It's All About the Cash Flow
Evaluating an individual’s financial health is not much different than determining the health of a business. If you boil it down to the basics, there are two concepts to examine. The first is cash flow. Cash flow is exactly what it sounds like. We look at income coming in and expenses going out, over a predetermined interval like a month. If you have more money than month, that’s good. The surplus can be saved, spent, donated, you name it. On the flip-side, if you’ve got more month than money, that’s not good. It results in depletion of an asset like savings, or incurring debt. This could be an untenable situation long-term. A thorough financial planning analysis should be completed to see if adjustments to lifestyle are required or if additional or different sources of income are available.
Cash flow’s cousin is Net Worth. Net worth is the value of all your stuff minus what you owe on said stuff. This stuff is usually categorized as financial (savings, investments, retirement accounts), real estate, and everything else that has value. In retirement, it is this net worth that is used to generate a supplement to any regular income sources like social security or a pension.
Lifestyle is all about cash-flow. Look no further than the latest Publisher’s Clearing House Sweepstakes campaign. Rather than a multi-million-dollar grand prize, the latest push is $7,000 per week for life. Not a bad gig if you can get it. Don’t get me wrong, “savings” are important too. A good financial planning rule of thumb regarding savings is to strive for 6 – 12 months of expenses in cash for an emergency. Great rule of thumb but one that becomes less relevant if you’ve got a guaranteed $7,000 of income coming in every week. That kind of money would go a long way in covering emergencies, especially paired with the necessary insurances (another subject entirely).
In divorce, the cash flow piece is examined through the topic of alimony. In the case where pre-divorce, there was only one primary breadwinner, the post-divorce lifestyle of both parties is likely to be very different, all else being equal. The one income that supported one household will now have to support two. If things were tight pre-divorce, you can see that careful planning will be needed to make things work post-divorce.
This is one of the advantages of the team-based, collaborative divorce process. The addition of a neutral financial planner can help the parties understand their new financial realities and carefully and thoughtfully examine different settlement options. This will help the parties come to a post-divorce lifestyle that both can live with. As financial planners, we work with the full team and often with the parties individually so that everyone is comfortable with the numbers and understands the implications of their decisions as they navigate the process.
If things get emotional, and they often do, the neutral mental health counselor can bring the discussion back to the issues identified at the first meeting as most important to each party. The attorneys are there to help the parties understand the legal aspects of divorce and give them additional confidence to make decisions and move forward.
Collaborative divorce is not for everyone. A history of abuse would make it a non-starter. That said, it is my humble opinion that collaborative divorce is process that is far underused and one that could save parties a lot of time, a ton of money, and heaps of emotional energy if more folks were made aware that it is indeed an option. And that, ladies and gentlemen, is a critical part of our mission.