Marrying Your Financial Lives
Of all the promises you'll make on your wedding day, the "for richer or for poorer" bit is likely to cause the most problems. According to a survey by the Association of Bridal Consultants, more than 67% of newlyweds believe the most serious conflict in their first year of marriage is over money. (Problems with in-laws rank a distant second.)
Financial experts are full of anecdotes about young couples and financial discord. It's often the details that drive people crazy. Judy Heltzel, a certified financial planner with Capital Financial Planners in Salem, Ore., recalls a pair of newlyweds who had decided they'd both change their last names and use a new name instead. At one meeting with Heltzel, the new wife had steam coming out of her ears. "He hadn't changed the name on his IRA, and it was bugging the heck out of her, because she had changed hers," Heltzel says.
Small problems often grow into larger ones, because some people find it easier to talk about anything other than money. Ginita Wall, a San Diego-based CFP and founder of the Women's Institute for Financial Education (Wife.org), recalls counseling a divorcee whose ex-husband had a lot of debt. The woman had known about the problem before they got married but couldn't bring herself to discuss it. Even the mailman had an easier time talking about it. "He would say to her, 'Tell your boyfriend to get the bills out of the mailbox. I can't get any of the new mail in there,'" Wall recounts. The marriage ended after just three years.
That, of course, is the worst-case scenario. But merging your finances does require a lot of work initially. And it takes a lot of maintenance to keep everything up to date and both spouses informed. But taking a few easy steps will save you a lot of headaches — and arguing — in the long run.
1. What's Mine Is Mine, What's Yours Is Mine
The first challenge to newlyweds is inevitably, how do we manage the checking accounts? Some couples opt to lump everything together right away, others decide to keep three separate checking accounts at first: his, hers and ours. While that may seem simpler at first, planners say that after a few years of marriage, couples find it easier to have a single account.
If you do decide to combine your checking accounts, experts say it's essential for each person to have his or her own spending money — and not have to tell the spouse where it goes. "Give each other a little space," Heltzel says, "money for those perceived extravagances that you don't have to account to the other for. So if she wants to have her nails done or he wants lattes twice a day, each feels that they're not being stifled by the other."
2. Put Yourselves on a Budget
Once you've got a system worked out, you'll be able to monitor your spending. "Go through the checkbook after about three months, and find out where the money is going," says Victoria Collins, CFP and author of "Couples and Money." Then you can develop a reasonable budget. At the very least, try to spot the problem areas and concentrate on reducing spending. So if you find, say, that you're dropping too much cash on restaurant meals and takeout because you're both too tired to cook after work, budget a certain amount of money. When you've hit that limit, you can't spend anymore until the first of the month.
3. Meet the Marriage Penalty
Bush's latest tax cut provided some much needed marriage-penalty relief. Now the 15% tax bracket is exactly twice as wide as the 15% tax bracket for singles. And the standard deduction is now double what it is for singles as well.
But assuming you and your new spouse earn more than $61,301 in 2006 ($63,701 in 2007) and you plan to file joint returns, you will still experience some tax punishment for tying the knot. So prepare to pay more come April 15.
One thing you shouldn't do is run to your human-resources office to change your W-4. At least not if you and your spouse are both working. Once you indicate that you're married, the rules assume that one spouse doesn't work. As a result, your withholding will actually decline. And that's just the opposite of what you want. "If you're both working and you don't own a home, it should be 'single, one' all the way," says Andrew Schwartz, a certified public accountant with Schwartz & Schwartz in Woburn, Mass.
4. Pay Down the Debt
It's a common scenario: One person comes into a marriage with a lot of savings, another enters the relationship with credit card debt up to the ears. (After all, opposites attract.) Catherine Williams, president of the Consumer Credit Counseling Service of greater Chicago, says that even though the thrifty spouse is not liable for debt incurred before the marriage, the free spender's history is sure to affect a couple's chances of obtaining credit in the future. And if you're in the market for a new home, you'll probably be applying jointly. That should be motivation for you to pay down the debt together.
5. Examine Your Balance Sheet
Before you can make any decisions about budgeting, investing or saving for a house, you have to know how much you own and how much you owe. Schwartz tells his clients to put together a combined balance sheet, on which they list assets and debts, and update it semiannually.
You should also check your overall portfolio and rebalance if necessary. You may discover that together, you're overweighted in one particular stock or sector, Collins says. You'll also want to look ahead to retirement and figure out a way to maximize contributions to your 401(k)s and IRAs and invest as aggressively as you should given your age and goals.
6. Protect Your Incomes
You don't really need life insurance if you're both working and don't have children. But you will certainly receive the pitch from an ambitious salesperson. If you think you need it, ask an independent financial planner first.
What you do need, however, is disability insurance, especially if you're relying on both of your incomes. You might get insurance through your benefits plan at work that will cover 60% to 70% of your income, but it's probably a good idea to supplement that. It can be expensive, but it's worth your attention. "If your spouse can't work, can't leave the house even and needs home health care and so on, you have to pay for that," Schwartz says.
7. Paperwork, Paperwork, Paperwork
You thought planning the wedding took a lot of organizational skills? Wait until you try to track down everything that has your name on it — or that you named a beneficiary for — a mortgage, 401(k)s, IRAs, disability insurance and life insurance at work. If you have a will already, you'll want to change it, if not you need to have one drawn up. These decisions are especially important for second marriages in which there are children involved.
8. Talk Money
Above all, it's important to communicate regularly and openly about money. If that means setting aside a time each week or each month for a state-of-the-finances chat, then do it. (Wall suggests rewarding yourself with a dinner out or a movie after each financial-planning session.) But it's essential to keep each other informed, especially if one person tends to deal with all the money maintenance, while the other handles different tasks. After all, Collins says, "It's not cool to be leaving for work to give an important presentation to your boss, and the other person says, 'By the way, we're overdrawn on our checking account.'"
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