Dating and marriage comes full of fun and excitement.
As the relationship develops and becomes more serious, conversations steadily become deeper and help reveal more about your potential spouse. By spending time together, you learn more about the things in life you both value most – career aspirations, desire for children, and other dreams and life goals. All of these conversations help provide a window into your partner’s world-view and help you gauge compatibility.
While falling in love often involves more emotional aspects than logic, before taking the leap to marriage, you should also ensure you are both on the same page when it comes to money and finances.
Why is Financial Compatibility Important?
Financial fights and money-stressors are often cited as a primary reason couples call quits on their marriage.
As a society, we generally adhere to the belief that talking about money and personal finance (as well as politics) is a bit taboo. However, our financial situation often dictates a huge amount of our daily life and overall happiness. Without deep conversations centering around the financial aspects of life, key issues and concerns often go overlooked. Often, money issues do not even come to light until after couples are married and finances are shared.
However, with some preemptive planning, you can ensure you both agree on how to treat money and finances in your relationship.
What are each spouses’ view of debt or other financing methods? Are you both comfortable investing or is one spouse extremely risk-averse? Will one spouse spend money frivolously? Is one person too uptight and needs to loosen the purse strings?
Ensuring you are both in alignment on your views on money can help mitigate financial stress in your lives.
1. Discuss Your Feelings on Debt
The most important financial conversation you both will have centers around your tolerance for debt.
If push comes to shove, how will you handle shortfalls in your budget? Are you willing to sacrifice your lifestyle today and build up an emergency fund nest egg to cover unexpected costs? Alternatively, will you use credit as a fall back?
Your mutual tolerance for debt largely determines much of your financial behavior. While some Americans live paycheck to paycheck in a never-ending cycle of debt payments, you both may wish to have a different lifestyle full of financial freedom.
Identify Any Unhealthy Relationships with Debt
Often, we see many red flags before any irreparable problems come to light.
Whether your partner insists on leasing a new car every couple of years or they run up large credit card balances to finance consumer spending, you must determine if you are willing to finance the same bad lifestyle choices in marriage. After all, these behaviors will probably only be exaggerated once you are married. Further, it would be unfair to ask someone to change once you tie the knot.
If you identify disturbing patterns in your partner’s spending behaviors or relationship with debt, you should discuss your concerns and feelings.
Explain how these tendencies can be detrimental to a healthy relationship. As you discuss your life goals and dreams together, hopefully, the person will modify their behavior. Discussing your goals and dreams may help them realize their financial decisions have consequences to both of you. Exhibiting self-control can help you as a couple grow closer and achieve your mutual goals.
If your spouse refuses to change, you may wish to reconsider your long-term relationship if you do not believe you have mutual financial goals. After all, financial issues and anxieties is a highly cited reason couples divorce.
For this reason, it is imperative to get ahead of any financial differences by discussing your feelings of debt prior to marriage.
The Normalization of Debt
For some people, debt is just an accepted part of life.
As Americans, debt is a symptom of a consumerist society. Because we work so hard, we sometimes feel entitled to having nice “stuff.” Further, we are constantly inundated with marketing and advertising for the latest gizmo or gadget. Social media may make us feel left out by not taking that European vacation or buying that fancy house.
Whether you find yourself financing that new, luxury car over 7 years to impress your neighbors, or you and your spouse frequent a new restaurant each night “for the credit card points,” our spending habits eventually catch up with us.
While most will agree that moderate consumer spending helps us enjoy life, instead of saving for the purchase, many Americans have no problem opening up a new credit card or putting their purchase on payments. Not only is this compulsive mentality immature, irresponsible spending behavior will inhibit your ability to build wealth as a couple.
If excessive, the financial stress and wasteful behavior will inevitably strain your marriage.
Coming to a Consensus on Debt: Complete Aversion or Reasonable Debt Maintenance
Your mutual feelings on debt will dictate how much and how widespread borrowing money will be used in your relationship.
While debt allows you to enjoy the purchase today, the periodic debt payments greatly hinder cash flow in the future. These payments add stress to your life. Further, the financing charges and interest payments restricts your wealth-building capability. When combined, the total of the principle and interest results in the purchase costing much more than the cash purchase price.
Some people simply do not have the self-discipline or financial awareness to cut back on their spending. Ultimately, many people end up financing their lifestyle through high-interest credit cards, payday loans, or other financing arrangements. By the time they begin paying attention, they find themselves scraping by just to make their debt service requirements.
