Lifestyle Financial Planning in Your Financial Settlement

Negotiating your financial settlement in divorce.

The subject of “reasonable needs” is used to argue the toss when negotiating a financial settlement. Sally Harrison QC, Head of Chambers at St John’s Buildings was quoted today (24/5/18) on Twitter as saying, “the best budgets are founded on the knowledge of our clients”. This struck a chord with me as it forms a significant part of the work that we do with our clients. We have to understand what they, as individuals spend on their lifestyle. The amount that would be “reasonable needs” to me, who regularly shops at Aldi, might be very different to that of a premiership footballer!

Should we consider what’s normal?

I don’t know about you but I think my life is normal. I’m not extremely extravagant. Should my expenditure be used to assess “reasonable needs”? Of course not!

A vital part of the work we undertake, as lifestyle financial planners, is to understand our clients’ lifestyle. We therefore help them to work out what their lifestyle costs by reviewing their expenditure. Completing a budget planner is no one’s favourite task and so, to avoid finding out what they actually spend, clients often ask us to use “the average”. However, when we are working out the cost of lifestyle, it is important to ensure that it is the lifestyle of the person we are working with, rather than the “normal” or “average” cost.

I think I’ve produced an accurate budget…

The important thing about budgeting is to remember to include everything. It’s straightforward to document the basics, such as rent or mortgage, utility bills, council tax and food. However, we all spend money on lots of other things. Haircuts, pet insurance, gifts, charity donations, swimming pool maintenance…ok, most of us don’t have this one but you get my point.

“Reasonable needs’ should include all of your lifestyle. Should larger items be included? Yes, of course; Things like cars, home improvements and other large irregular expenditure need to be accounted for. Making sure your ALL your expenses are fully recorded is a good first step in negotiating your financial settlement.

I’ve been offered a clean break financial settlement in my divorce…

Which means you have receive a lump sum as agreed in the financial settlement. You won’t receive an income from your former spouse, as the lump sum forms a clean break between you and your ex. You now don’t know how this money should be used. How much should you use for a house? How much do you need for your lifestyle? Should you save or invest some of the money to produce an income? These are difficult questions to answer.

Your starting point should be: how much do you need each year to top up any other income?. By this point, you will probably know how much you are able to borrow with a mortgage, and what that will cost. You are also likely to have an idea of the house that you might be able to buy. Many are tempted to buy the biggest house they can, using all the lump sum. This is a dangerous strategy as you may not have the income to run the house, meaning it will have to be sold in the future. Broadly speaking, you need to balance your needs.

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Tamsin Caine is a Chartered Financial Planner at Smart Divorce. She specialises in working with separating or divorcing clients to help them to understand how to divide their finances to move forward with their lives. If you would like to speak to Tamsin or find out more about how she can help, email her at Tamsin@smartdivorce.co.uk any time or telephone 07975 922766 during office hours.