Making sense of divorce with cashflow planning

Cashflow planning, in its most basic form, involves forecasting income, expenditure and wealth in the short, medium and long-term. It provides a graphical representation of an individual’s, or family’s finances, enabling clients to better understand their circumstances.

The value of assets, investments, pensions and debt can all be projected over time, using assumed growth, inflation and interest rates. Income sources and outgoings are also taken into account, on a regular and ad hoc basis. For this reason, the output of cashflow planning is only as good as the data input. Current circumstances and likely future events must be realistically understood by the client and properly interpreted by the financial planner.

Regularly reviewing a cashflow plan is also imperative, especially after big life events such as a divorce or separation, as situations and aspirations can dramatically change. In fact, there are numerous ways cashflow planning can help make sense of divorce.

Relationship strain

Just recently, research from relationship support charity, Relate, found that enquiries often peaked on the first Monday back to work in January, dubbed ‘Divorce Day’.

Their website visitor statistics also increase significantly during the month, up 58% on average. As Aidan Jones, CEO of Relate recently explained in the news, The emotional and financial pressures of Christmas and the holidays can push couples to breaking point.

The breakdown of a relationship can be an emotionally charged time, but it’s also when significant financial decisions must be made.

Cashflow planning pre-divorce

If your client is considering separation, it’s not uncommon for them to be concerned they cannot afford to maintain a financially stable lifestyle on their income alone. In fact, research from Relate found 24% of people in an unhappy relationship said ‘we can’t afford to break up’, as a reason for remaining together. To put that figure into perspective, only 3% more stated the most popular reason; ‘for the sake of the children’.

Cashflow planning can give both parties clarity over their finances. That can aid the decision-making process and reduce stress during a difficult time. With careful consideration of their current and potential circumstances, a separation might be more financially viable than first thought.

Embracing cashflow planning at this time can also help identify the most appropriate assets to be shared. This is especially relevant when you consider retirement provisions if one person has taken time out of their professional career to raise children, missing valuable pension contributions. Cashflow planning could identify a likely shortfall in pension income, meaning a sharing order may be appropriate.

Finally, cashflow planning could identify an excess of income or wealth in future, meaning there is little or no need to fight for assets. This could minimise the stress and length of negotiations.

Post-divorce aspirations and financial clarity

The roles of a mediator and solicitor during the process is well known. Beyond resolving the immediate situation, however, this is where a financial planner and cashflow planning can help even further.

Prior goals and aspirations are likely to be no longer appropriate, even if it’s not immediately clear what people want from life. Previously, objectives were likely linked to those of their spouse or civil partner. However, following a divorce is an ideal time to reassess. Cashflow planning can take these new aspirations into account, indicating a realistic way of fulfilling them.

Clients should be encouraged to take the time to think about their personal circumstances and what is important to them. With a better idea of what they want to achieve, they’ll be in a better position to start setting measurable goals in the short, medium and long term.

After divorce it’s common for a client to feel a little less secure. Sometimes, this can be emotional, in other cases, it can be more material.

Longer term cashflow planning gives divorcees an opportunity to take back control, with their newly defined goals in mind. It’s a step that can improve security now and in future, as well as mental wellbeing.

We are here to help

Finances play a big role in divorce, before and after the event. It’s likely that your client’s financial situation will change significantly as a result; cashflow planning can clearly demonstrate that effect and help build a robust financial plan.

Planning for a new, positive future, cashflow planning can help realise new goals and aspirations, whilst helping ensure the future is financially secure. For any clients debating or, going through a divorce, we are here to help realise their new ambitions. Please don’t hesitate to put them in touch with one of our financial planners.