Financial Planning For The Couple-To-Be
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December 27, 2007 @ 10:30 pm
photo courtesy of centralpark.com
Getting started together in married life is a very exciting experience. However, if not adequately prepared financially, it can also be frightening and intimidating. The purpose of this article is to dispel some of the mysteries of beginning one’s own financial life and to assist in making that a harmonious process for both newlyweds.
While this article’s major focus is on two people getting married and various of the financial issues involved, much of this article can apply to singles, as well as to unmarried people living together. Obviously, tax matters such as filing a joint return are not relevant in either of those cases, and many of the nuances involving rights of each party, benefits and the like are not relevant. This article is not intended to address the potential multitude of issues, and certainly none of the legal aspects involved in any relationship. There are so many different variations possible – every state has to a degree different rules, the states in general do not have the same rules as the Federal government, each person and each couple bring different issues to the table – that this article can only help highlight and focus on various matters, but by no means replaces the need for serious attention to your specific issues. If finances warrant, the use of professionals (such as a CPA, attorney and financial advisors) is strongly encouraged.
Paying for Your own Wedding
If you will be paying for your wedding, it will likely be the first large expense either one of you has encountered – outside of purchasing a car or paying college tuition. It is most helpful if you give yourself a comfortable time frame in which to save for the wedding. Plan the cost of the wedding well in advance, and then budget yourself to put away (preferably in a savings account specifically designed for this purpose) a certain amount every week or every month. If possible, both of you should contribute towards this account. Also, if both of you are going to contribute to the same one account, that account should require both of your signatures in order to withdraw money.
Be realistic as to what size wedding you can afford. While undoubtedly it is an event that you will forever remember, it isn’t a good idea to start married life heavily in debt. Money pressures are often devastating to what was originally a successful and harmonious marriage. If you find it necessary to borrow, consider borrowing from family – which is often easier than borrowing through a bank, where credit checks and possibly collateral demands may present obstacles. On the other hand, be realistic as to your relationship with family, and understand the risk of straining that relationship by borrowing. Treat any such loan as an obligation that you must repay, just as if it were from a bank, and expect to pay a fair rate of interest.
Using a Bank Account
Opening up both a checking account and a savings account (or an interest-bearing checking or money market account) is essential for the proper handling of your money. It is important to keep funds liquid – readily available for whatever uses are necessary. Take pains to avoid bouncing checks. Don’t write checks on money that isn’t in the account, and be sure to reconcile your bank account each month. If you don’t reconcile your account, you may find yourself issuing checks on funds that don’t exist. If your control over funds is strong, you should also consider getting an overdraft privilege (or credit line) attached to your checking account. Simply put, with this protective mechanism in place, if you were to issue a check in excess of what was in your account (or against uncollected funds), the bank would nevertheless honor the check. The use of the overdraft privilege constitutes a loan – you are borrowing money from the bank. This should be paid back immediately, rather than allowing it to remain as a loan. This credit line, or overdraft privilege, should be treated as an exception to the rule – not as a handy way to get into debt. If used properly, it also will contribute to establishing a favorable credit history.
Establishing Your Credit
One of the most valuable tools that you will be developing during the early years of your married life will be your credit rating. In many ways, it is very easy to establish a superior credit rating. Unfortunately, it is probably even easier to establish a bad credit rating. Paying your bills on time, which generally means buying within your limits and paying your debts, is about all you need to do to ensure a superior credit rating. The first time you fall behind in paying your credit card bill or the first time you miss a note payment on a loan from a bank or on a leased vehicle, you will have damaged your credit. A few such failings and you may cause serious damage to your credit rating that will take years to rectify. Establish procedures so that you keep your bills organized and so that you make it a policy to pay them. Typically, most of us find it easy to pay our bills based on how we get paid – every week, every two weeks, once a month – whatever works for you. Don’t allow your desire for that hot new jacket or dinner at a fancy restaurant, to prevent you from paying your utility bill on time.
