EP 175: Understanding Expenses: Why Your Monthly “Nut” is Key to Post-Divorce Planning – Part 2

Understanding Expenses: Why Your Monthly “Nut” is Key to Post-Divorce Planning – Part 2

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Thank you for listening! Find a transcript of this episode below.

In the previous episode, we were setting a stage for understanding your fixed monthly expenses. If you didn’t hear the previous episode, go back and listen to that one first before you continue on with this one. What we were discussing is you need to know your fixed monthly expenses as accurately as you can in order to really plan for not only to negotiate a settlement that’s truly workable for you, but also so that you understand what your post-divorce life will look like from a financial perspective. Because, you’re going to have to know what that is, and you don’t want to be surprised by the results.

Really. One of the things you should be thinking about is if the result that you see today, given your current lifestyle, doesn’t look like it’s going to be feasible going forward. You can start planning those things, and the changes you’re going to need to be making now, and start thinking about what kind of changes you need to make today so that when your divorce is over, you can live on what’s a realistic and feasible budget going forward.

Now, one of the things to think about is some of these things do require planning. If you’re thinking about selling the house, that could take you six or eight months, or longer, depending upon where you are from the time you decide you want to sell it to it actually being closed upon, and you having funds from the house, and if that’s going to help you reduce your monthly expenses, and that’s something that’s feasible given your situation. You need to start thinking about those today rather than waiting until six or eight months from now and try and rush and scramble.

What I wanted to do in this episode, though, was really discuss an example of how your, a few examples of how understanding your monthly expenses can be useful to you.

Let’s say you do a calculation. I’m going to try and use simple math, because I know it’s really hard when you’re on the treadmill, driving in the car, or doing walking around, which is where I listen to podcasts all the time, or cooking, or doing any number of things at the moment to keep up with math, in particular. But, it’s very important to illustrate some points, and for better or for worse, if you are getting divorced, then maybe you haven’t been involved in the finances. You’re going to have to know these numbers going forward, because you can’t, like the old ostrich, you can’t just stick your head in the sand and pretend like the lions are going to go away.

These numbers, although they’re not lions, they are expenses, they’re here, and you need to know what they are, and you just need to be prepared for them.

Here is what’s important. Let’s just say, for instance, that you have $10,000 a month in expenses, which is $120,000 a year. Easy numbers to work with, $10,000 a month times 12 months is $100,000. Let’s say you’re going to be the person receiving spousal support.

I’m going to say, in this case, you were a stay at home parent, and the laws in your state, and what you’re negotiating, or whatever else, you can expect $6,000 a month in support, or $72,000 a year.

Remember, you have $10,000 a month in expenses, and you’re going to receive $6,000 a month in support. What does that mean? It means that you have to make up $4,000 in income to keep the bills from racking up, and racking up debt.

What does that mean? It means that you need a job that pays you at least $4,000 a month in this scenario. Or, to put it a different way, is at least $48,000 a year in income from your job in order to stay current, in order to cover your monthly [inaudible 00:04:40], your monthly expenses. You’re getting $6,000 in support, you have $10,000 of expenses, you need $4,000 a month in a job.

Of course, I’m oversimplifying things like taxes, and variable expenses, but that’s the point, is, you’re going to need to know that you’re going to have to either go back to school, or hopefully you maybe already have a skill, or whatever else, but in order for you to keep from living off of your savings, or to keep from racking up debt, you need to know today that in this example, you’re going to have to make $48,000 a year in your own income after this divorce process is over, so you need to get to it.

Now, let’s play with this simple calculation again when it comes to expenses. Now, let’s say you know that right now you have $10,000 of expenses, $10,000 a month in fixed expenses. What if you look down and you went through the worksheets, and you made a list of all your expenses, and gathered up your numbers and you know that it’s $10,000 in expenses now, but you look at some of the things, you look at a few of the items, and you say “I think I can cut some of these expenses. Some of the small ones I can cut out, some of the bigger ones I can cut out.”

Maybe, because this is the most common, what I’m going to use as an example, but you’re thinking to yourself “You know what? I think we can cut this house expense, we don’t need this big house anymore, because it’s just going to be me, or me and one of the kids, or the kids have grown.” Whatever else, it doesn’t matter.

You know, you’re thinking that “I don’t need this big house anymore, and I can downside, and move to a smaller place, and save some money.” After you look at your budget, and you look at your expenses, instead of $10,000 a month, you’re now at $7,000 a month, or at least you think you can go to $7,000 a month in expenses.

Now, $7,000 a month, remember the first exam- … we’re starting at $10,000, but you say “You know, I can make some life style changes, leave those broad, and then get down to $7,000 a month.” $7,000 a month is $84,000 per year in fixed expenses.

Now, $84,000 a year in fixed expenses, all right, still heavy, but a lot better than $120,000 a year in the previous example. You have $7,000 a month in expenses, instead of $10,000 a month. We said, in the previous example, you were getting $6,000 a month in support.

Guess what? Since you’ve reduced your expenses, all you need to make now is an extra $1,000 a month in income to cover your expenses. Instead of needing a job that pays $48,000 a year, which is probably a full-time job. You only need to make $12,000 a year in order to keep from living off of your savings, or rack up any debt.

