0174: Understanding Expenses: Why Your Monthly "Nut" is Key to Post-Divorce Planning - Part 1

Visit us at divorceandyourmoney.com for the #1 divorce resources in the USA and get personalized help. Learn about coaching services here.   Thank you for listening! Find a transcript of this episode below.   I was meeting with a client in person recently and we had a long discussion about whether or not they should keep the house or sell it as part of the divorce process. One of the things that, although in theory they could afford the house and keep it for a few years as the kids grow up and they want to keep some kind of consistency, that might not have been the right line of thinking for this person and ultimately the more we talked about it, the more we discussed how the house could become a burden. It's something that could actually cause, keeping the house, could cause more harm than good. But we're not going to talk about the house specifically today, that'll come up a lot in this episode. I want to speak more broadly about how you should you think about your expenses, and your post-divorce expenses, and understanding your post-divorce picture, even before you start the divorce process or if you're in the middle and going through it.   One of the things to keep in mind is that once you get divorced, actually, almost all financial advice, you can read every book in your local library, every book on Amazon, every book in Barnes & Noble, which is one of the few book stores that still has physical shops, and if you read every personal finance book all the advice boils down to this: make more money than you spend. Very simply, your income needs to be higher than your expenses. If your expenses are higher than your income, that's bad, but if you are saving money every day, week, month, year, in the long run you'll never run out of money. If you are net spending money, you will increase in debt. It doesn't really matter what your total income is. If you make $50,000 a year, so long as you're only spending $49,000 a year or less, you'll be in pretty good shape for the rest of your life, I mean, your whole life, so long as that's your picture. If you make 50 million a year, yeah, 50 million dollars, if you spend 49 million dollars a year, you're good.   But guess what? I know people who, not a ton of people like this, but I do know people who make 50 million dollars a year, and they spend 55 million dollars a year. Guess what? They have tons of debt, and they can end up going bankrupt. I've seen it before. Conversely, if you make $75,000 a year, but you're spending $82,000 a year, that is not a good situation to be in. It doesn't really matter what those final dollar numbers and dollar amounts are, you have to be savvy and you need to spend less than you earn. That's the context for this.    Why do I bring this up? Well, one of the most important things you need to understand when it comes to your post-divorce life ... Look, everyone listening to this podcast will no longer have to listen to me at some point, which is a great thing to think about. I'm always happy when I lose a listener, funnily enough, because your case is over, and you get to move on with the rest of your life. But as you're thinking about your settlement, or the divorce process, one of the things you need to do, and manage most efficiently, is cutting out and thinking about and understanding the fixed expenses. Wherever you can reduce them, you should reduce those fixed expenses.   One of the things that, or the way that people describe fixed expenses is oftentimes called your monthly nut. I don't know why it's called that, but that's what people call it. Basically, I won't say people call it, but I know a lot of people who call it your monthly nut. I think it's kind of a crude term, but basically just your fixed expenses, and what you need to make every month so that you're not losing money, or not spending from savings, or not racking up debt in one form or another. This is the amount of money you need to make to keep constant, to break even in a given month, where your income and your expenses are at least even.   When we talk about monthly nut, we're basically just talking about the expense side of the equation, because that's the important thing. The lower your monthly nut, the lower your monthly expenses, the more wiggle room you will have after divorce. More importantly, what that means is that it'll be easier to rebuild yourself financially after the divorce process is over. Almost no one ends up in a better financial position after divorce than they did before divorce. One of the ways to mitigate the impact of divorce, or to rebuild your life more quickly, is to have a low fixed monthly expense base.   The main question, of course, is what is a part of your fixed monthly expenses? Let's dig into a few items that we're talking about. If you haven't gotten it already, get my courses, go to store.divorceandyourmoney.com, or you just go to divorceandyourmoney.com/store, and I have some great courses in there. In the courses, there are some awesome checklists to help you stay organized. If you buy the courses too, I have some Excel templates I'd be happy to share with you as well, or some worksheets that I'd also be happy to share, that provide some of this information. If you go through the courses, you can follow along in depth, so you can work through your situation specifically.   