When you were single, you were afforded the luxury of your own spending habits, saving and investing on your own terms. Managing your individual finances was all about you. But when you fell in love and got married, your personal finances and investments transitioned from “my money” to “our money.” You entered into a financial partnership where each of you is accountable for your combined financial success. As you start your new life together, here are five questions you should be able to answer about your finances.
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What is your current individual financial situation?
Start with where your finances are today. Very few newlywed couples are aware of their combined net worth and understand their household balance sheet. It’s important to evaluate your assets such as bank accounts, taxable investments, business interests, real estate, and retirement accounts. On the heels of that, calculate and know your liabilities, such as credit cards, student loans, personal or family loans, taxes owed, automobile debt, and mortgage. Do your assets outweigh your liabilities?
By preparing a detailed cash flow analysis that goes back 12 months, you can create a realistic budget based on your historical spending behavior. Then repeat the process for the first three months after getting married to see how they compare. Communicate openly and honestly about how to divide your expenses into two groups: fixed and flexible. Your fixed expenses are the recurring monthly costs, such as your rent or mortgage, utilities, insurance, car payment, etc. Your flexible expenses include entertainment, travel, and dining out, and are typically where you can make immediate spending cuts, increase your savings, and add to your investments. Plan together to ensure you are saving consistently each month and that your combined monthly expenses are less than your take-home income.
Who will pay what bills?
Communicate openly and often about your money. Financial disagreements or misunderstandings can fester, so making sure you keep the lines of communication open is important. Have a clear process for who does what, and when. One individual may have more of a propensity or interest in financial management; if that’s the case and both spouses support that arrangement, it may be the best for your family — but make sure that both parties are informed about their financial situation. It can be helpful to have a set time each month to pay bills, do record keeping, and discuss overall financial issues. Consulting with a financial adviser early in your relationship is another way to create a mutually agreeable plan and to have regular sessions to track your progress towards financial goals and talk about money.
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How Do We Stay Within Budget?
Having one joint household budget makes it easier to monitor spending and stay on track. First, create a monthly and annual budget, taking into consideration your income, monthly fixed expenses such as rent or mortgage, utilities, insurance, groceries, credit cards, and your savings goals. Then determine how much you can afford for discretionary expenses such as extra clothing, travel, and those concert tickets. If one person is “in charge” of the budget or finances, it is important for the other person to communicate about his or her unplanned purchases. But, even the best laid plans can go astray — be sure to have overdraft protection in place to cover any purchases that fall through the cracks. Apps like BillGuard, Level Money, and Mint Personal Finance allow you to track, budget, and manage your money in one place so you can see where you’re spending and where you can save.
Will you maintain individual accounts, joint accounts, or both?
Whatever you decide, you will need to decide and arrange the logistics and paperwork. Will one partner assume larger financial responsibilities if the other becomes ill or incapacitated? When amending your documents and account registrations to reflect a potential name change and updating your beneficiary forms, the question then becomes, how will you hold your assets? One strategy is to keep your individual bank accounts for personal spending, but automatically funnel the majority of your respective paychecks into a joint bank account for household bills. For instance, you may opt for directing 90 percent of your combined salary into a joint account to cover all your bills and savings plans for your future, and keep 10 percent for individual spending. This strategy allows both individuals to maintain personal autonomy, while being responsible.
What are your financial goals?
Goals often include the purchase of a first home, saving for your children’s college education, paying down debt, building an emergency fund, starting a business, saving for vacation, and retirement. While it’s common for spouses to differ on their individual financial goals, it’s important to have a candid conversation about each of your objectives and share your “why.” Be sure you’re rowing in the same direction and have a plan to get there. Communicating your reasons for your financial priorities is the first step in transforming your individual objectives into your financial goals as a couple. You may want to start by independently ranking, in order of priority, the three financial goals that are most important to you. Consider creating your combined investment policy statement and prepare a written financial plan.
