The Big Merger
Money changes everything. Agreeing on how to manage it may make for a better marriage.
Talking finance isn’t very romantic. But just as you’ll want to know your fiancé’s political and religious beliefs and values, it’s important to explore his approach to managing money.
The discussions aren’t always easy. Financial matters can trigger strong emotional reactions. Money has a way of making people feel safe (the saver), fearful (the “not enough” mentality), powerful (the investor or business mogul), popular (the social spendthrift), hip (the latest-gadget guy), or in control (the keeper of the checkbook). Whatever your feelings are, examine them closely and share them with your partner.
When planning to merge your finances, and throughout your marriage, “Discuss finances openly and frequently so that there’s a blending of understanding for a sound financial relationship,” says Tom Shopa, CPA, of McBride Shopa and Company in Wilmington.
Make those discussions a consistent part of your life together—and a priority, beginning right now. Here’s how.
Ask questions. Is your partner a spender, a saver or a risk taker? If you have children together and one of you stays home, who will handle the money and how? Do either of you have major assets or debt?
Knowing the answers and each other’s credit standing will help you make important decisions about credit accounts, mortgages, investments and more. If your partner has a tarnished credit history, for example, you may want to apply for a home mortgage in your name only. If you have an excellent credit rating, you may choose to exclude his name on your accounts.
“With first marriages, though, people usually have fewer things and build their marital wealth together,” Shopa says. “It’s still sound and conventional to buy property together in both names and title it jointly.”
Budgeting, Bills and Bank Accounts
Examine your expenditures together. See if there are ways to streamline. Can you save money by consolidating health or car insurance policies or cell phone plans? Auto insurance companies may offer discounts for multi-vehicle policies. And if both your employers offer health insurance, perhaps it’s better to put one spouse on the other’s plan.
Develop a budget to include monthly expenses, pay off debts, and put money into savings accounts. Then decide who will assume responsibility for paying the bills each month or if you’ll alternate.
“For simplification purposes, it makes sense to establish joint accounts so that both husband and wife have access and so that everything passes easily to the spouse in cases of survivorship,” says Ken Rudzinski, a certified financial planner with The America Group in Wilmington.
Some couples, however, prefer to have separate accounts and divvy up the monthly bills. “I’ve had couples that say, ‘You pay this, I’ll pay that,’” Rudzinski says. “Other couples have a joint account for marital expenditures, as well as individual accounts they hold separately.”
Keeping individual accounts is more common in second marriages. “But contribute to a joint account to pay living expenses,” says Shopa. Partners may have very different obligations. There may be stepchildren or alimony payments involved, or one spouse may want to maintain some financial independence.
If one spouse makes more money than the other, he or she may contribute more to the joint account, or each may contribute a percentage of their income. “The result is that both spouses pay the joint expenses and bills,” Shopa says. “But if one wants to buy something special for the other for Christmas, it comes out of his or her personal account.”
Have a Safety Plan
While establishing bank accounts, create an emergency fund with three to six months’ of expenditures in liquid assets. “It’s important, even if you need to use wedding gift money to start that account,” Rudzinski says. He suggests a money market or high-interest savings account, like an ING Orange Passbook account.
If one partner suddenly loses his or her job, it could reduce your income drastically. “Where are you going to get the money to maintain your standard of living?” Rudzinski says. With an emergency savings account, you can eliminate some of that worry.
Along with an emergency cash fund, a safety plan should include auto, home, life and disability insurance. Term life insurance is critical, especially if the surviving spouse may be left with children and a home to pay for. A term life insurance policy can pay off the mortgage and provide monthly income to the surviving spouse.
“Term insurance is so inexpensive these days,” Rudzinski says. “You can get a 10-, 20- or 30-year term policy with high face amount and low payments. A 25-year-old male non-smoker, at a preferred-plus rate, can pay only $245 per year for a $500,000 policy.”
Don’t be caught without life insurance, and make sure you both have adequate disability insurance. “If you’re in a car accident or have health issues, and your debt depends on two incomes, you need that insurance to cover it,” Rudzinski says.
“Disability is, in some cases, almost more important than life insurance because people have a much greater chance of becoming disabled than of early mortality,” Shopa says.
Savings and Retirement
Begin saving part of every paycheck for the future, Shopa says. “It’s the best time to save and to use the money for common goals like the house, family, education and vacation you want.”
It’s also the time to start saving for your children’s college educations and your retirement. “The sooner you start saving money, the better off you’ll be and the less of your own money you’ll have to save because of the simple laws of compound interest,” Rudzinski says.
Couples planning to have children can set up a Section 529 college savings plan before those children come along. Start saving in your own name, then transfer to your child later. If it turns out that you don’t have children, you can transfer the account to another family member or withdraw the money. If the money is not used for qualified educational expenses, however, you’ll pay a 10 percent penalty. All of the gains are treated as ordinary income.
“If your employer offers matching funds on a 401(k) or 403(b), contribute the maximum amount allowable—$15,500 per year,” Rudzinski says. “Even if you can only put in 1 or 2 percent, put it in. Don’t stop or decrease. Increase when you can.”
When you have made the maximum contribution to your 401(k), consider putting excess funds (up to $5,000) into a traditional IRA or Roth IRA. Consult a financial planner, however, because the rules about combined incomes and limits are complicated.
While planning your financial future, it may also be a good time to speak with a financial adviser or accountant about the tax implications of marriage.
“There is a marriage penalty tax imposed when the couple’s combined incomes result in a higher tax rate than that of the individual’s,” Shopa says. “So the immediate need is to adjust the withholding and claim the proper amount of exemptions. That way, the couple pays their tax liability as they’ve earned the money”—and they’re not caught by surprise come April. Filing taxes separately could be beneficial, Shopa says, but it may not eliminate the marriage tax penalty.
One final bit of advice Shopa offers specifically, but not exclusively, to couples entering a second marriage is this: Get a prenuptial agreement.
“I really feel that both spouses, whether they have a little or a lot of assets, liabilities or responsibilities, should have an agreement signed prior to the wedding date that discloses their financial situation and agrees to how the couple’s wealth will be shared if the marriage doesn’t work out,” he says.
Prenups don’t always apply to failed marriages. They often contain specifics about stepchildren, how you earn and spend, and what will happen during a major life event such as death or disability.
“Drawing up a prenuptial agreement is a process, not something that you can wait for the last minute to do,” Shopa says.
Talking about prenups, taxes, insurance and retirement may seem terribly unromantic, but such discussions may make your marriage stronger in the long run. So before you take that walk down the aisle, take the first step toward planning a harmonious financial future.