Let's just take an example of your monthly nut. We started by discussing the house. Now, the house is going to come back in this part of the discussion, because it's one of the biggest variables in your monthly expenses. If you can reduce your monthly expenses in any capacity, then that's great. Specifically, when it comes to the house, the house is one of those expenses that, depending upon where you live, and of course that's a big variation depending upon what part of the country you live in, and actually even what neighborhoods matter in your city that you want to or need to be in, but some people I know can reduce their monthly housing expenses for 20 or 30 or 40 or even 50% a month in terms of what they're paying for the house. When you're dealing with a divorce situation, where you're going to be on your own and single finances in a bit, that's something that you can think about.   The reason that house expenses can add up is you have not only just the house itself, but you have things like a mortgage amount, electricity, property taxes, utilities, lawn care, and everything else that goes into maintaining a house. What you need to do is sit and write down all of those costs that you pay every month, every year, and even some of the ones that occur every several years, like a new boiler, repainting the house, and really figure out what are those on a monthly and an annual basis, because they add up. The real question you're going to need to be asking yourself is, will I be able to afford this when the divorce process is over?   Now, the house is just one of many monthly expenses. For all of you listening who are going to be paying spousal or child support, support payments are a fixed monthly expense. Now, you need to know what range of a fixed monthly expense can work in your situation. There's other fixed expenses, from what kind of car you drive, to what types of insurance you have and how big the coverage limits are, to utilities, to internet access, to things like that. These are all fixed expenses, to some sort of basic level of food that you need each month.   Now, there's also an opposite, which is called the variable expenses. These are the expenses that are ... They use a term discretionary, is one way that they describe it, but basically these are the expenses that you like, but you can live without. What goes into a variable expense? Well, something like entertainment, and eating out. I know some people who spend, particularly some of my New York friends, who spend many thousands a month on eating out. Now, it's part of being in New York City that people can spend thousands of dollars a month on eating out and that not being a weird thing, but it's something to think about, because when you don't really have a kitchen. But if you live in the middle of the country, or in a suburb, maybe you just go out once a week, but if you're going out four times a week for dinner, you might need to think about how you can cut that back a little bit.   The point is, though, is you need to, if you're listening to this, you need to really understand, just conceptually, what are your monthly expenses? Are your monthly expenses, are they ... You should figure out as accurately as you can. For some of you, your monthly expenses might come out to $3,250 per month. Actually, I know what my monthly expenses are, at least on a personal level, and also for the business I have to know exactly what those monthly expenses are, especially when you have payroll and office rent and everything else. So, I have a very clear understanding of my monthly both personal and monthly business expenses, and I look every month, because it gets deducted straight from my back account, I look, and say, "Hey, do I need to keep that expense?"   Now, if your number is $3,250 a month, you need to write down $3,250 a month. If your number is $17,800, then you need to write $17,800 a month as your monthly expenses. I know plenty of you listening who are in both ranges, everywhere in between. I know some people I work with who are lower than that, and some people I work with who are much higher than $17,000 a month in monthly expenses. But it doesn't really matter exactly what that number is, because everyone's life is different. You have different lifestyles and lives. What the important part is, is regardless of who you are, how much money you have or don't think you have, it's you need to know what that monthly expense number is. Here's why it's important, is if you know what your monthly expenses are, you will have a very clear sense of exactly what you need in order to make it through the divorce process, and how to negotiate a settlement that is workable for you.   Now, the next thing I want to discuss, and I'm going to discuss this in the next episode, but I really want to dig into, dig deeply into understanding the examples of how your fixed expenses can have a big impact on your settlement, and what that means in terms of what your job looks like going forward, if you need to get a job, or if you're paying support, how that looks for you, and I want to go through some examples in the next episode of ways that you can start reducing your monthly expenses.