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Engaged? Time to Talk Money
If you’re planning to become engaged this holiday season, you are not alone. According to a Modern Bride survey, more than 25% of all couples initiate their plans to tie the knot in November and December. If you’re among the couples who soon will begin wedding planning, it’s important to remember that while your engagement is your first step toward sharing a life together, it’s also the beginning of sharing your finances with someone else. Your first reaction may be that finances and romance don’t mix, but the fact is that money issues derail plenty of marriages. To keep your financial house in order, follow these steps to martial money bliss:
- Practice full disclosure. Maybe you’ve seen the commercial for CreditReport.com where the young guy sings, from the basement apartment of his in-law’s home, that he wished he’d known about his new wife’s credit problems before marrying her. It’s not romantic, but each of you should prepare a detailed financial statement listing assets and liabilities, annual gross income, interests in family trusts, even potential inheritances. The more you share information, the better prepared you will be to make joint financial decisions.
- Consider a prenuptial agreement. Once the domain of the ultra-wealthy, today more and more middle-class couples, particularly those who have been married before or who have a blended family, include a prenuptial agreement in their wedding plans. A prenuptial is a written contract created before you say “I do” that addresses a range of legal and financial objectives. For example, you might use a prenuptial agreement to separate pre-marriage assets, protect a family business, define community property, specify what happens to assets in the event of divorce, or address potential family inheritances. While you can draft the document yourselves and have it signed and witnessed by a local notary, you each might consider hiring a lawyer to review the agreement to ensure your individual interests are protected and that the agreement follows state law. Note that prenuptial agreements have been struck down in court down because each spouse didn’t hire a lawyer to review the agreement.
- Create a shared money vision. Ask yourselves: What’s important about money? Does money mean power, freedom, or is it an end in itself? Exploring this question may lead you back to your childhood to think about how your family managed money. You might also ask: If money was not an issue, what would I do with my life? Having a little perspective on where the other person comes from can provide a foundation to understand and resolve future conflicts – especially if one spouse is a spender and the other is a saver.
- Draft your top ten goals. Do you want to buy a home, pay off student loans, eliminate credit card debt, save for a vacation, have children, retire early, or start your own business? Your short and long-term goals will inform how you need to invest and manage your money. In addition to prioritizing your goals, be as specific as possible. That is, “pay for college” is a start, but you likely will make more progress if you attach a timeframe and price tag to your dreams.
- Think about implementing joint and separate checking and/or savings accounts. Many couples use a joint account, perhaps funded in proportion to each person’s income, to pay for mutual expenses such as food, rent/mortgage, and common goals. In addition, separate accounts, funded after the necessary joint account, grant each spouse the freedom to make relatively minor purchases without consulting the other.
- Prepare an investment policy statement. Agreeing on spending is one thing, but seeing eye to eye on how you’ll invest, particularly in this volatile market, is quite another. To gauge and compare your risk tolerance, consider these questions:
- Am I more concerned about maintaining the value of my initial investment or making a profit from it?
- Am I willing to give up stability for the chance at long-term growth?
- How would I feel if the value of my investment dropped for several months?
- How would I react if the value of my investment dropped for several years?
Remember, if you can’t reach an agreement, you could split your portfolio into individual accounts. Or, alternately, the conservative spouse could invest conservatively in his or her 401(k) while the other spouse takes on more risk with their retirement account. Collectively, however, the total portfolio would remain properly diversified and on target to reach your goals. If you can afford it, a real risk taker might be granted a small “play money” account, ideally no more than 5% of your portfolio, for higher-risk investments.
- Budget and pay bills together. It’s easy to budget for essentials like car payments, but an accurate budget requires that you track all your expenditures. To accurately estimate what you spend on variables such as entertainment, keep all your receipts in a bowl for three months. When you finally tally the results, you may be surprised how much you spend on lattes. Once your budget is drafted, sit down weekly for ten minutes to discuss short-term mutual financial decisions, and meet periodically, say once a quarter, to review your overall finances. Although one person may do much of the actual bill-paying, the other spouse should be involved because managing money together reduces conflict.
- Keep the lines of communication open. Recently, a Fidelity study found that only 23% of couples made financial decisions together. (Source: Fidelity Research Finds Husbands and Wives Approaching Retirement Have Different Understanding of Their Financial Plans, http://content.members.fidelity.com/Inside_Fidelity/fullStory/1,,7454,00.html). In a marriage, disagreement can be difficult, but silence is dangerous, and that’s especially true with finances.
- Seek professional help. Particularly if these exercises illuminate polarized spending and saving habits, a financial advisor could help you to examine your money attitudes, clarify your goals, organize your finances, and establish an investment plan. Working with a professional also can help you to fortify your money management foundation with an emergency fund and proper insurance.
Of course, all this advice may feel like it will be more useful down the road a little bit. Currently, you may feel like you need to invest all your energy in planning your dream wedding within your budget. In that regard, a good budgeting rule is: If you can pay for it with cash, then you can afford it. Adhering to that simple rule will give you a terrific head start in beginning your marriage on solid financial footing.