Credit cards are a very important and convenient fact of life, but they must be respected for the harm they can cause you. Don’t take out or accept every credit card offered to you, and don’t take on more credit and more debt that you can comfortably handle. For most of us, one or two credit cards with sufficient credit lines will be more than adequate to meet any reasonable needs. Make it an absolute requirement that you pay your credit card in full every month – avoid wherever and whenever possible carrying a balance on your credit card. Not paying off your credit card every month is in effect borrowing money and paying for it at the highest interest rates.
Employment and Compensation
Unless you are fortunate enough to be able to live off of a trust account, one or both people in a marriage will need to work – and probably for a long time. Too many times, when one gets a job, the W-4 form is filled out without thinking. No thought is given as to how many exemptions should be taken, and what the impact is on the net paycheck. If your gross pay is $1,000 a week, one of your most immediate questions is how much that will net – because it is only the net that is going to contribute directly toward covering your living expenses. Understand that the more exemptions you put on your W-4 form, the higher your paycheck will be. However, the greater your paycheck, the less taxes are withheld. Understand how those factors jointly work on what you will face on April 15th of each year – will you have enough taxes paid to cover your obligations, will you owe money, will you get a refund? While a large refund is actually giving the IRS an interest free loan at your expense (and thus economically a mistake), a simple down-to-earth reality is if that “forced savings” works for you, so be it.
Recognize the unfortunate possibility of unemployment. Another reason for savings is to provide for dry spells, when there may be no regular income. Depending on your personal experiences and levels of skill and training, you may wish to spend (invest) money in training for either, or both, of you to broaden your skills. This will further protect you from possible unemployment and enhance your reemployment opportunities.
Budgeting
One of the most overlooked planning tools of a young marriage is establishing a budget – and keeping to it. The two of you should sit down and talk about what your various living needs are – rent, utilities, telephone, cable TV, internet, clothing, vacations, schooling, note payments, and so on. Go through the past year or so of your checking account or bills to get ideas as to all the items that constituter your financial life and how much they truly cost. Keep in mind that your costs include income and Social Security taxes. One of your required “expenditures” should be contributions to a savings or investment account. At the end of this article, you will find a suggested format for developing a budget. Fill this out, or use it as a template to create your own budget.
There are many different systems for budgeting your money – any or all of them can work if you are willing to let them. One simple, but reliable, approach is the envelope system. From every paycheck, you put away some money in an envelope for rent, in another envelope for food, in another envelope for the car loan, and so forth. At the end of every month, in theory, you have put away enough money to make that payment or cover those expenses. Make sure there is an envelope for savings.
Savings and Retirement Plans
It is vital to save. Start a savings plan and contribute to it on a regular basis. Try not to invade it for any type of normal living expenses – give it a chance to build up and serve as a base for such major purchases as a house or a business, or to cover an emergency situation. As soon as you are in a financial position to do so, start putting money into some form of retirement plan. If your employer offers a 401(k) plan, contribute to it – as much as you can. If not, by all means put $4,000 (or the current year maximum) a year into an IRA (generally a tax-deductible contribution). You get a tax deduction for saving money instead of spending it.
Unless you have adequate funds and are financially sophisticated, do not go lightly into the stock market or into the hands of a financial advisor/counselor/planner who would have you put money in any investment other than a safe liquid one. It is not that you should never invest in the stock market – in the long run, that is an excellent place to invest. However, it is not something for novices or for those who do not have excess funds. Take it upon yourself to learn about the stock market and mutual funds by reading any of the substantial literature that is available, and subscribe to one or two financial-oriented consumer magazines. If you do invest in the stock market, absolutely never give transactional discretion to any broker. All transactions must require your approval.
While this article strongly emphasizes the importance of and need for savings, allow one contrary caution – don’t over-save to the extent you prevent yourself from actually enjoying life. While such is truly the rare exception, on occasion some people go overboard on savings, not allowing themselves to spend on various basic and reasonably priced enjoyments – aspects of life that make it worth (and give you the opportunity to enjoy the fruits of) all that hard work.
Insurance
Insurance is one of those expenditures that hopefully will be “wasted”. The problem is, you don’t know in advance if it will be wasted, and if it turns out to be needed, not having it can be extremely expensive. There are a few types of insurance that you will need to deal with – health, property and casualty, auto, disability, and life.
