This article is also published as part of Jo Carr-West’s monthly divorce series in Family Law.
Divorcing clients are sometimes surprised that one of the key documents their lawyer will ask them to complete is a budget of their projected living expenses. However, the principle of need is often a significant determining factor in the vast majority of divorce cases. A thorough and comprehensive list of household outgoings is necessary in order to reach a financial settlement between divorcing parties.
For those going through a divorce, predicting what they will need to live on in the future can seem like an overwhelming task. This process may involve thinking through where they are going to live, considering the cost of a different sized house, how much it will cost to fund children living in a new household for a portion of each week, how much the parties might need to pay for childcare, and so on.
Putting together a budget was one of the top 10 tips for separating couples in my January 2016 article. However, even for those who undertook the task in the early part of the year, it is sensible to review this to ensure that it is still comprehensive and, more importantly, that it remains a realistic reflection of what the family needs to spend on a regular basis.
So, what should you think about when putting together a budget?
Most importantly, the budget needs to be inclusive. From a tactical perspective, it is difficult when negotiating (whether while in mediation, between solicitors or during court proceedings) to add extras to the budget at the last minute. It is far more beneficial to aim to ensure that everything is included from the outset. The process is often daunting, especially if it is done at the last minute. The budget is better done over a period of time, particularly if expenditure is changing from month to month.
Solicitors can provide their clients with templates for a comprehensive budget. However, for those without the benefit of legal advice, ss 3.1.1 and 3.1.2 of the Form E provide a useful model budget, and can be found online. The form is divided into different categories, including sections for expenditure on the home such as mortgage or rent payments, utilities and council tax, expenditure on shopping and other household costs, personal expenditure, expenditure on professional fees and, in s 3.1.2, there is a separate budget for expenditure on children, divided into separate categories. Although not every item will be applicable, it is a useful aide memoire. It can also be used to cross-reference an existing budget to ensure nothing is missing.
A sensible (albeit arduous) task is to measure your budget against your actual expenditure. This can be done by analysing bank and credit card statements and receipts. Accounting software and apps designed for personal or domestic banking are useful resources. These programmes enable people to link up their bank accounts and credit cards to track and categorise their expenditure on different items, so they can easily build up a picture of what they are spending and when.
There are a number of expenditure categories that people often find difficult to budget for. These include holidays, the nature of which might be quite different for a separated family, items of annual expenditure such as Christmas and birthdays, and petty expenditure – from cups of coffee to an extra bus journey here or there.
Although this may seem slightly trivial, if petty expenditure is underestimated it could result in an amount being allocated for one party’s needs that does not enable them to meet their own costs of living in the future. Alternatively, if it is overestimated and a party allocates a generous amount for unexplained or uncategorised expenditure by cash withdrawals in their budget, this can lead to further questions being asked by the other party and, possible, to a sense of mistrust being built up.
Ultimately, as well as being comprehensive, a budget should be credible. There is little point in turning what can be a critical part of the case into an over-exaggerated wish list, as this undermines the process as a whole. If a close analysis of the budget during a negotiation results in items being struck out because they are overly ambitious of fanciful, this can lead to the other party (or a judge in court proceedings) taking a more sceptical view of the entire proposed budget.
Partner, Hunters incorporating May, May & Merrimans