$12,000 a year is not a very high burden for most people. You can probably find a job, part-time, or even some of the stay-at-home jobs that will easily pay you that extra $1,000 a month. You could even drive for Uber these days and make $1,000 a month extra.

The point is this, is simply by reducing those monthly expenses, those fixed monthly expenses, you went from needing to make $48,000 a year, to $12,000 a year just on that $3,000 a month difference. That’s a huge thing to think about.

Now, your numbers are going to vary, this was an oversimplified example. But, the point is the same, is that if you can cut your monthly expenses, particularly after divorce, whatever your situation is, you can put yourself financially in a much better place, and have a lot more breathing room than you would have otherwise.

If you ever wanted the complaints, I get complaints about attorneys sometimes, because they don’t always have the best bedside manner. But, sometimes, attorneys will say to you, as the client, they’ll say “Yeah, yeah, you just got to sell your house, and move on.” They might say it like that, but they’re really just doing the same calculation we just did.

They could’ve said it better to you, because you have so many things going on, but really, they’re saying “Look, if you can cut your expenses down quite a bit, I know the support laws in the state” or “I know what your income is, and what you’re likely going to have after this divorce process is over, if you cut and sell the house, you might be able to make some substantial life style, I wouldn’t say life style improvements, but you will not be in a position where you’re always trying to catch up each month, and just treading water for the future.”

Now, the other thing I wanted to mention related to this is, when you think about your monthly expenses, I know we talked about big monthly expenses, but we can also consider some smaller monthly expenses.

One thing that people think about, and often forget, is that there is no monthly expense that’s too small to reduce. What do I mean by that? I mean, you need to think about, of course, the big expenses, but also, even the tiny ones. Let’s just say, because I may have been watching Netflix earlier, let’s just say you have a $10-a-month Netflix subscription.

Most people don’t really notice the $10 a month, it’s such a small amount for most people, and just occurs once a month, and you kind of say “Hey, I don’t really need that,” I mean, you don’t really ever cancel Netflix, not a lot of people cancel, because it’s such a small amount in a given month.

But, something to think about that most people, and this is how I think about monthly expenses, $10 a month, times 12 months, is $120 a year. $120 a year times five years is $600 over five years. The question you have to ask yourself is is Netflix worth $600 to you? Or would you rather use that $600 for other things? That’s just from a $10 a month subscription.

What if it’s something bigger than that? The point is that monthly expenses, no matter how small, they really add up, because they occur every month until they disappear.

A simple one, also applies for my life today, is I am, if you were to see me in person, I like to go to the gym, and I eat a lot of food. I also live about 40 feet from am Original House of Pancakes. One of my favorite meals is four eggs, six pieces of bacon, some toast, some jam, some butter, some coffee, and I eat that meal multiple times a week.

But, I made a change in my life, because I was like “Look, I got adjust my monthly expenses.” I’m always trying to think about ways to make my life more efficient as well. I said “You know what, instead of going over to The Original House of Pancakes, sitting down, spending $12 on my favorite meal, what if I spent 10 minutes, and it literally only takes 10 minutes, to make that same meal myself?” I get eggs, and scramble them, and put toast in the oven, and everything else. Then, in 10 minutes times several times a week, I spend $4 on ingredients, $4, instead of the $12+ I was paying several times a week at The Original Pancake House, and I like my cooking even better than theirs.

Just that little change, saving $8 three times a week, we’re going to call that $24, that adds up to quite a bit. All for less than 10 minutes of my time to put together, times years, that’s a lot of money.

Another example of cooking at home, just in terms of expenses and things to think about is salads. I like to eat lots of salads. I was paying $11 at the salad place near me, I went to the grocery store, I bought a big container of salad greens, and some fruit, and some olive oil, and vinegar, and a couple other toppings. Now, in the span of about 70 seconds, and instead of $11, for $2 of ingredients ,I can create a healthy fresh salad that was just as good as the $11 I was paying before.

You multiply that, let’s just say I save $5 a day on average on food, that’s $35 a week, that’s $140 a month, which is $1600 a year just on a $5 a day food change that I made in my life, which is also helping me be healthier, and other things.

But, I, like you, want you to be very cognizant of all of your monthly expenses, big and small. Because, when you’re in a divorce situation, you’re really going to need to understand your finances, and understand where the money goes. Are you spending efficiently? You’re going to probably have to make some adjustments, and now is a good time to really dig down, and see what’s essential to your life, and what you don’t need anymore.

I know people who’ve gotten rid of babysitters, or things like that, that weren’t huge burdens, but they ended up just being happier doing things themselves, or not having someone in their life. All of this, this time of your life is an opportunity to not only understand your finances a lot better than before, but there’s no better excuse than “I’m getting a divorce” to make a change in your life.

You don’t have to make every change at once, but you should be thinking about ideas, and what the major changes are in your expenses that you can make today, because it’ll make your future life much easier, much less of a burden when you’re worrying about keeping up with next month’s bills, or your bank account is low on money, or you’re just withdrawing from your savings, and it’s like you’re continually losing money each month.

If you can cut those expenses down, that’ll put you in a much, much better place than you would’ve been before. You will be on a much more solid financial footing for the future.

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