Newlyweds, here’s how to manage your finances
Laura Shin, Contributor Forbes Magazine, 14 Aug. 2013. Web.
Congratulations, newlyweds!
After all that planning and your big day, you probably want this honeymoon phrase to last forever. Well, it will — as long as you do something decidedly unsexy: talk about money.
Why is that? Money is the number-one cause of fights in marriage, but since that’s no fun to think about, consider this instead: Establishing open dialogue around finances can help you ensure a long and happy marriage.
A May study by the National Foundation for Credit Counseling found that of engaged couples, 45% thought talking about money would be a necessary but awkward conversation, while about a quarter thought such a conversation would lead to fights, reveal financial issues one partner was not aware of or even cause the couple to call off the wedding. Only 32% thought it would be an easy and productive conversation.
“You have two people raised in different households, and how they were raised around money and the conversations they heard about money impact the way they behave,” says Therese Nicklas, a certified financial planner with U.S. Wealth Management in Boston.
“It’s important to get that information out on the table so you can set goals, understand what is important to each of them and they can move forward as a couple, as a family.”
Here are tips for getting your marriage started on the right financial foot.
13 Financial Tips For Newlyweds
Congrats on your big day! As you begin to build your life together, you should talk about money. While it may not be easy, the number one rule is to be honest. “It’s all about a foundation for your relationship,” says Therese Nicklas, a certified financial planner with U.S. Wealth Management in Boston.
In particular, don’t hide any assets, income or debt; doing so is financial infidelity. Second, have an attitude of working together. “Don’t come from the mindset of ‘This is mine’ and ‘That is yours,’” she says (although there are sometimes reasons for separate accounts; see later slide). Schedule a discussion time in advance, and bring recent credit reports, pay stubs, insurance policies and statements for all financial accounts. Last rule: no blaming. Just as you should be honest about your situation, be open to what your partner says.
1. Talk about your financial goals, memories and habits.
“Things you want to talk about are your goals, dreams, visions for the future,” says Nicklas. “And talk about your parents. What kinds of conversations did you grow up with around money? Did your parents fight about money, were they spendthrifts, were they afraid to spend money? At the time of the month they paid the bills, was that a stressful experience?” Also discuss your current money habits — whether you live paycheck to paycheck, whether you are a saver, how you decide whether or not to buy something, what your attitude would be toward a windfall.
If you find there are differences, there’s no need to freak out. You’re just learning about the other person, with an attitude of understanding. Later on, you’ll create out a setup that will work for both of you, even if you have different approaches.
2. Take a look at the numbers.
With your financial documents, tally up all your assets — savings, checking, retirement accounts, real estate, collectibles etc., and your debts — school loans, credit card debt, mortgages, etc. Then determine your net worth by subtracting your debts from your assets. At this point, you should also go over your credit reports. And, if you don’t know it already, reveal your income to each other.
“If there’s anything else out there that hasn’t been known, now it’s going to be known,” says Mark La Spisa, president of Vermillion Financial Advisors in South Barrington, Illinois. But if honest, open communication without judgment has been established, then it should be less scary and more of a relief to get everything off your chest.
3. Set financial goals.
Nicklas advises setting three kinds of goals: emergency funds (three to six months of essential bills) one- to five-year goals, such as for a down payment or a trip, and then long-term goals such your child’s education or retirement. Don’t put all your long-term money in retirement accounts, since you won’t be able to withdraw it without a penalty.
Depending on your situation, you may need a professional to determine how to divide your money among debt, savings and retirement.
Debt free? Secure at least one month of emergency savings, and then contribute enough toward your employer-sponsored retirement account to get your company match, says La Spisa. Also, put the maximum contribution toward your Individual Retirement Accounts. Once you have emergency savings, max out your employer-sponsored retirement account. For life goals, frankly but realistically discus what you want from your life together and can afford.
