Congratulations on getting married! You’ve both enjoyed the romance and the ceremony, and now it is time to get to the nuts and bolts of living together and jointly managing your new family’s finances.
This article will set forth the five best financial practices for newlyweds and comes from the office of a noted bankruptcy attorney in Philadelphia. Heed this advice, and you will avoid the most common arguments and financial pitfalls that lead to bankruptcy or divorce.
1. Disclose Everything About Your Financial Situation
If you two have not had this conversation yet, now is the time. Pour a glass of wine, sit down with pen and paper, and list all of your debts including student loans, credit cards, and any support obligations.
Next, list all of your sources of income and amounts. Share your paper with one another. If there are any surprises, talk them through. You want to begin your marriage with an honest assessment of your individual financial situations.
2. Pledge to Live Within Your Means
Now that you know how much you each make and how much you each owe, it is time to pledge to live within your means. You do this by crafting a budget. Your budget will include all or some of the following:
- Mortgage or rent;
- Homeowners or renters insurance;
- Cell phone;
- Car payment;
- Car repairs and maintenance;
- Tolls and fuel and other commuting expenses;
- Auto insurance;
- Health Insurance;
- Household supplies;
- Personal care and grooming;
- Student loan payments;
- Credit card payments;
- Spousal or child support payments;
- Holidays and gifts;
Couples are free to choose which expenses they contribute to jointly, and which they pay individually. For example, a couple might decide to contribute equitably to a joint account to provide for household expenses, healthcare and maintain individual accounts from which to pay all of their personal expenses and debts. Another example would be for a couple to contribute all of their income to their joint account, withdraw an agreed sum\ for spending money, and otherwise pay all bills from that joint account.
Financial arrangements are as varied as couples themselves. Discuss what would work best for you, and be prepared to disagree and then come to a compromise. Keep in mind also that whatever you initially decide to do is not set in stone. Plan to periodically revisit your budget and how you pay for things and adjust as necessary. Sitting down for this discussion should happen at least once a quarter, or whenever a major expense comes up.
3. Pledge to Create a Joint Emergency Savings Account
This is an essential step to financial security. Being prepared in case of an unexpected large expense means you do not have to resort to charging that expense and paying exorbitant interest.
Conventional wisdom dictates that you should have at least 6-8 months of expenses saved for emergencies. This will take a while to amass, so start now by each contributing 10% of take-home pay to a joint savings account.
Let’s say your take-home pay combined is $75,000 annually. Contributing 10% of income to your emergency account comes to $7500 a year or $625 a month. If this amount is not in your current monthly budget, you must either find ways to cut back or find ways to make more money. If you save $625 a month for a year, you will not only have $7500, but you will have earned an additional $379.20 in interest at 0.10%. Not much, but better than paying interest!
By way of contrast, if you needed an emergency roof repair that cost $7500 and you had to charge it to your credit card, you would have to pay that off over time and pay interest. Let’s say you charged it to a card with 16% interest, which is pretty low. If you could afford to pay $625 a month towards that debt, it would take you fourteen months to pay it off and you will have paid $727.76 in interest.
Start to put that $625 into emergency savings each month now. Not only will your money pay you, but you will save $727.76 on that big emergency expense.
In a worst-case scenario, if you can afford to pay only the monthly minimum of $175 on that $7500 charge, it will take you 309 months to pay it off, and you will have paid a total of $9459.53, almost $2000 in interest alone!
Start saving now. The peace of mind you will both feel knowing that you are financially prepared for any emergency that arises is priceless.
4. Pledge to Eliminate Credit Card Debt
You have seen in the above example how credit card debt grows and can become either unmanageable or plague you for years. Resolve to pay off all credit cards as soon as you can.
One way to do so is to pick the card with the highest interest rate and pay that one off first, putting as much as you can towards that debt and paying the minimum on all other cards, When that debt is paid, start paying off the card with the next-highest interest rate, and so on. During this process do not use your credit cards.
Another way to pay off your credit cards, if you need more motivation, is to pay off the smallest balance first. This gives you both more immediate positive feedback and can motivate you to pay off your other cards in the same way.
Another benefit of paying off credit card debt is that your credit rating will improve significantly because your debt-to-income ratio improved. When it is time for you to purchase your first car or home, lenders will offer you better interest rates and terms.
5. Pledge to Save for Retirement
Start when you are young, especially if your employer offers to match your contributions to the company 401(k). If you do not contribute, you are leaving free money on the table!
Starting to save even just $100 a month toward retirement when you are 25 years old is exponentially more fruitful than starting to save when you are 35. The 25-year-old will have saved almost twice as much as the 35-year-old by the time they are 65, thanks to compound interest.
Let’s say the Smiths and the Joneses both invest $100 a month at a 5% annual compound rate of return in the primary breadwinner’s 401(k). The Smiths begin investing at age 25, putting away $100 every month until 65. The Joneses begin saving $100 a month at age 35.
An extra ten years of saving means that the Smiths have about $162,000 in their 401(k), while the Joneses have $89,000. The Smith’s’ balance is nearly double the Jones’, and the Smiths contributed only $12,000 more of their own money. And this is without considering employer matching funds, or if the 401(k) can perform better than 5%, which is fairly conservative.
Any successful financial plan begins with a full and frank discussion. Best of luck!
About the Author
Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy Philadelphia bankruptcy attorney.