What to Do Before ‘I Do’10.13.10
According to Capital One in a survey on Couples and Money published in November 2009, money accounts for more arguments between couples than anything else. Before you pledge to love, honor and cherish until death do you part, financial professionals suggest you pledge to pull back the curtain on your financial past.
To move forward together in realizing your dreams – buying a home, taking special vacations, sending children to college or retiring comfortably, it is important for each of you to understand how money defines you and what roll your financial past plays in coming together as a couple.
1. Talk About Your Money Dreams
A good starting point in your money discussion is talking about your money dreams. This sets the stage for a positive discussion of what you value and how your money impacts this.
How do you see yourselves spending or saving money as your careers evolve? What specific goals can you identify for your money? How quickly can you get debt free? How will you discipline yourselves to save?
Couples generally spend more time planning a vacation than they do discussing their long-term financial goals. Set a day and time each month or quarter to have a money meeting. Talk about how you are spending your money, paying off your debt and saving. Are your money dreams and values aligned with your finances? Are you on track to accomplish what you set out to do or are adjustments needed?
Regardless of who takes the lead in managing your household finances, it does not excuse the other from participating in the planning process, budgeting and periodic check-ups. No woman should find herself in a position where she is ill-equipped to take over the family finances. With 45 percent to 50 percent of all first marriages ending in divorce, 60 percent to 67 percent of second ending in divorce and 70 percent to 73 percent of third*, you just might find yourself solely responsible for your finances. Be prepared by taking an active role in your marital money management.
2. Reveal Your Debt
This is one of those pivotal points in your relationship with your partner-to-be where complete and total honesty is mandatory. If you are swimming in credit card debt, have filed for bankruptcy or foreclosed on a mortgage, this is the time to unload your financial baggage.
Bring out all your credit card statements, student loan, auto loan, mortgage and home equity loan statements and make a list or spreadsheet of your joint debt. Include balances, interest rates and terms, so you can have a thorough understanding of what’s ahead of you to pay-off your loans.
If one or both of you are carrying an extensive level of consumer debt (credit cards, retail financing packages or other creative solutions to buying what you otherwise couldn’t afford), it is important for you to talk about the spending habits that got you to that place. As you move forward together, you will have to find common ground on what is an acceptable amount of spending relative to your income and savings habits. This can be a tough conversation, so keep your emotions in check.
Depending upon what assets (savings, investments) you bring to the marriage, it may be appropriate for you to pay off some of your own debt before combining finances. From there you’ll have to discuss who pays what from your respective paychecks and which debts should have the highest priority.
Request copies of your individual credit reports from the three major reporting agencies —
Experian, Trans Union and Equifax – and discuss the findings with your partner. If one of you has a particularly bad credit history, you may want to seriously consider whether you should combine your finances or keep them separate. Often your credit scores impact loan or mortgage approval and may be a consideration in determining the interest rate you receive on a loan. Thinking through whose credit is used could be very important in making a sound decision.
3. Tally The Assets
Pull together statements of all your assets – 401(k)s, IRA’s and brokerage accounts, savings accounts and trust accounts. Add these assets to your list or spreadsheet to complete the process of creating a joint balance sheet. There is nothing to be gained by hiding an account or interest in a business or partnership. A good forensic accountant will uncover it if you ever find yourself in the situation of having to unwind what’s to be joined.
If you expect to receive an inheritance or distribution from a business or partnership, this is an appropriate time to discuss the parameters. Longer-term financial planning can be significantly impacted by the inflow of a lump sum of money, so label these additions as “very likely”, “likely” or “possible.” Delaying the purchase of a home or large expenditure can be timed to coincide with inflow.
Discuss with your partner how you acquired the assets you own. Are you a super saver? A good stock-picker? Born to a wealthy family? The values you and your family have lived by to create wealth are probably an important part of who you are. Talk about what it means to you to live by the practices that have led you to where you are. How will you change or maintain them?
4. Be The Budget
You have a good idea of what your living arrangements will be after the wedding, so you can likely estimate your living expenses. Make a list or spreadsheet of your projected costs – rent or mortgage, utilities, insurance, medical premiums and deductibles, travel, entertainment, and so forth. Don’t forget to include the monthly debt service on your loans. Obviously, the goal of this exercise is to confirm that you will be living within your means.
Pay yourself first. Live on 70 cents. The general rule in financial planning circles is to save 30 cents of every dollar you earn. The first 10 cents should go into an emergency cash reserve. As a dual working couple, you should have at least three months of your operating expenses set aside in a savings or money market account. If only one of you is working or there are children involved, planners suggest 6 months of expenses in an emergency reserve. The second 10 cents should be invested in a long term retirement account, such as an IRA, Roth IRA or 401(k) at your workplace. The remaining 10 cents may be earmarked for charitable giving or something that is meaningful to you. If your financial condition does not allow for charity at this time, sock away the remainder in a special account for unexpected expenses, repairs or emergencies.
Another good rule of thumb is you don’t want your housing costs (rent, mortgage, taxes, insurance) to exceed 28 percent of your gross income. These costs and other debt should never account for more than 36 percent of your gross income.
5. Don’t Be Afraid to Talk Pre-Nup
It is hard to talk to about marriage as if it was a business, but that’s exactly what we should do. A pre-nup is not about planning for relationship failure, but rather I believe it may be an insurance policy for dealing with the legal issues of money and property should it become necessary. We marry with the intention of spending the rest of our lives together, but the statistics prove otherwise.*
If you meet any of the following criteria, having a pre-nup is advisable:
-Your partner brings a great deal of debt to the marriage
-You have a much higher net worth than your partner
-You have a much lower net worth than your partner
-You earn (or will earn) significantly more than your partner
-Your partner earns (or will earn) significantly more than you
-You plan to be a stay-at-home mom
Having tough “money” conversations with the person you expect to spend the rest of your life with can prove to be a very deep and meaningful exercise. Not only are you “coming clean”, but you are beginning to establish the foundation for one of the most important aspects of your lives – financial security.
Written by : Lisa Boone
Boone is a Vice President and Financial Advisor for Morgan Stanley Smith Barney and a CERTIFIED FINANCIAL PLANNER™.
*Sources: divorcestatistics.org, Jennifer Baker, Forest Institute of Professional Psychology, Springfield.