4. Create a budget.
Add your essential costs — housing, transportation, utilities, groceries — and discretionary spending — gym, shopping, entertainment, etc. If you aren’t sure how much you spend on various categories, track your spending for at least a month, or use a service like Mint. (www.mint.com – An online money management tool)
La Spisa recommends saving 20% of your take-home pay —10% toward emergencies if you’re still building savings and 10% toward retirement. If you’re living on more than 80% of your income, ratchet your spending down. Save 3% of your income, then cut rarely used expenses — i.e. cable and gym — and dine out less or downgrade your cell phone package. Maybe that brings your savings to 7% a month. Then, put your next raise toward savings, arriving at 10%.
If you have debt, says Nicklas, you should try to live on 70% of your take-home pay and use the other 30% for savings and debt – but make sure you stop accruing more debt.
5. Decide how to set up your accounts.
You can have 1. all joint accounts, 2. a combination of joint and separate accounts, or 3. entirely separate accounts. Most couples do one of the first two; those marrying later in life, people previously divorced, or couples in which one member has debt that’s in collections or bad credit often choose the last option so the spouse’s finances are unaffected.
If you have markedly different spending personalities or habits, the second option could help head off any fights over spending.
6. Designate a bill payer and a weekly or biweekly money meeting.
One person should be made responsible for paying the bills but the other should always be aware of what is happening with the finances, so make sure to meet regularly about money. Look at whether saving and spending habits are still keeping you on track for your savings goals.
7. Set a minimum threshold cost for discussing big expenses.
An easy way to head off fights about money is to agree to discuss any purchases above a set amount. “If I spend $20, that’s no big deal,” says La Spisa, “But if I spent $1,000? You may feel upset. We should agree that anything above a certain amount, the other person deserves the respect to have a conversation.”
8. Talk about how you’ll deal with friends or family in need of money.
Set a policy to discuss these kinds of situations together as a couple. “It depends on what you have in income surplus that you could help someone with, the severity of the situation, and the frequency. Is this someone who is always in trouble financially, or do they have a sudden illness? What’s really important is that you evaluate it as a couple,” says Nicklas.
9. Call your accountant.
Discuss with a professional whether it makes sense for you to file jointly or separately. “If one had, say, a bankruptcy or a problem, it may not be in their best interest to file together,” says Nicklas.
If you decide to file taxes jointly, your tax bracket will likely change. “Two people making $100,000 as singles most likely will pay more in federal taxes making $200,000,” says La Spisa. Ask your accountant to make a tax projection to see about what you’ll pay. You can keep yourself from a huge tax bill by having more withheld from your taxes now; ask your accountant how much. You can avoid getting into that higher tax bracket by doing things like maximizing your 401(k) contribution. Ask your advisor what records you should keep to make the proper deductions.
10. Update all your beneficiaries.
A beneficiary is the person who will receive the benefits of a will, trust, life insurance policy or other financial accounts such as an IRA or 401(k), checking account or savings account. You’ll probably want to update all your beneficiaries now to name your spouse.
11. Give your spouse power of attorney, and designate him/her a health care proxy.
With the power of attorney, your spouse can make legal decisions about your property and finances, particularly in the event of your illness or disability. Be sure to understand what powers you are giving your spouse.
Similarly, when you name your spouse your health care proxy (also called durable power of attorney for health care), talk about what types of interventions you’d like or not like to have, if you were to become incapacitated. You could also create a living will to state whether life-prolonging measures should or should not be taken.
12. Create/update your will to include your spouse.
Without a will, the state will make decisions for you. A will is especially important if one or both of you have children already.
13. Update or re-evaluate all your insurance policies.
If you both receive health insurance through your employers, see whether it makes sense for you to be on the same plan, and if so, which plan gives you the coverage best for your situation and for the cost.
For disability, re-evaluate based on how you’ll each be impacted financially and work-wise if your spouse is no longer there (including if a stay-at-home spouse can no longer take care of the children and outside help is needed).
Decide whether you’ll need life insurance. Many couples forgo it if both spouses work, but there are exceptions. “Buying new life insurance isn’t a priority unless we’re going to commit to new expenses we didn’t have previously, like a mortgage,” says La Spisa.
Look at your auto insurance to put your spouse on your vehicle, and meet with a broker to review your homeowner’s insurance.
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