Health insurance is, for many, virtually taken for granted, since businesses often provide full or partial coverage to their employees. If you or your spouse are not employed by a company that provides medical insurance, you need to consider your options – purchasing medical insurance privately, or possibly through a group or association with which you or a close relative may be connected. This can be expensive and, as with many other insurances, the greater the deductible (the higher the threshold necessary before the insurance begins coverage), the cheaper the insurance. It is not unusual for young couples to feel they do not need medical insurance – you are probably at the healthiest time of your lives. However, it only takes one accident or one surprise illness to cause you not only significant and substantial medical expenses, but possible compound that by also putting you out of work for a period of time.
Casualty and property insurance for most people typically means homeowners or renters insurance. Its purpose is to protect your property from damage, theft, and the like, and it generally includes personal liability insurance. Auto insurance is probably required in every state in the country – though the rules vary considerably. Concerns include coverage for property damage to your automobile, medical coverage for yourself or other people involved in any accident, and liability relating to automobile accidents. This can be expensive – especially if you are young, and especially if you live in a high accident area or in certain densely populated cities. However, in most areas it is illegal to drive without at least liability insurance, and in many cases it is foolish to drive without casualty insurance – unless your car is worth little more than its scrap value.
Umbrella, or excess liability, insurance often is not needed for a young couple. This type of policy gives you extra liability coverage in the event that there is a major catastrophe for which you are found liable – for instance, if somebody were to fall in your apartment and suffer a debilitating injury. Of course, not having this type of insurance can put you into bankruptcy if such an unusual accident were to happen.
Too often overlooked by young couples, but far more important than life insurance, is disability insurance. The chances of someone in his or her twenties, thirties and even forties becoming disabled over the next ten to thirty years are far greater than of that person dying. And, if disabled, your need for money increases, while at the same time your ability to generate that money might decrease or be eliminated.
Life insurance is not a savings vehicle or a form of investment. Its purpose is to provide your dependents – those who rely upon your income – with the ability to continue their established lifestyle in the event of your death. For a young couple with no children, and perhaps only an apartment and no mortgage, life insurance is probably unnecessary. If you are considering purchasing life insurance, consider only the cheapest insurance available – term insurance.
Buying that Big Ticket Item
There will be a time when you will need to deal with buying a large item – a car, or a home, or an apartment. Essentially, there are two ways of buying these – either you have the money to buy them outright, or you borrow. In order to have the money, most of us need to have a planned system of savings so that we may gradually build the pool of funds necessary to make such a purchase. That should be a specific, targeted goal.
You can expect that some part of the cost of a car, and a significant part of the cost of a house, will require borrowing. In most situations, the money will be borrowed from a bank or mortgage company or some other lending institution – as contrasted with coming from family. You will have made obtaining a loan/mortgage much easier if you have maintained a good credit rating. When the time comes to look for a mortgage, be sure to shop around. There are many different deals available, rates will vary depending on who is lending the money, and the costs of borrowing (points up front, closing costs and the like) will vary significantly. Be realistic as to what you can afford. Extreme caution is urged before committing to an adjustable rate or interest only mortgage, or one with negative amortization.
Children
Make no mistake about it, children are a delight – and an expense. Recognize when you get married that having children is often a double hit on your income. First, typically you lose at least part, if not all, of the income power of one of you, at least for a while. Second, that child represents a very real and significant expense. You should plan, financially, for the birth of a child by building up the appropriate financial reserves. A child should be a benefit to a marriage, not a burden or an ever-present source of financial strain. In addition, while it is not unusual for both spouses to continue working after the birth of a child, you must not overlook the cost of dependent care – if neither spouse is going to stay home with the child on a full-time basis, you will need to hire someone or some group to take care of that child, unless you are fortunate enough to have family that would be willing to do it.