I think all of us can agree this is not the ideal lifestyle for a happy marriage.
As an Example, Think of a Home Mortgage
Debt is also known as “leverage.” Leverage allows you to control 100% of the asset with a relatively small percentage of your own money in the deal. However, leverage augments the outcome of your financial decisions – whether the result is good or bad.
When you purchase a house, the lender may only require a relatively small down payment (say, 20% of the purchase price). After signing the mortgage and executing the sales agreement, you gain 100% control of the property.
However, you technically only “own” 20% of the home’s value free and clear. This percentage is your equity value. When the value of your property rises, you reap all of the benefit of the appreciation.
While the bank does not own 80% of the equity value in your home, it does own a financial asset tied to your home (i.e. the mortgage). This contract states you will repay the principle balance plus interest over a specified period of time. Because the bank only owns this debt investment, they do not gain any benefit or experience any loss in the event your property value changes.
However, if you do not pay the required amount, the lender can foreclose, retake possession of the home, and recoup their money.
When you are gainfully employed, the housing market is rising, and the economy is booming, leverage is your friend. However, when markets turn or you lose your ability to earn an income, leverage can turn your dreams into a nightmare. For this reason, debt can be a two-edged sword.
Because of the increased risk that debt presents, many Americans have differing views on how much they are willing to risk by taking on debt.
Complete Debt Aversion
Because debt adds both risk and stress to life, some people avoid debt at all cost.
Without debt, you have complete control of your income to save for your next purchase or invest for the future. Avoiding debt keeps you from making financial purchases that you truly cannot afford. Instead, you must diligently save and/or invest for the desired expenditure.
By the time you accumulate the necessary amount, you may realize that the purchase is not worth the work it took to save. If you still want to make the purchase, paying cash will help you enjoy the item or experience more since you will not have lingering payments after the “newness” has worn off.
However, complete debt aversion requires substantial patience. For some asset purchases (such as a home), the cost to buy generally appreciates over time. If the price of the house increases faster than your savings rate, the purchase could be delayed indefinitely as the asset becomes increasingly unaffordable.
To counter the effects of inflation and appreciation, those that avoid debt at all costs will need to diligently save AND invest to supplement their savings rate.
Complete debt aversion may not be possible when you are young and just starting your career. However, your ultimate goal should be to accumulate enough wealth to simply pay for any purchases outright.
Assuming a “Reasonable” Amount of Debt
Alternatively some couples may choose to only use debt for certain types of expenses.
When used responsibly, debt financing allows you to purchase big ticket items such as a home or vehicle that you may not have the upfront cash to buy.
The Mortgage: The Most “Healthy” Debt
For homeowners, a mortgage allows you to leverage real estate and build equity over time in your primary residence.
As an example, borrowing for a home allows you to lock in the purchase price today even if you do not have all of the cash to buy the property outright. Over 15, 20, or 30 years, the property will steadily rise in value. While you pay interest on the loan, you also build increasing equity as the debt balance is paid down and the property rises in value.
Further, due to the inflation, the “real” cost of your housing payment steadily decreases. Unlike rent which rises with inflation and housing demand, your mortgage payment is locked in when a fixed-rate mortgage is used.
While holding a mortgage on your primary residence is almost universally excusable, your ultimate goal should be to pay off the balance. This allows you to save and invest a housing payment to build wealth.
Student Loans: Avoiding a $1.5 Trillion Financial Catastrophe
For those who obtain higher education, some turn to student loans to finance their education in hopes of earning a greater salary in the long-term.
Since studies show that those with college degrees earn substantially more over their lifetime than those with a high school diploma, higher education can greatly increase your earnings potential. However, college at all costs is certainly irresponsible.
For some, student loans may seem “required.” However, you can reduce the total amount needed by attending junior college or an in-state university. Obtaining scholarships prior to enrollment also help offset the cost of education. Further, working part or full-time can also supplement your cost of tuition and living expenses.
While minimizing student loans requires sacrifice, hard-work and scholarships allow you to borrow much less. Instead of financing your lifestyle in college, ensure any student loans are minimized and ONLY spent on the basics required to pursue higher education.
Mutually Agree on Your Debt Philosophy
At the end of the day, you and your spouse must come to a consensus on what part debt will play in your combined finances.
If one spouse continually justifies borrowing for impulse purchases while the other spouse abhors debt, your house will be full of constant conflict.
By coming to mutual terms on what debt and how much leverage may be acceptable, you can ensure you both sleep well at night while enjoying the purchases you make.
