In a divorce, you'll hear the phrases "maintain a lifestyle to which your family is accustomed" and "reasonable needs." There's an inherent conflict for divorcing couples between the concepts of lifestyle and reasonable needs. The cost to meet the reasonable needs of your family may be much different than the cost of your lifestyle.
Your family's lifestyle and reasonable needs are the two components of expenses that play a part in a divorce. The difference in the definitions between "reasonable needs" and "lifestyle" becomes painfully obvious when child support and alimony is determined.
Often, the support amounts (child support and alimony) do not satisfy either spouse's expenses to maintain previous lifestyles or the family's current reasonable needs. Cost of living, after the divorce usually goes up by at least 25%, if not more. The income of the parties stays the same. Hence, there will not be enough. This may lead to each ex-spouse believing that he or she is either paying too much or not receiving enough money for support. Both spouses must make adjustments in how they each pay for their needs and maintain their lifestyle.
Historical and Current Expenses
Your first step to determine the cost for your family's lifestyle is to gather documents showing how your family has spent its money over a period. Several years’ worth of records is optimum, but records beginning one year prior to any separation may suffice.
Some of the records you need are:
- Bank account registers
- Canceled checks
- Paid bills
- Credit-card statements
- Loan papers,
- Cash receipts
To keep better track of expenses, change some of your spending habits. Start paying for as many expenses as possible with a credit card or check. Keep a daily log of any cash purchases. Enter your current daily expenses under the proper categories. The average numbers you reach from your record keeping are the same ones you'll use for proving your reasonable needs. They will also help you substantiate and describe the historical cost to maintain your family's lifestyle.
Direct and Indirect Expenses
Once you have your family's expenses listed and categorized, allocate them further into direct and indirect expenses. Direct expenses are the expenses incurred specifically for a family member. Indirect expenses are the costs for housing and other types of expenses necessary to maintain your family's lifestyle.
Examples of direct expenses are:
- Tuition for a child to attend a private school
- College tuition and room and board
- Medical expenses
- Music lessons
Some indirect expenses are:
- Mortgage payments
- Utility bills
- Automobile loan payments
- Insurance premiums
Once you have compiled the worksheets for your family's expenses, compute the average monthly total for the children's indirect expenses and direct expenses.
Organizing Your Records
Organize your documents by year to prepare a historical accounting of your expenses.
Define and list the categories of expenses and the family members who benefit from the expense.
For example, canceled checks made out to the telephone, natural gas or electric companies could all be classified as utility expenses and all family members benefit.
The next step is to review each canceled check, paid bill, receipt and credit card statement to categorize all the transactions. At the same time, you are categorizing the expense, record it into your system. Enter the expenses that you pay annually in the month you make the payment. Examples of these expenses are Real estate taxes or insurance premiums.
If you don't pay all your credit-card bills in full every month, make a notation of the full amount of the bill and the amount you paid. In some instances, the payment you make on the balance owed may be a monthly expense. Don't forget categories for interest, penalties, and late fees.
One hint about expenses: be sure to look at what your spouse is doing with his or her money, especially if you both earn a good income. It's not uncommon for divorce lawyers to suggest that a spouse earning an income that exceeds his or her reasonable needs use the excess income to purchase prepaid items, household goods, or other merchandise such as a cemetery plot, a future vacation, or furniture to fill a new home.
The intended effect is a reduction in your spouse's bank account balances and an increase in his or her consumer debt - and subsequently, a reduction in his or her assumed net worth. Another planning tactic is to prepay household bills that are not customarily listed as current debts on court financial disclosure forms.
Compare the average monthly costs for yourself - and for the children if you'll be receiving support - with the amount of income you expect to receive in spousal and child support after the divorce. Take into consideration the income you expect to earn or receive from all sources using the numbers in the worksheets regarding your family income.
Planning for Special Situations and the Future
You should also determine and plan for your family's future expenses and lifestyle. For example, if you need to plan for your home being sold, anticipate your family's costs for living in a new residence. Also, add into your future expenses any spousal or child support you may be responsible for paying. If you want to retain the family home, have the home inspected to learn if it needs any major repairs and the life expectancy of the roof and the heating and cooling system and major appliances. Add the cost of repairs and replacement of non-functioning or nearly worn-out items into your anticipated future expenses. This also applies to your vehicle if it's an older model, has high mileage, or is not in good working condition.
Break down the costs of health insurance to ascertain what the cost is for the children's coverage only. If both parents have group health insurance coverage for the children, compare the type of coverage and costs to have the children on each plan. Learn the cost for the group coverage, the deductible, the type of benefits available, and the length of time you and your children are eligible to receive the insurance coverage.
If your child has special medical needs, prepare an itemized list of all the special expenses you incur for the child's medical care. For example, a child with diabetes has higher expenses for medical care, recreation and food than a child without diabetes. The difference between the costs in these categories for a diabetic child and a non-diabetic child may be the basis for requesting additional support and special health-insurance provisions. Make plans now for anticipated future expenses such as a vocational or college education, weddings or other future events.