10 Cash Flow Rules In Divorce (Part I)
September 28, 2010 | Alimony, Child Support, Divorce, Family Law News, Income Calculations, Legal Perspective, Marital Property
In business, they say, cash flow rules. The same principle is true, I find, in divorce. I have been brainstorming a set of cash flow “rules” for divorcing spouses. Here is part one:
1. Never run out of cash. My #1 divorce rule is the as Inc Magazine‘s #1 business rule. In divorce, there is a period of time immediately following separation when a divorcing spouse’s cash flow may be particularly vulnerable. Spouses who are not working need to know that litigation might drag on for weeks before the support payments will begin. In order to meet routine financial obligations (bills, loans, credit cards), divorcing spouses should be sure to have a two months’ supply of cash before separating.
2. When it is impossible to increase income, reduce spending. Some divorcing spouses expect to preserve the standard of living they have always enjoyed, but it is just not possible. In fact, the law does not guarantee it. Our judges know that two households cannot be run as cheaply as one, so it is necessary to cut corners. Many families are living beyond their means or just scraping by. Divorce did not create the problem and cannot solve it. If your cash flow is not enough to pay the expenses, you must reduce expenses.
3. House-poor or pension-poor is just plain poor. Liquidity is a valuable resource. Some divorcing spouses insist on keeping a house or pension instead of assets that can be converted to cash more easily. Kids can’t eat a house. A pension won’t pay the light bill if you are 45 years old. Even though you may have worked your whole life to earn that pension or create a great home for your kids, you might be better off trading it away or selling it to generate cash that will pay the bills. You will sleep better at night.
4. Credit borrowing does not equal cash flow. Loans and credit cards are temporary – and very expensive – ways of dealing with inadequate cash flow. By borrowing, you may be digging a deeper financial hole for your future. Do not borrow unless you have a sure means of paying off the loan or credit card within a year or less.
5. Build earning capacity. We have all heard the story about the father who is refusing overtime at work so that he will not have to pay more child support or the mother who is waiting until the divorce is concluded before she returns to college. It might seem like an attractive strategy, but it always backfires. The sooner that you enhance your cash flow, the sooner you will restore your financial stability.