Do This Before You Get Married!

One of the biggest causes of arguments, stress, and unhappiness in a marriage is money. Everyone knows someone who has argued with their spouse (or former spouse!) about money, and generally it isn't pretty. Whether it devolves into name calling, insults, or storming out, money fights are nasty business. So don't sabotage your marriage before you are even married! This post will cover some questions that you absolutely need to ask before you get married, as well as tips about what to avoid in financial discussions.

My fiance and I went to a marriage prep class last weekend, which is required by the Catholic Church before getting married. Although the class lasted two days and covered a wide range of topics, the one that made everyone chuckle/groan was the topic of finances.

Generally, people fall into one of three categories: Savers, Spenders, or a little of both. When Savers and Spenders get married, it can lead to some pretty intense 'discussions' about where money goes. If you don't handle these discussions the right way, or you can't find a way to reconcile your opinions, you're in for a rocky ride. If you can create a set of common priorities, though, you will be able to weather many storms.

For example, my mom is definitely a spender, whereas my dad is a saver. They have had their fair share of disputes over money, but they are still together after 25 years and two kids. The key to this is that they both had the same priorities - my brother and me. It was critical to them that we both received a good education and the opportunities to pursue our interests, without turning into spoiled brats. If they had to go without the fancy TV so that we could do Scouting or sports without going into debt, they did it.

They were also able to compromise. My mom would love to spend tons of money on nice clothes and a big house, whereas my dad would rather save for retirement and wear his clothes until they fell apart. They ended up reaching a middle ground, with a modest spending and plenty of savings. Sure, they still disagree sometimes, but that's normal when people have different opinions. The important thing is how they handle it.

Talking to your future spouse is critical, so that you are both on the same page once you get married. Here is a list of questions that you should answer before getting married, and a list of things to NEVER EVER EVER do when discussing money together.

QUESTIONS
1. Are you a Saver or a Spender, or somewhere in between? How will that affect your budget? (and you MUST have a budget!)
2. What are your financial priorities? (owning a home, children's education, travel, retirement savings, etc) Another critical factor to discuss here is whether your priorities are things or experiences. If you both like things, it might make more sense to get that flat screen TV. But if you like experiences, you might choose to spend the money on a weekend getaway or date nights.
3. Is the money you earn 'yours' or 'ours'? Will you keep separate bank accounts, combine them into one, or have a some of each?
4. Who will be in charge of paying the bills? Will you take turns, work as a team, or will one person take responsibility?
5. Do you have a will or trust account set up? If something happens to one of you, what happens to the assets and debt of the other person? Who is the beneficiary on life insurance policies, retirement plans, or other financial accounts? This is a slightly morbid, but necessary step in combining your lives. Planning for the death of a spouse might seem depressing at first, but God forbid it ever happens, the lack of stress on financial matters will be much appreciated.

NEVER EVER DO THESE THINGS
1. Do not discuss money if either of you are H.A.L.T. (Hungry, Angry, Lonely, Tired) This will only lead to crankiness and problems. Of course if it is an emergency, that's one thing. But if someone just had a hard day at work and needs to decompress, or is ravenously hungry, it might not be the best time to discuss the budget.
2. Never, ever call each other names, insults, or anything derogatory. This will only cause hurt feelings, and won't solve anything. You might feel like you've won temporarily, but in the long run you'll be hurting both of you. You should have left name-calling back in grade school - don't bring it into your marriage. Nobody is dumb, stupid, or anything like that. If you truly think so, you shouldn't be getting married!
3. Do not leave your spouse out of financial decisions. Even if you have agreed that one of you will be responsible for paying bills and handling the finances, make sure that both of your priorities are represented, and that you both know your financial situation. If you choose to be a one income household to raise children, the person without a career should not feel trapped. Do not play mind games with money. It's important for both of you to know your financial situation in case anything happens to the main bill-payer. If he or she becomes incapacitated, bills still need to be paid.

Taking Stock of the Past Year

This October marks the one year anniversary of my full time employment at my current job. This is my first full time permanent job, so when I started, I knew I had to buckle down and start getting serious with my paycheck.

Now that I've been getting those biweekly checks for a year, I figured it's about time to take stock of where all my money went. When I did take a look at where my money went, I was pleasantly surprised.

When you look at your past year, how do you feel you've done? Has the economy wrecked your well-laid plans, or have you been frugal and kept up your debt payments/savings? What are your goals for the next year?

Cash Buffer / Emergency Fund

Over the course of a year, I have been making regular contributions to a high interest checking account that serves as my cash buffer and emergency fund. Currently I have a few thousand dollars in this account. I would have had more, but when we moved to our new apartment, we used some of it to aid our cash flow (one security deposit came due before the other was returned to us). This is not a step I plan to repeat, but at the time it was the best option.

The peace of mind that comes along with having this cash buffer is incredible. My fiance changed jobs in the past year, from a full time but exhausting and unfulfilling job, to several part time jobs that are much more flexible and enjoyable. Despite the uncertainty of unemployment with the current recession, we were able to continue paying down debt and saving money without tapping into our emergency fund. But just knowing it was there if we needed it made the stress of the situation much, much less. I think many couples' money fights could be avoided if they can create similar financial priorities. We did cut back on going out to eat and our 'fun fund', because to us, saving money and reducing debt is much more important than splurging on restaurants and travel.

Paying Down Debt
This is one area that my fiance and I both know is crucial. We both have student loans from college, and we make regular monthly payments in excess of the minimum payment amount. Even though I am still in school, so my loans are technically in deferment (I don't have to start paying until I am no longer a full time student), I am paying them monthly anyway.