Tax Returns
Now that you are married, filing tax returns will likely change slightly. When you were single, each of you filed your own tax return – as a single individual. Once married, you effectively have two ways of filing – either married filing jointly, or married filing separately. Most of the time, married filing separately is inadvisable because it will cost you more in taxes to file separately than jointly. It may also cost more in taxes to file jointly than it did filing as single individuals. This is often referred to as the marriage penalty in our tax system. This penalty can be significant if your incomes are approximately comparable and relatively significant. Note that from a tax point of view, whether or not you are considered married is solely a function of your marital status as of the last day of the year. If you marry on December 31st, you are considered married for that year.
Filing jointly is voluntary, not mandatory, but is the most common way for married people to file tax returns, something that is done virtually automatically. However, there are pitfalls. When you file jointly, you are assuming full and total personal liability for all taxes that may come about from that tax return. The IRS is not limited to collecting a tax only from the person who incurred it, or who lied or misrepresented on a joint tax return. With only certain exceptions (which are too esoteric for the purposes of this article), each party to a joint return is equally and totally liable for all liabilities arising from that tax return. This may be of significant concern – especially if one of you is in a cash business and not reporting all of his/her income; or if one of you takes unusually aggressive positions as to deductions, or simply doesn’t pay taxes.
There are three ways to take care of your annual tax filing: you can do it yourself; you can use a storefront operation; or, you can use a full-time tax professional such as a CPA or an accountant. Many people are capable of doing their own – especially with the use of tax software and particularly when the return is relatively simple. However, unless you are willing to pay attention to the rules and actually spend time understanding federal and state taxes, you should consider using a paid service. If your return is truly simple, and little more that a W-2 and an interest statement, a storefront operation will probably do a creditable job. On the other hand, if you have some complexity – your own business, stock market transactions, rental properties, or other complicating issues – it is strongly recommended that you go to a full-time professional. Keep in mind – sometimes you may not realize your tax life is more complex than you think.
Separate Assets
Starting off together, it is natural to believe that everything will be owned jointly and that regardless of where the money comes from, you will be sharing everything. In all likelihood, that will be the case. However, there is at least one type of asset that, even in the most jointly cooperative situation, should either be kept separate or at least be recognized as something worthy of special consideration. I’m referring to gifts and inheritances from family. This is not the $50 or $100 annual birthday gift, but rather items such as a $10,000 estate planning type gift, and inheritances. In most states, you will find that these types of assets, as long as they are maintained separately, are entitled to special treatment as one’s own separate asset. Also, if either or both of you bring significant assets to the marriage, you may wish to engage legal and financial counsel.
Prenuptial Agreement
If one or both of you come from a family with significant wealth, or if this is a marriage later in life and one or both of you already have built up some wealth, you should at least consider the merit of a prenuptial (also referred to as antenuptial) agreement – to protect or shield those assets. The validity and enforceability of such an agreement varies widely from state to state. However, the basic rules to making a prenuptial agreement enforceable are that there be full disclosures as each of your respective financial situations, that there be separate legal representation for each of you, and that there is no pressure or coercion in signing the agreement. Any such agreement requires competent legal counsel.
About The Author: Kalman A. Barson, CPA/ABV, CFE is the founder of The BARSON GROUP, a CPA firm with offices in Somerville, New Jersey. Kal and The BARSON GROUP specialize in litigation support services – including financial investigations, income determination, business valuations, expert witness testimony, funds flow tracing, and related tax consulting and financial planning. Kal is a frequent lecturer, having spoken on behalf of the American Institute of CPA’s, the New Jersey Society of CPA’s, the Institute for Continuing Legal Education, various Bar Associations and legal groups and various other professional and business organizations. He is the author of five books on investigative accounting, as well as books on Divorce Taxation, Business Valuation, and Financial Issues in Divorce Practice; and has had many articles published in professional publications. He is a member of the American Institute of CPA’s, the New Jersey Society of CPA’s and the Association of Certified Fraud Examiners. Mr. Barson is also the past President (for 8 years) of CPA-USA Network (formerly the National Associated CPA Firms). He can be reached at (908) 203-9800 ext. 101, by e-mail at: kal@barsongroup.com. For more information about The BARSON GROUP’s services, please visit our website: http://www.barsongroup.com
