids.

Savings. If you have traditionally saved, it is important to include savings in your budget.  Personal savings and retirement savings are the most common category of savings included in budgets, but you may have other categories like college savings if you have kids or savings for a particular event, like a wedding. Whatever you have done in the past may be a good indicator of what to plan on moving forward. (Be careful not to double count retirement in your budget and as a deduction to your income).

Kids' Expenses

If you have children, their expenses need to be included in the budgeting process as well.  The inherent expenses will be in your budget, like groceries.  The groceries you buy are not separate for you and the kids – they are more general “household” expenses. But anything you can specifically identify as an expense for your child should be separated out.  These direct expenses include things like clothes, extra-curricular activities, school-related expenses, after-school care, summer camps, etc. You typically want to budget all kids’ expenses over a year even if you only incur expenses during certain times of the year.  For example, you incur most of your summer camp expenses on March-April when you are signing kids up for camp.  So if you spend about $3,600 a year on summer camp, you should budget $300 a month, knowing that a majority of that spending will be in the Spring.  

We have provided a template budget for you to work through.  By categorizing your expenses thoughtfully and including often-overlooked items, you empower yourself to make informed financial decisions, setting the stage for a more secure and stable post-divorce financial future. By understanding your financial landscape, making informed decisions, and proactively managing your resources, you pave the way for a more secure and empowered financial future.

Let’s look at incomes next.