A Newlyweds Guide to Joint Finances
MONEY TALKS – This weekend my family and I are heading to Waterville Valley to celebrate my younger brother’s wedding. Marriage is certainly an exciting time in life that is filled with joy and exuberance. However, once the honeymoon is over and life sets back in, you may soon be faced with the reality that as a married couple you need to reevaluate your financial situation to create a plan for two, not two individual plans. Here are a few tips to get your journey started off on the right foot.
Reconfigure Your Bank Accounts - Traditionally, when two people enter into a relationship, they each have their own bank accounts and tend to keep their finances separate. Once married, they often move in with one another and begin to comingle their assets. These sudden changes may result in added stress and strain on the relationship. At Lakeside we value each client’s independence so we recommend keeping your respective accounts and adding three additional accounts. The first account is a joint checking account which should be used to pay for all household expenses including; mortgage/rent, utilities, groceries, household goods, etc. This should be funded by both parties, though not necessarily in equal shares. The second account should be a short-term savings account used for one-off automobile or home expenses. Ideally this will be at the same bank as your joint checking account so money can easily be transferred back and forth as needed. Start off by putting $500 in the account and work your way up to $5,000. Lastly, a long-term savings account should be setup as a safety net to protect against unforeseen expenses. This account should not be at the same institution as your joint checking and short-term savings account because you don’t want to be tempted to spend the money when you check your balance at the ATM (out of sight, out of mind). Ideally this account should be setup at an online savings bank and funded with 20% of your gross household income. If you can’t afford 20%, start with 10% and work your way up over time.
Purchase the “Right-Priced” Home - Purchasing the “right-sized” home is certainly a buzz word in today’s society. Unfortunately the “right-sized” connotation more often than not refers to the size of the home, not the price of the home. At Lakeside we recommend starting off by figuring out what priced home you can afford. Generally speaking, we recommend purchasing a home that cost between 2x – 3x your gross household income. Although in New England and other parts of the country where the cost of real estate is exorbitant, we often stretch the limits to 2.5x – 3.5x. For couples with large student loan or other debt, your total debt payments (including mortgage) should be no more than 36% of your gross monthly income. A 20% down payment is ideal because it will eliminate private mortgage insurance (PMI); however, if you can’t afford a large down payment, there are several programs available to first-time home buyers that require as little as 3.5% down. Once you determine how much home you can afford, then you can tour houses in several communities to determine how far your dollar goes.
Start Planning for Retirement - While retirement accounts are individual in nature by design, it does not mean that you should look at your retirement independently. More often than not, one spouse has access to an employer provided retirement plan such as a 401(k) while the other spouse may not work, or their employer may not offer a plan (especially if they work part-time). If this is the case, you or your spouse may want to consider contributing to an Individual Retirement Account (IRA) or Roth IRA. In 2019 the contributions limit is $6,000 for those under 50 years of age ($7,000 for those 50+); however, both IRA’s and Roth’s have income limitations which may restrict, or even eliminate, the amount you can contribute. A good goal would be to save between 10% and 15% of your gross household income each year regardless of which accounts are being funded by whom. Also be sure to update your beneficiary designations, as you may have listed a parent or sibling when the retirement account was originally setup.
Review Your Life Insurance - Most newlyweds (and Americans in general) are woefully underinsured because all they have is the standard employer provided term life policy which is generally equal to 1x or 2x their salary. This is simply inadequate to provide a sustainable income stream for the surviving spouse. While the specific amount of insurance needed will depend on your age, income level, spending, and years until retirement; most people will need between 7x and 10x their annual salary in life insurance. Before you determine the exact amount to purchase, try using a Life Insurance Calculator. A 30 year fixed term policy is usually sufficient and is generally very affordable (often under $50/month). Lastly, don’t forget to update your beneficiary designations on your current policy as well as any new policies you take out.
Create an Estate Plan - An estate plan is an essential piece of a good financial plan. Most people recognize that an estate plan allows for the transfer of property at death. However, what many fail to understand is that an estate plan also focuses on the control and decision making of your affairs while living. A comprehensive estate plan will address who will make medical decisions on your behalf if you are unable to make your own decisions. It will also allow you to name a trusted person to manage your financial affairs. These important medical and financial decisions could be temporary, such as if you were recovering from a car accident, or permanent in nature if you were to develop a life changing medical condition. Creating an estate plan now can have a tremendous impact on your own life as well as that of your family. A basic estate plan that is customized for your individual needs can be drafted by a local attorney and shouldn’t break the bank. Don’t leave your health, finances, and children in the fate of someone other than your choosing. Put a plan in place now, before it’s too late.
Following these five steps will get you pointed in the right direction for financial security and may even help to reduce stress or anxiety because you will know your family is well protected. Keeping an open line of communication and discussing any large financial transactions will help build trust and ensure no one is left in the dark. Most importantly, greet each day with love in your heart; marriage is a partnership that requires patience, compassion, and hard work. Best of luck Jesse and Laura!