2. Talk Through Your Incomes, Career Trajectory, and Future Spending Needs
Money represents freedom.
If you do not believe this, what would you do if you hit the lottery or inherited $1`00 million?
For most of us, we would probably quit our jobs, buy that dream car and house, and travel the world. Sure, we would probably also give to charity and help our family out financially. We might even start our own business.
If you are smart, you would probably also save and invest and live on the income your wealth produces.
While the chances of you hitting the lottery are slim to none, you can still dream together and a set a financial plan in motion to achieve your financial goals in life.
Discussing Your Incomes
We all know that revealing our salaries on the first date is impolite (at best).
However, by the time your relationship has grown more serious, having a real conversation about your incomes may be prudent. Often, men feel a sense to provide for their significant other. In the early stages of dating, we may wish to portray a sense of financial success. While shallow, this allows us to appear more attractive and capable of supporting a family. However, this could also lead to overspending or a lifestyle that is not financially sustainable.
To avoid surprises in marriage (if your significant other expects a certain lifestyle), consider discussing your incomes during the engagement period. Additionally, you can discuss any earnings potential or career aspirations. This will help you gauge and limit any differences in expectations going forward.
Together, discuss the type of lifestyle you can reasonably expect to afford on your combined salary. You will also want to ensure the importance of saving and investing for the future.
Discussing your incomes can provide a “level-set” and clarity on your financial situation prior to marriage.
Talk About Career Aspirations and Goals
Having a conversation on both of your career aspirations and goals is also very important.
What kind of work-life balance will you both have? Will one of you be traveling every week at the expense of family life? Are you both gunning for that promotion and will need extra help raising children? Alternatively, will you only work enough for your family to scrape by?
Discussing your long-term career aspirations can help you both devise a strategy to achieve your goals.
Avoiding the Rat Race
If you love your job then you may not understand how grinding the working world can be.
However, if you wake up dreading your long days in the office, you probably dream of making your eventual escape. If you hate the thought of delaying your dreams in life until retirement, you probably hope to achieve financial independence much earlier.
Discussing your displeasure with your spouse can help you both devise a plan to develop passive income or achieve a financially-free lifestyle.
Perhaps, you earn a great salary but your lifestyle only allows you to tread water. Instead of spending money on luxuries, you can both sacrifice a little today by paying off debt, reducing lifestyle expenses, and saving to invest. After reducing your required spending, you can either take a risk and open your own business or take a less stressful job that you actually enjoy.
Having much lower lifestyle expenses provides more flexibility forpursuing the type of work you want. Worst case, you can always take another higher paying, stressful job until you get back on your feet.
Starting Your Own Business
Maybe, you have always wanted to start your own business.
Planting the seed in your spouse’s mind early on can help turn the idea into reality. While “now” may not be the right time, together you can set a timeline to achieve the goal. Perhaps, you can begin taking the preliminary steps to set your business plan in motion.
However, if your spouse never knows your entrepreneurial dream, they will never know how they can support your business endeavors.
Having spousal consent and support to pursue opening your own business can greatly enhance your chances of success.
Consider Discussing Large, Future Expenses
As we all know, life can be brutally expensive.
Whether you see an engagement ring and wedding, new car, home purchase, or college expenses in front of you, developing a plan can help you tackle these high-cost items with relative ease.
Unfortunately, most Americans rarely save for future expenses. Instead, they live paycheck to paycheck. When they need to incur a large expense for a new car, they simply take out an auto loan. When their kids turn 18 and it’s time to pursue higher education, they co-sign for student loans.
These financial habits keep the middle-class American family in the endless cycle of consumer debt and the prison of a job they hate.
Set Up Sinking Funds
Instead of relying on loans to finance known future costs, set up separate high-yield savings accounts or brokerage accounts to pile up money for your large purchases.
If you have a 5-year old vehicle, you know you probably will need to replace the car in the next 5 to 10 years. Instead of financing the vehicle, calculate how much you will need to set back each month to pay for your next vehicle in cash. If your time horizon is more than 5 years, consider investing part of the balance in the stock market through low-cost index funds.
If you have children, calculate how much to invest each month in a 529 Plan to pay for college. This will help you and your children avoid the crippling effects of student loans. Further, the market will do the heavy lifting, freeing up more of your money to spend elsewhere.
Sinking funds provide a great method to put money away for future costs.
3. Identify Potential Gaps Between Your Earnings and Spending Habits
Cash flow is king.
