Financial Planning and Couples: A Perfect Union
Whether you’ve recently tied the knot, plan to soon or are just getting serious, now is the time to talk about money! Sound unromantic? Unfortunately, money is a common cause of stress in relationships, but you can take steps now and throughout your life together to prevent it from coming between you. Smart money management can also put you in a better position to achieve your dreams. Here’s how to start.
Start a Conversation
Talking about money can be uncomfortable, but candid discussions about your financial situation and goals are critical. Early in your relationship, be frank about where you stand financially. If one of you is struggling with debt or has very specific financial goals, you should talk about it now. Discuss your money habits, too. Are you a risk taker or cautious about your money? A saver or a spender? Your attitudes about money don’t have to be identical, but if there are big differences, some compromise may be required. It’s better to hash these issues out now rather than let them cause misunderstandings or arguments later.
You’ll also need to decide how to combine your finances. You might maintain your own separate savings and checking accounts at first, for example, with each person contributing toward your shared expenses and, perhaps, covering bills for their own purchases out of their own accounts. This can, however, become complicated. It can also make it difficult to develop a budget or plan for the future, both of which will be important to your shared financial health.
Your early conversations should include a discussion of how each of your families handled money when you were growing up. Was it never discussed? Did you live on a tight budget and scrimp sometimes? Or was there always plenty for whatever you wanted? It’s useful to know what experiences and attitudes you grew up with so you can develop an approach to money that you’re both comfortable with.
Run the Numbers
Discuss your incomes and review your financial documents, like savings and checking accounts, debt, real estate or other assets. Subtract your debt from the value of your assets—cash, all investments and other assets—to determine your net worth, which is one indicator of your financial health. Avoid being judgmental as you gather the facts, and remember that you’re a team, you each have your strengths and weaknesses.
The next step is to develop a budget together. Add up the income the two of you can expect each month after taxes (your take home pay, in other words), as well as any supplemental income. Make a separate column with all your expenses, including housing costs, utilities, car payments, debt payments, taxes on non-salary income, savings, commuting costs, average grocery charges, and other spending money you’ll need for daily activities. Subtract your monthly expenses from your monthly income. If you have some money left, you can use it, say, to furnish your new home together or save it for big goals, like a new car, a vacation or a home. If your income is less than your expected expenses, you’re probably going to have to decide how to cut back on spending. Review your numbers monthly to be sure you’re on track and that you’re taking into account any changes in income or potential new expenses.
Tackle Debt Management
It may be a good idea to get credit scores for each of you as a measure of your financial health. Whenever possible, make reducing your debt a priority. Here’s why:
- It will reduce or eliminate the interest rate you pay on your outstanding debt balances.
- Wiping out debt and interest payments will leave you more money in your monthly budget to spend.
- Heavy debt, especially if you miss payments, could lower your credit score. A low score could affect your ability to borrow money for a home, among other goals.
Set Short- and Long-Term Priorities
It’s hard to achieve your goals if you don’t know what they are—or realize what the other person wants. Saving will be easier, too, if you have a clear incentive to do it. Do you want to buy your first home? A bigger place? Set up a generous travel fund? Discussing your dreams is the first step to making them come true. Make financial planning a habit early in your relationship so that you can make the most of your money for many years to come.
You’re likely going to have questions or hurdles along the way, and your local CPA is a great resource. They can help identify ways to improve and let you know if you’re headed in the right direction, in addition to providing expert guidance when it comes to more technical steps, like combining or sharing accounts, estate planning, etc.