At Independent Financial Planning it’s common to be going through the financial planning process and discover a few common issues that arise in financial planning. In this case, I’m going to stress a few that apply specifically to newlyweds but really would be helpful for anyone. These ideas are general thoughts and, as you should know, each person is unique and going to have different needs depending upon his or her situation. If you’d like advice, give me a call.
- Not taking the necessary time to discuss what is important to you about money. This conversation to have with your spouse is incredibly important. It’s during this time that you will discover hidden expectations, hopes, and fears. While this is a huge topic during premarital counseling (some high percent of divorcees site financial issues as a driver toward divorce) it is still often neglected throughout a relationship. Ask yourself what is important to you about money and dig until you really hit the answer. It’s not just about freedom. Freedom to do what or from what? Those tangible answers will be really helpful in the decision making process about buying new clothes for your second son rather than hand-me-downs, or buying new or used cars, etc.
- Not creating an emergency fund, setting up a budget, and planning to eliminate debt. It’s a rare occurrence when I’m doing planning for newlyweds that there isn’t some kind of debt remaining from student loans, the wedding and honeymoon, car, or even home purchase. Start off on the right foot and after you get your emergency fund (3-6 months) developed then set as generous a budget as you can. You don’t need to add stress to your budding time together so if you think you’ll spend $300 eating out this month go ahead and bump it up to $400 or more. Try to set an easy target you can easily have a win and then observe your spending and reduce the caps to fit your lifestyle and take whatever difference to pay down debt. As you want to add in new expenses then you can start to cut. Don’t increase your discretionary expenses when you get your raises but save toward the things you know you’re going to need or become more aggressive at paying down debts.
- Rushing to buy a car, a house, or making other large lifestyle changes. I know you want to get the American dream right away and buy a house and get a new(er) car. But I don’t recommend you start your relationship together with big transactions and expenses. Don’t worry about getting everything right away. You’ll save up and be able to put down 20% on a home or be able to buy that new used car from savings rather than taking a loan and in the end you’ll be better off for it. Like in #2, your financial life will be less complicated and you can ease into your life together.
- Neglecting to get life insurance on each other and putting too much into retirement plans. I know, you’d never thought you’d hear a financial planner tell you not to put too much into retirement plans but I’ve seen it happen. One couple after being married for five years wanted to buy a home but they had saved nearly every penny into 401(k)s and traditional IRAs. When it came time buy a home they were going to have to take loans from their 401(k)s to make the down payment. This is a liquidity issue. If they had saved in a Roth IRA or just in a joint brokerage account they could pull that money out for the down payment. Definitely save for retirement but realize you may have some expenses arise before you’re 59½. The other side of this is neglecting life insurance. Term life insurance is cheap when you’re young. A mere ten dollars a month for 20 years of $250,000 (if in good health) coverage. It’s a good idea in case something horrible would happen to either of you. Then, when you have children you can boost up that amount as needed.
- Not updating your beneficiaries, getting a will, or consulting a tax advisor. Consulting a tax advisor is a new one for me, but with the Affordable Care Act effectively providing significant subsidies to individuals who are generally young and don’t earn as much, it is an important thing to do. It’s happened now for two couples I know who were receiving subsidized healthcare while single but when married their collective income was enough to boost them out of the subsidy. Particularly if your income is going up a lot as a couple filing jointly, you’re going to want to seek some advice so you don’t end up with a large tax bill with penalties come April 15. Updating your beneficiaries on your retirement account is the other step. You can finally remove dad and mom from being the beneficiaries to your spouse. The beneficiary designation on an IRA overrides the will so you have to make sure you make the change even if your will is how you want it. The will is important too, because it applies to everything (other than IRAs) that you own. It can be relatively simple to do and not very expensive so I encourage a newlywed couple to do it in the first half of the year after marriage.
Being newly married is great fun. So enjoy those early years and sow the seeds for financial and relational peace by communicating about your motivations, especially regarding money, and including each other whenever you’re planning to make a large purchase. Finances can be stressful so do the few things to put your marriage in good financial shape. Contact Independent Financial Planning if you’d like more information.