Just like businesses monitor their cash intake and outgo to stay solvent, you both should understand your net savings (or spending) each month. This can help you make budgeting choices to ensure you are in the green most months. In turn, you will be able to build wealth through your savings and investments.
If you have a volatile income due to commission incentives or bonuses, you may need to squirrel away extra during the high months to ensure you can maintain your lifestyle during the lean months. This provides for stability in your financial lives and can alleviate stress.
The first step to identify gaps in your monthly budget is to understand the natural spending and saving choices each spouse tends to make.
Identify the Spender vs. the Saver
In most relationships, one spouse tends to be the spending culprit. Since “opposites attract,” hopefully, the other spouse exhibits more frugality. Often, this relationship provides balance between spending and saving.
However, different personalities often come at odds with each other. The natural saver may feel like they are implementing self-control to the point of self-deprivation. They may exhibit extremely frugal behaviors in order to appease the spouse who has an unhealthy spending habit. Conversely, the spender may feel like they are constantly monitored and controlled. This feeling could grow to the point they cannot enjoy life.
Both ends of the spectrum result in conflict and an unhealthy relationship with money.
If left unchecked, couples could end up financing their lifestyle as the naturally frugal person loses hope and becomes resentful.
However, by establishing basic financial ground rules early in marriage, you can mitigate most of the conflict and potential issues that arise from having two different natural tendencies.
The Budget
Obviously, the most important tool in your arsenal to combat financial conflict in your relationship is the budget.
Budgets provide the basic guideline for where your money should go. For the naturally frugal person, it provides assurance that it IS OKAY to spend your money on enjoyable experiences. While frugality is normally a good trait, budgets allow for both couples to provide input into where their hard-earned money should go. The naturally frugal person may wish to allocate a larger amount to retirement or other savings funds. Once their goals are reached, they can feel comfortable increasing their consumer spending. This should appease the spender.
For the natural spender, budgets provide approval and permission to spend. Instead of carelessly wasting money, a budget helps you track and identify areas you are spending money that are not important or bring you happiness.
If the spender has never really considered where their money goes, this could be an eye opening experience. They may not even realize they spend hundreds on clothes each month. Maybe, they never have considered where else that rarely used $200 gym membership could be better spent.
Laying out the budget helps you realize and tell your money where to go.
Coming to a consensus on a budget and continually tracking your finances can help both spouses enjoy their lives while accomplishing their mutual financial goals.
4. Have a Conversation on Investing
For many Americans investing is scary.
Even if you did not personally invest through the 2008-2009 Global Financial Crisis, you probably have heard about the financially devastating impact the Great Recession had on markets. For those that jumped off the roller-coaster at the lows, they realized about a 40% decline in their portfolio. However, for those that continued to maintain course (and even invest at the lows), they recovered most of their balance within 2-3 years.
Hopefully, one spouse understands markets may be volatile at times. However, immense wealth can be generated through compounding interest since markets rise over the long term. The key is to continue investing (and even increase your contributions) when the market declines.
Gain Comfort in Investing
If you are like me, you absolutely love investing.
I enjoy playing with my contribution amounts and expected rate of return to see how much money I may have in the future. However, not everyone shares this passion for investing. Some even see the markets as gambling.
If your spouse or significant other is not comfortable with investing yet, you should do your part to educate them on the powerful wealth building possibilities that markets provide.
For example, the S&P 500 index fund has historically averaged 10% annualized returns. At this rate of return, investors can expect their money to double in ~7 years. However, investors who do not have a long-term mentality may find themselves panic-selling at market bottoms. This causes them to miss out on the inevitable “bounce back” in their portfolio.
Even if one spouse tends to handle the finances, the other spouse should still take part in the discussion. After all, if the financial leader were to pass away, the surviving spouse should know where their money is invested, the account information and passwords, and know a trusted adviser to help them maintain course.
Discuss the Fundamentals of Investing
If you have trouble convincing your significant other to become an investor, you may want to explain what investing entails.
While markets fluctuate on a daily basis, stocks represent pieces of ownership in individual companies. If your wife loves Lululemon (LULU), she can own a percentage of this company by purchasing the stock or index fund that owns LULU. If you husband loves golf, he can own a stake in the Callaway Golf Company (ELY).
When you purchase an index or mutual fund, your dollars are divided among hundreds or thousands of companies’ stock. This provides diversification. When one stock declines, another rises to offset the loss. Over time, owning an S&P 500 or Total Stock Market Index fund allows you to profit from the economic development of the U.S. economy.
