Let Me Clarify
Statistically speaking, one of the top stressors amongst married couples comes from managing finances. As a couple, you each bring a different perspective to the table. This could include good or bad financial experiences that you have had, the type of lifestyle you were provided growing up, or your general attitude toward spending priorities. While you may not always agree about every financial decision in the future, it is important to set the foundation through honest communication and an awareness of the areas to focus on once you decide to tie the knot.
Let me clarify.
Most of us pledge “…for richer or poorer” when we make the commitment to our loved one. However, many couples never have the conversations that are necessary to set themselves up for a smooth transition to jointly managing finances and may not be fully aware of the decisions that should be made early on. Not only can this create missed financial opportunities, but all too often, we see the negative impact that these decisions can have on the relationship as a whole.
How will you manage money together?
Before any goals or decisions can be made, you need to communicate your overall beliefs toward money and discuss your financial personalities. Without an understanding of the philosophies you each have, there will always be a disconnect between your views and the understanding you have of the financial decisions your partner makes. Creating this foundation opens the door for more constructive conversation regarding specific items, such as joining all finances or managing separate accounts (or even a combination of the two), how you will approach credit cards and other debt, and how you will prioritize and work as a true team toward achieving the larger financial goals that you both have (saving for retirement, buying a house, etc.).
What is an appropriate emergency fund?
If you have not had the chance to read my previous post about emergency funds, I suggest starting there. The principles remain the same; a long-term goal of having between 3 and 6 months-worth of living expenses set aside in a truly stable and liquid savings vehicle. However, where the appropriate amount for you falls on this range now depends on both of your spending amounts, your sources of income, and the job security that each of you has. I typically lean in the “better safe than sorry” direction of 6 months, however every couple has different income situations and appetites for risk.
Remember, it should not be “I have my emergency fund and he/she is still working on theirs.” As a couple, it is your shared goals that determine your financial failure or success.
Is your insurance coverage appropriate?
There are plenty of types of insurance to consider throughout your lives. Early on, I suggest starting with evaluating your health and disability insurance coverage.
When you are married, most plans offer “family coverage” that allows you to share deductibles, out-of-pocket maximums, and other costs, typically at a lower premium rate than what it would be for two individual plans. Saving money on premiums is always great, but keep in mind that you should evaluate your combined needs (expected doctor visits, prescriptions, specialists, etc.) to select the plan that makes the most financial sense, beyond what simply has the lowest monthly cost.
Disability insurance becomes extremely important for young couples, especially if there is one main income earner. Not only does this insure potentially many future years of earnings, but if something should happen to the “bread winner”, without a replacement for income, the spouse may be backed into a corner of being forced to find employment. This can become increasingly difficult based on the state of the economy at the time and the current demand of the spouse’s career skills.
How will this affect your taxes?
You have probably heard the term “marriage penalty” referring to negative tax impacts when getting married. Without getting into the weeds, in the past, married couples reached higher tax brackets sooner than they would have as individuals. Luckily, due to recent tax law changes, this is no longer the case.
For you, the major planning should start with estimating or projecting your combined tax situation and planning your paycheck withholdings appropriately. With separate deductions, income phaseouts, and tax rate thresholds for married couples, your first year of joint filing may not go as planned. If this is the case, take it as a fresh opportunity to use the outcome as a way to analyze the full upcoming year of planning your finances together.
Do you need to update your beneficiaries?
Most qualified plans (401Ks, 403Bs, 457 plans, etc.) consider the participant’s spouse as the default beneficiary. In these cases, in order to designate assets to other beneficiaries, you would actually need the spouse’s written consent. Regardless, one of the first steps that you can take to protect each other is to be sure that you update your listed beneficiaries on your accounts. These might include retirement plans, IRAs, life insurance policies, bank accounts, and any other accounts that would come into question if something should happen to either one of you.
Not all conversations are easy to have. I have a feeling discussing “money philosophies” and “financial habits” might be a bit awkward at first. But they say that investing in yourself is the best investment that you can make. I hope that you can use the ideas above as a way of investing in your relationship and setting a course toward shared financial success.
This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation. Clarify Wealth Management and LPL Financial do not provide legal advice or services. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.