The Importance of Cash Flow in Divorce

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By Diane C Pappas, CDFA™
Solutions For Divorce LLC
www.SolutionsForDivorce.com

One of the first things your attorney may ask you to do in the divorce process is to fill out a financial statement, often referred to as the Rule 401 financial statement. (MA Financial Statement Long Form). The financial statement is the most important document that the court receives in your case and therefore great care must be taken when filling it out. Since the financial statement is used to summarize your financial situation and provide a narrative tool to tell your story, it needs to be accurate, especially when it comes to your living expenses. Once your living expenses and your current and future sources of income are identified, you can determine cash flow.

Cash flow is indicative of your ability to maintain a lifestyle post-divorce, similar to that enjoyed during your marriage.

What Is Cash Flow?

Cash flow is the money available to pay your expenses. If your income from a job or support (child support and/or alimony), minus your living expenses and taxes leaves you with money, then you have a positive cash flow. If your income and support is less than your expenses and taxes, you will have a negative cash flow. A positive cash flow means you are living within your means. A negative cash flow means you are either depleting your assets or you are living on credit. While you may be able to sustain a negative cash flow for a few months, one is typically unable to sustain a negative cash flow for extended periods of time. Achieving a positive cash flow in divorce becomes more difficult as there are now two households to support, on the same income that once supported one.

Why is Cash Flow So Important?

The goal in divorce is to ensure that both spouses have enough money to cover their expenses and taxes once they are on their own. Most people live paycheck to paycheck, which means there is just enough money to cover expenses with nothing left over. In a perfect world, we would all have positive cash flows. But, this may not be possible in the years following a divorce.

If you are not realistic about what it takes to run your household, and take care of yourself and your children, from the very beginning, you may run into some serious financial trouble down the road.

How to Achieve a Positive Cash Flow

There is only one way to achieve a positive cash flow – live within your means. And, there is only one way to fix a negative cash flow – increase your income or reduce your expenses. Sounds easy right?

As I wrote in a previous post, ‘Taking Control of Your Expenses After Divorce’, (Blog Post – Taking Control), a woman’s standard of living has been shown to drop at least 27% after a divorce. In the same study, a man’s standard of living was shown to actually increase by 10%. Why does this happen? One reason is mentioned above – not enough income to support two households, but another reason may be because women do not take the time to fully analyze their spending, which includes not only their own expenses but also those associated with raising children and running the household on an annual basis.

Many expenses do not present themselves on a monthly basis, so it becomes necessary to average both necessary and discretionary household expenses over a full year. Since most people have an aversion to creating a budget, many of these types of expenses are underestimated. I recommend doing a thorough 12-month analysis of those bills that fluctuate on an annual basis. This may be a daunting task for most people, but as I always say, being informed and taking control of your money is an empowering experience. Accurately filling out the expense schedule on the financial statement is the only way to really understand what your expenses will be like post-divorce.

So, You Want to Keep the Marital Home?

Think twice about this and make sure you fully understand the costs involved with maintaining a home once one spouse moves out. I see many women making the decision to buyout their husbands based solely on emotional reasons, often failing to take into account the financial ramifications.

Since support, whether in the form of child support or alimony typically does not increase with inflation, you can understand how quickly expenses can outpace available income. If your husband maintained the home during the marriage, you will now have to hire someone to do such simple chores, like mowing the lawn, shoveling the snow off the roof to prevent ice dams or fixing a leaky faucet. These bills can add up and quickly contribute to a negative cash flow.

A long-term negative cash flow can affect every aspect of your life, including your children. Your stress will trickle down to the kids. Tensions will rise and the blame game will start. “This is all your father’s fault!”

Working together with your attorney and a CDFA™ on all the financial issues, will greatly improve the outcome of your divorce and put you on the path to a good life for you and your family.

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  1. The Biggest Financial Mistake Women Make in Divorce | The Divorce Center - April 27, 2016

    […] a previous blog post, ‘The Importance of Cash Flow in Divorce’ , I wrote that it is very important to understand what it takes to run your household because there […]

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