Discuss an Investing Strategy for Your Relationship
To maintain course during market corrections, it is important that both spouses are in agreement on their investing strategy.
For most individual investors, automatically dollar-cost-averaging in low-cost index funds provides the best results. As markets fall, your contributions buy more shares of the index. When markets inevitably rise, your contributions buy slightly fewer shares.
Thanks to technology, you can easily set up multiple automatic investments through various online platforms.
Depending upon your goals, different types of accounts provide ways for your investments to grow tax-advantaged.
Your Eventual Retirement
Inevitably, we all hope to one day have the financial means to retire.
Even if you love your job now, circumstances could change in your “Golden Years” that could inhibit your ability to earn an income. Perhaps, you get a new boss who treats you unfairly. In order to insure yourself against these possibilities, you should plan to have a nest egg large enough to provide the lifestyle you desire in retirement. Maybe, you want to spend more time with your children and grandchildren. Over time, our life goals change. Building a retirement nest egg allows you the financial flexibility to pursue your ever-changing life goals.
Whether you invest in a 401(k) or other workplace plan or open an Individual Retirement Arrangement (IRA), setting aside a portion of your monthly income can help you accumulate wealth for the future in a tax-advantaged account.
How Should You Both Save for Traditional Retirement?
Generally, experts recommend putting aside 15% for retirement. Over your career, this should allow you to accumulate a portfolio capable of replacing your income and combat inflation.
Two primary types of accounts exist in the tax code to help you save for retirement – Traditional and Roth.
While the Traditional 401(k)/IRA provides a tax deduction in the year contributions are made, you will pay taxes as ordinary income with distributions are made in retirement (after 59 1/2). By contrast, Roth accounts do not allow a tax deduction on contributions. Your contributions with a Roth are “after-tax.” Instead, your balance grows completely tax-free.
What About Early Retirement?
For those who seek early retirement, consider investing an additional 15%-30% in an ordinary brokerage account. Because touching Traditional and Roth accounts prior to 59 1/2 may result in taxes and penalties, bridge investing in an ordinary brokerage account allows access to your funds prior to 59 1/2.
Investing in an ordinary brokerage account may be slightly less tax-efficient. You will owe taxes on the capital gains (when sold) and dividend distributions. However, you are free to make withdrawals and contributions as you please. Further, unlike 401(k)s and IRAs, no limits exist on how much you can invest.
Other Types of Investing
While retirement tends to be the biggest financial animal to tackle for most people, you can also efficiently save for other life expenses.
Higher Education
If you want to go back to school or see children on the horizon, you can also save tax-efficiently to pay for educational expenses. After all, unless you have a very strong income, most families will find cash flowing college extremely difficult.
However, you an offset this expense by opening a 529 College Savings Plan or Coverdell Educational Savings Account. Both accounts allow for after-tax contributions. The capital gains and dividends accumulate tax-deferred. However, when withdrawn for qualified expenses, the gains and dividends can be withdrawn without tax consequences.
While the 529 Plan does not have a limit on contributions. However, carefully consider gift tax implications when making contributions. Further, investment options tend to be limited and based on a state’s particular plan. By contrast, the Coverdell ESA has a much lower limit ($2,000 in 2019). While a 529 Plan does not have an age stipulation, Coverdell ESAs require the beneficiary to be under age 18.
Both types of plans allow an leftover amounts to be transferred to another qualified family member without taxes or penalties. If your child receives a scholarship, the amount of the scholarship can be withdrawn from the plan without penalty.
5. Ensure You Are in Agreement on Insurance
Insurance can be a great way to help you rest easy at night.
Whether it’s legally required (i.e. automotive) or is an add-on luxury (i.e. a warranty on a new, $1,500 television), ensuring you have the proper perspective on insurance is important to keep more of your hard-earned money while mitigating financial risk.
Discussing the Purpose of Insurance
Insurance provides a way mitigate the financial risk that catastrophic life events can cause.
After all, we could diligently save and accumulate a decent sum of money, only to have all of our work wiped out by a sudden illness. For most Americans, we probably can’t afford to replace our car on a whim or pay for Intensive Care in the event of illness completely out of pocket.
However, most of us can afford small monthly premiums to insure us against large expenses. While recurring insurance premiums can be quite a nuisance and you hope to never need your policy, insurance caps your downside.
The Economics of Insurance
Insurance companies carefully study the probabilities of events occurring in a certain pool of individuals. After they determine the likelihood and amount of payouts they will make over time, they charge premiums to offset their expected cost and generate a profit.