This pre-payment serves two purposes. First, it helps to decrease the amount of interest I will be charged over the life of the loan by decreasing the balance. My rates right now are currently very low (between 3.75% and 6.76%), but when I took out the loans the rates were very high (8-9%). Since a large amount of interest accrued at the higher rates, my payments go toward reducing this accumulated interest. Once I graduate, the interest will be added to the principal and will earn interest on top of interest. This is something I want to avoid as much as possible.

The second purpose of paying my loans before I absolutely have to is to prevent myself from getting used to having that extra spending money. Lets say for example, I pay $800 per month on my loans. If I weren't putting this toward loans, I could be living a much different lifestyle than I am now - fancy restaurants, travel, shopping, etc. But since I started putting this money toward loans as soon as I started getting a paycheck, I don't miss it. It would be much harder to change from that high-flying lifestyle and cut back to afford debt payments after graduation.

Retirement Savings
This is the area where I am most proud of how far I've come. This time last year, I knew absolutely nothing about saving for retirement. I had no idea how much people had to save to retire 'comfortably'. Nobody my age that I knew was saving - most were still looking for jobs. I did tons and tons of research online, and decided it would be dumb of me to not take advantage of the tax benefits provided for retirement savings.

Since my company was in the middle of a merger, and the 401k plan was not yet set up, I opened a Roth IRA for myself and started contributing. Once my company offered a 401k, I set up a Roth 401k with them (with a regular 401k for the employer's 3% safe harbor contribution) and started contributing 10% of my income. This 10% comes out of my paycheck before it even reaches my bank account - so I never miss it. I still contribute to my Roth IRA. Since any gains made in these accounts will never be taxed, starting early is critical.

Goals for the Next Year
Here's roughly what I accomplished in the last 12 months:
$10,000 in debt payments
$6,000 in retirement savings
$3,000 in cash buffer/emergency fund

Here's what I want to accomplish in the next 12 months:
-max out my Roth IRA ($5,000 per year)
-continue contributing 10% (plus 3% employer safe harbor) to 401k
-reach 3 months expenses (including minimum debt payments) in the emergency fund (another $5k to go)
-pay down $15,000 in debt

National Save for Retirement Week

In honor of National Save for Retirement week, we will be having a week of posts dedicated to saving for retirement. Check back next week for posts about retirement planning, tax advantaged accounts, and other helpful information. In the meantime, take the poll about your retirement planning!

Congress established National Save for Retirement Week to increase awareness of the need to save for retirement.

In 2009, the House of Representatives and the U.S. Senate unanimously approved resolutions designating Oct. 18-24 as National Save for Retirement Week. The resolutions seek to increase personal financial literacy and raise public awareness of the retirement-savings vehicles available to all workers, including public- and private-sector employees, employees of tax-exempt organizations, and self-employed individuals.

Research shows that more than half of all workers in the United States, 53 percent, have less than $25,000 in total savings and investments, excluding their home and defined benefit plans. With longer life expectancies and rising costs, especially for health care, it is critical that Americans understand the importance of saving for their future - now.

^Above information from http://www.retirementweek.org/xp/plans/retirementweek/

Step 3: Building a Budget for Busy People

In Step 1, you created a list of every account you have - both assets and liabilities.
In Step 2, you checked your credit report to make sure everything was correct.

Now that you have a handle your current and past financial transactions, Step 3 involves creating a plan for future transactions. Having a plan is critical to getting your finances on track. There are thousands of cliche statements about having a plan - failing to plan is planning to fail, a man who does not plan long ahead will find trouble right at his door, a good plan today is better than a perfect plan tomorrow.

Ok so you get the point. Now, some people call their financial plan a budget, some people who don't like the word 'budget' call it a spending plan. Call it whatever you like - the important thing is that you make one!

Luckily, I have found one of the best (and easiest) ways to create this plan. Go to this website and download the spreadsheet by Michael Ham. Fill in as much information as you possibly can - income, debts, retirement goals, plans for buying things in the future, utilities, health insurance (if you are lucky enough to have it) - anything you can think of. If you think you will die without your "eating out" money, or going shopping, by all means add it in. The purpose of creating a budget is not to deny yourself the ability to spend money on things you enjoy. The purpose is to make sure that you can afford the things you want to do and aren't going into unnecessary debt to finance your lifestyle.

Don't forget to budget for emergency savings, either. Without this cash buffer, you are all too vulnerable to unforeseen problems and emergency expenses, which can make you all too dependent on credit cards, or worse, pay-day-loans. You need to have cash set aside in case your car breaks down, in case the air conditioning or heating breaks, or whatever else might happen.

Now, if you are anything like me, the first time you enter your information into the spreadsheet, you'll be in for an unpleasant surprise. If you haven't been saving for retirement, and you haven't been saving for an emergency fund, and you have loans in forbearance, you've probably had more than enough money to finance habits like going out to eat with friends, buying nice wines, shopping - whatever the case may be.

http://www.funnytimes.com/cotw/cotw20090121.php

But if you really want to get a hold of your financial future, you need to be realistic. The spreadsheet has a little number at the top that will tell you how much of your income you have left on a monthly basis. If this number is in the red, you are financing your lifestyle through debt - which is simply not an option. You need to play with the numbers - perhaps spend less on restaurants or shopping in order to build up a cash buffer or save for retirement. The loss of the instant gratification of a nice dinner will be more than made up for by the peace of mind you will get by knowing your financial future is protected.

Like that proverb says, a good plan today is better than a perfect plan tomorrow. Even if your situation changes, starting with a plan now is the best thing you can do. You can go in and change your budget every month if you want, but the important thing is to know how much money you have coming in, versus how much you have going out. If you like going to lots of sporting events or concerts, and wonder why you are always scrambling to pay the rent or your credit card bill, this will help you figure it out.

Try to stick to your plan for a month, and see how it goes. Planning for the future is the best way to get ahead!