Financial Planning 101: What Newlyweds Should Know
Financial Planning 101: What Newlyweds Should Know
Most newlyweds spend more time picking out their wedding cake than they do talking about how they'll handle money. But understanding where your new spouse stands on key financial issues can not only strengthen your financial situation, it can also help your marriage. Here are a few areas to get you started.
Get on the Same Page
Setting some common goals will help you from splurging on too many pricey lattes as well as help open up communication and ensure that you're working together. Studies have shown that disagreements about money cause more divorces than arguments about relatives, house chores, and sex. So talk to each other about your hopes and dreams, like houses, nice trips, and even kids. You'll deepen your understanding of each other and build trust.
Budgeting and Saving
Start by agreeing to a realistic budget. This is easier said than done, since budgeting is an inconvenience for most people. So find a strategy that both partners can stick by, such as the one below:
First, with the help of a financial planner once a year, determine how much money you should be saving each month to meet your lifetime goals. As part of that conversation, you should create a household spending budget to make sure that you can really sock away that money. Include room for some “fun” money that you can spend without having to be accountable to the other person. Of course, if your total spending budget and savings exceed your after-tax income, then you might want to reduce your spending budget or modify your goals.
Second, stick to the old adage of “pay yourself first” by automating your savings deposits whenever possible. For your emergency account, set up auto transfers into a separate high-yield savings account, money market or short-term bond fund. For general and education savings, set up auto-deposits into appropriate accounts with the help of your advisor. For retirement savings, use your employer-based retirement account, such as a 401(k), to deduct savings directly out of your paycheck. For additional retirement savings, set up a Roth or traditional IRA as well.
In other words, get your monthly savings out-of-sight, out-of-mind. Make sure that that the only thing sitting in your usual bank account is truly spendable. Some banks will also allow you to set up “electronic sub-accounts” so that you can further divide your checking or savings into spending categories. Use them if you seem to constantly run out of money each month.
Third, track your progress, but not too frequently. In other words, don't do the financial diet that won't last. Instead, take a quick snapshot of your savings progress just once every quarter, but don't analyze every investment account for performance. The market moves up and down and you don't need your emotions running with it. Instead, look at your investments and repeat the budgeting exercise above just once per year.
A good financial advisor can also help you decide the best place to invest your money. But one size does not fit all when it comes to investing. Many advisors will simply ask you questions about your “risk tolerance” and then construct a single investment portfolio for most of your goals. That's why many people often invest for their short-term goals, such as education for their children, in portfolios that are simply too risky. Every goal should have its own specific saving and investment strategy based on many factors, including human capital risk, time to reach the goal and importance of each goal. Retirement, education and house down payment goals are not the same and shouldn't be treated as such.
One of the biggest potential pitfalls couples face is the debt trap. Avoiding consumer debt whenever possible is the best way to reduce marital stress. If you already find yourself with lots of debt, then start paying down your highest interest rate liabilities first while paying the minimum amount on other debts. Then move down the list by interest rate as you pay them off. To be sure, paying off the smaller loans first might seem more satisfying by clearing them off your plate. But sorting by highest interest rate could save you lots of money, especially if credit card debt is involved.
Of course, you want to have an emergency rainy-day buffer of cash. But, after that's been established, you're usually better off paying down debt, unless it's has an exceptionally low interest rate. You could effectively earn five to ten times the interest rate paid by your bank account simply by paying off your car loan or credit card faster.
Life, disability and long-term care insurance policies are often the last consideration for a newly married couple, until it's unfortunately too late. Insurance policies are typically less expensive for those who are younger; a qualified financial planner can help you determine the amount of coverage that is appropriate.
Estate planning is often associated with the “doom and gloom” of health problems or death. Nobody wants to think about these life events, especially soon after tying the knot. But estate planning is really a way of saying, “I love you” and “I want to have a plan to make sure that you'll be taken care of.”
Everyone—young and old—needs to have a plan. An estate plan is especially vital if either partner has children or owns assets separately. You should have four key documents: A last will and testament, a power of attorney, a living will, and a healthcare power of attorney.
A last will and testament allows you and your partner to make important decisions instead of the courts. You can choose who will manage your affairs, be the guardian of your children and what happens to your assets. Having the courts determine your final financial fate can be a disaster. Not only does it delay the probate process, the laws of many states might dictate a division of assets that is different than your intent. While handwritten wills might look good in movies, using a real legal document is your best choice for actually protecting your family.
If you're ever incapacitated, a power of attorney will help to ensure that your financial affairs remain in order. A power of attorney delegates someone you trust to handle financial transactions on your behalf while you're unable to do it yourself.
A living will allows you to spare your loved ones from having to make a difficult end-of-life decision on their own. While a living will is too often associated with the notion of “pulling the plug,” you're actually giving your loved ones a great gift by helping them know that your wishes without putting them through enormous trial and second guessing. You also get the conversation started ahead of time.
Similarly, a healthcare power of attorney empowers someone you trust to make health care decisions for you when you are deemed incapacitated by a medical authority. Most importantly, it allows you to designate which family member you trust most for these key decisions.
Contrary to popular opinion, marital financial planning isn't simply about prenuptial agreements to decide “who gets what” if the marriage dissolves. Good financial planning is about how to make the marriage strong in the first place with realistic financial expectations, trust and cooperation.
Kent Smetters is The Boettner Chair Professor at The Wharton School at The University of Pennsylvania. He is also co-founder of Veritat Advisors, a mission-driven firm that makes objective and personalized financial planning affordable for all households. This article is adopted from “The Veritat Advisors' Guide for Newlyweds.”
(Advertisement) To learn more about Veritat Advisors, click here.