For policy holders, we pay a much smaller and affordable monthly premium. The company pools our monthly payments with other policy-holders and invests our premium payments. When a claim is eventually made, the insurance company pays the claim with this pool of funds. In essence, our premiums subsidize other policy-holders’ claims. When we make a claim, other policy-holders “return the favor.”
Determining Your Insurance Needs in Marriage
Let’s be honest, most Americans are way over-insured.
Whether we have a “Cadillac policy” to cover our healthcare expenses or purchase warranties on every consumer product known to man, many of us have such an aversion to loss that we forget insurance companies make money on our policy way more often than we receive an economic benefit. After all, if they did not earn a profit on us, they would go out of business.
For this reason, you should review your insurance needs and policies annually to ensure you receive the best rates and only have necessary coverage.
Car Insurance
Car insurance is probably the hardest insurance product to avoid.
Because operating a vehicle uninsured is illegal, everyone who owns a car should have the proper insurance to protect life and property.
If you have not shopped for car insurance, consider obtaining multiple quotes. Even if you like your current insurance company, the car insurance industries has been heavily commoditized. Why pay more money for the same service and coverage? Further, when you get married, you may receive a multiple car discount with your new spouse. Obtaining an insurance quote for your combined insurance needs can result in substantial savings.
Also, you can consider adjusting your deductible as you build wealth to cover any out-of-pocket expenses. Often, you can substantially reduce your monthly premiums by increasing your deductible amount. Just be sure you have the financial means to cover the cost.
As you build wealth, you can begin to “self-insure” and even consider liability insurance and pocket the savings. You will just want to evaluate the “risk-reward” depending upon your personal situation. Sometimes, the premiums will not be reduced enough to offset the increased out-of-pocket risk.
Health Insurance
With the high cost of healthcare, proper health insurance is a must.
However, your respective employers may offer different plans ranging from High-Deductible Healthcare Plans (HDHPs) to Health Maintenance Organizations (HMOs) and Preferred Provider Organizations (PPOs).
Depending on any pre-existing conditions, chronic illnesses, diseases, and propensity to get sick, you could save a substantial amount in premiums simply by adjusting your coverage. When you get married, you could receive better coverage and save a substantial amount by being on one spouse’s employer plan.
Consider a High-Deductible Plan
At first glance, “high-deductible” may be scary.
Since we already think of anything healthcare-related as overly expensive, the thought of paying more out of our own pocket may seem unacceptable.
While most high-deductible plans require you to cover 100% of costs until your deductible is met, the cost is generally offset by substantially lower premiums. Further, your total out-of-pocket costs are capped. After this maximum is met, your insurance covers 100% going forward. By contrast, some PPOs require you to continue covering a certain percentage of the bill.
To be a “Qualified High-Deductible Plan,” the deductible must be at minimum $1,350 (for individual plans) in 2019. Once your medical expenses reach this amount, insurance kicks in to cover most of the costs.
Healthcare Savings Accounts
While the deductible may seem high, consumers can enroll in a Healthcare Savings Account (HSA).
With a HSA, individuals enrolled in a HDHP may contribute pre-tax dollars up to specified limits. In 2019, the limits are $3,500 for individuals and $7,000 for individuals with family.
Since the account rolls over each year, you can easily save up for any future healthcare expenses. In addition to the tax deduction on contributions, the balance can also be invested and grow tax-deferred (like a Traditional 401(k)/IRA). When withdrawn for qualified healthcare expenses, the distributions are tax-free.
You will want to carefully consider any premium savings and your personal healthcare needs when deciding whether a HDHP + HSA is right for you.
Life Insurance
Does anyone like discussing life insurance? Probably not…
After all, none of us like to think about our own mortality. However, when you marry, you are no longer only responsible for your own well-being. You must also consider the financial impact to your spouse and family.
Therefore, if anyone relies on your income and you have not self-insured through accumulating wealth, you should have term life insurance in place.
For most Americans, 10-12 times your salary should produce enough capital gains and dividends to replace the deceased spouse’s salary.
As an example, if one spouse earns $100,000, they should have $1 million to $1.2 million in term insurance. Based on the historic market return of 10%, $1 million invested should produce an average of $100,000 per year in perpetuity. This means the surviving spouse does not have to sell the house or worry about their financial future.
Even if one spouse is a homemaker and does not hold a traditional job, you should still consider life insurance. After all, rearing and watching children all day does provide an economic benefit to the household. Should that spouse pass away, the surviving spouse would need to hire full-time help while they working or greatly reduce their hours to be there for the family.
Avoid “Gimmick Insurance”
As mentioned previously, the sole purpose of insurance companies is to drive profit for shareholders.
Therefore, they will be willing to offer insurance or warranties on almost anything. In order to build a wealthy household, you should do your best to avoiding insurance with bad economics.
Whole Life Insurance
While life insurance is a wonderful, risk-mitigating product, whole life insurance is drastically more expensive.
While whole life is marketed with a “savings component,” the rate of returns are substantially lower. Instead, buy term insurance and invest outside of insurance products to build wealth. This allows you to have greater say over your money and avoid hefty fees and low rates of return.
Warranties
One of the most profitable areas for car dealerships, appliance retailers, and electronic stores is their warranty sales.
Ever wondered why stores and dealerships market warranties so heavily? These stores certainly are not doing you a favor. Their business is to make money. They market warranties so hard because most of their profit margin comes these add-on warranties.
Depending upon the business, their margins on warranties can range from 70%-90% in extra profit. After all, a new car rarely breaks down. A new television or computer rarely goes bad during the warranty period. Even if they do have a covered issue, these companies have carefully calculated the expected cost of repair and baked that into the cost of the warranty.
Instead of buying home warranty or extended warranty on your vehicle, invest the cost of the warranty in an index fund. Each and every time you have the option to purchase a warranty, continue adding that amount to your investment. You will inevitably have more than enough to cover or replace items when they break.
6. Think of the Children! But Discuss the Financial Cost as Well
Another huge topic to discuss prior to marriage relates to your desire for children.
Within reason, finances should not be the primary driver for deciding if and when to have children. However, the cost to rear children can accumulate to hundreds of thousands of dollars. The total cost drastically rises when considering college costs.
For this reason, you should also discuss the financial impact of having multiple children. The number of kids you have will certainly affect your lifestyle as the number of children increases. After all, both of you want to provide a quality life for your kids.
What’s Your Ideal Number?
One? Two? Five?
One of the first places to start is to understand how many children your partner expects compared to your ideal family size.
If money was not an issue, how many kids would you want?
Given the financial constraints and your desired lifestyle, you both should come to a consensus on how many children you could reasonably afford. Perhaps, you would ideally want three children if money was not an obstacle. However, maybe you could not provide a desired quality of life for three kids but could provide a well-balanced lifestyle for two children.
Discussing your desired life goals and dreams and how a family fits into shared goals is an important topic of conversation prior to marriage.
Find a Way to Support Your Ideal Number
If you do want more children but that would be a stretch financially, there are certainly ways to mitigate the costs.
Perhaps, both of you will continue to work and receive pay raises and promotions. Maybe, you could start a side hustle and earn extra income.
If you have a strong desire for a large family, you can probably find a way to make it work with the help of family and friends.
Supplement by Investing
If you do not have the overhead of children, you can get a jump-start by building wealth today.
Thanks to the power of compounding, you can begin socking away money each month for inevitable expenses. These sinking funds should be earmarked for specific goals like their first car at age 16 or their college costs starting at age 18. Investing allows you to put away a small amount each month that will grow to cover a substantially larger expense in the future.
Investing for College
One of the best gifts you can give your children to secure their financial future is a debt-free education.
With the U.S. total student loan balance over $1.5 trillion, we have a student loan crisis that is crippling the younger generation. Instead of buying home and starting families, Millennials are working hard to repay their exorbitant loans with stagnant wages.
Even if you have student loans, you can help your children avoid a similar fate by opening and funding 529 Savings Plan.
For example, the average cost of attending a public, in-state university is $25,000 per year. For most families, cash flowing $25,000 per year is unattainable.
To save $100,000 (for 4 years), you would have to put back $463 per month for 18 years. Alternatively, you could invest a certain amount each month that will grow and pay for your child’s college costs. Instead of saving $463 per month, you would only need to invest $167 per month for 18 years at the historic market rate of return of 10% to accumulate a 529 Plan portfolio capable of sending one child to college debt-free. Investing allows you to contribute ~$300 LESS per month to accomplish the same goal.
Saving an investing in a tax-advantaged 529 Plan or Coverdell ESA substantially reduces the cost of your future child’s college educational expenses. In turn, this reduces the total cost of rearing a child.
Similarly, the same sinking fund/investing approach could be taken to pay for other expected costs. This allows your investments to cover the majority of the big-ticket costs of having a family.
7. Mixing Money and Family: Parents, In-Laws, and Finances
Perhaps, the most touchy topic most couples face is how to deal with the in-laws.
For some couples, one or both sets of in-laws may be especially “involved,” violating the boundaries of your relationship. Sometimes, a new wife seems to value her father’s opinion more than trusting her new husband’s opinion. A new husband could feel financial pressure and look to his parents for a loan or “gift” when there is too much month left at the end of the money.
Navigating the waters between being financially dependent on your parents and financially independent as a newlywed couple can be tricky. This is further complicated when in-laws and emotions are introduced into the picture.
Money and Family
Often, engaged or newlywed couples still have financial ties to their parents. Maybe, they are just starting their careers and do not have the financial means to independently support themselves. Perhaps, their families have accumulated wealth and just want to “gift” them money to help out.
Intermingling finances with families and a new spouse can result in drama – especially, if the giving in-laws impose stipulations and manipulation tied to their monetary “gift.”
Avoid Family Loans
To combat any animosity or manipulation that comes with money, newlywed couples should do everything in their power to avoid financial loans and commitments to family. Since our money financially charges most of us, borrowing from family can introduce a whole new set of problems that extend beyond the financial impacts.
When you borrow money from parents, you and your new spouse no longer have autonomy. Your parents and in-laws now have a stake in how you run your household. When you owe money to family, they will question every vacation you take and why you are posting that steak dinner on Instagram while you owe them money.
Owing money to your family can cause relations to sour.
Step 1 of Financial Independence: Cut Financial Ties with Family
Your ultimate goal should be financial independence as a couple. For most people, financial independence comes in the form of freedom from traditional employment.
However, the first step is cutting financial ties with your parents. While you may have relied on their support growing up, when you earn your own money and are married, you should strive to earn your own money and pay your own bills.
This provides both a psychological and emotional benefit for you and your spouse.
If your lifestyle does not permit you to maintain your traditional lifestyle, then you should reduce lifestyle expenses until you can independently support your household.
The Role Reversal
In many cultures, the children are expected to financially support and care for aging parents.
If you have the willingness, financial capability, and desire as a couple to financially support aging parents, then by all means support your family to the extent necessary.
However, you should always care for your own household FIRST. Your priorities should be saving for your own retirement, paying off your own debts, and securing your own children’s future before paying anyone else’s bills. In the end, if you do not have the financial bandwidth to take on your parents expenses in their retirement, you cannot assume their burdens as well.
Supporting Your Parents and In-Laws in Non-Financial Ways
As we all know, throwing money at a problem may not be the best solution.
After all, more effective ways exist to support both your own household and your immediate family members.
Building Your Own Financial Independence
One of the best non-financial ways to “support” your aging parents and in-laws is to be completely self-sufficient. Ensuring your household is financially independent allows your parents more of their income to invest and save.
Further, financial independence allows you to accumulate the wealth to help out monetarily without affecting your own lifestyle or family’s future. This can make gifting money and financial support much less painful.
Offer Educational Assistance
Even if your parents or in-laws do not yet require financial assistance, you can begin discussing the topic of retirement or how to prepare for a job loss.
If you are truly scared they will not have the means to support themselves only on Social Security alone and they have neglected their retirement savings, express your worries. Help them understand how important their future retirement is for the whole family’s well-being.
Especially, if you are a financial professional or they appreciate your knowledge and input, one of the best non-financial ways to help is to offer educational assistance. Thanks to the internet, there are countless articles, websites, and programs available to begin learning about saving and investing. No matter their age or income, it is never to late for them to get started saving for the future.
If you subscribe to the debt-free lifestyle, you can offer to pay or go through Dave Ramsey’s Financial Peace University with them. Perhaps, you understand how to calculate the time value of money when properly invested. You can help them calculate their monthly savings rate to accomplish their retirement goals for self-sufficiency.
Depending upon their experience, they may not even know how to open a brokerage account or Roth IRA. If you have experience, you can walk alongside them as they open an account and automate their contributions.
Family and Money: A Key Discussion to Have
Discussing each spouses’ family’s financial situation is key to understanding the impact on your own relationship.
Just like we should not rely on our parents to support our lifestyle, we also never want to worry about needing to financially support aging parents.
Talking about these issues can be tough. However, it is important to have a conversation with your spouse and express your worries if you identify an unsustainable lifestyle. More than likely, it is NOT your place to initiate a financial intervention with your in-laws.
Instead, use negative financial choices and circumstances as an opportunity to shape your own household’s goal for money. After all, we not only learn from our parent’s wisdom but also their mistakes.