Once the wedding bells stop ringing, the honeymoon is over, and the last thank-you note is written, the reality of day-to-day finances sets in for most newly married couples. When you are just starting out, talking about money may not sound romantic. But couples who have spent many years together learn that their financial situation can be a source of strength and partnership, or a force that can tear them apart. As you embark on a new relationship, consider this expert advice to make that relationship as solid and strong as possible.
- recognize the need to maintain and improve individual credit scores
- decide on joint vs. separate checking accounts
- make a practice of setting goals together
- build a budget around your goals, and use the budget together
- pay down credit card debt
- cancel credit card accounts
- assume each other will save
- ignore retirement
- go into debt
Many people think that once married, they will share credit scores, and that is not the reality. Each individual has his or her own credit score, based on the accounts in his or her name (even if sharing the same last name). If one member of the couple has an account in good standing, with a good history, adding a credit score-challenged spouse as a joint account holder will help the latter’s score. Moreover, having the credit score-challenged spouse on the account will not negatively affect the former’s score. This dispels a common myth that joint accounts will have a negative impact on the credit score of the spouse with the better credit score.
Each spouse should check, review and correct errors on their own reports at least once a year. A credit score actually involves three scores from the three major credit reporting agencies – Equifax, Experian and TransUnion. All three are required to provide a credit report, which can be accessed at www.annualcreditreport.com.
There’s no right or wrong way to do this. However you do it, decide together and then be consistent about executing. One way that works for many couples is to maintain three accounts: a joint account and one for each partner. This allows the couple to pay household bills from the joint account, and keep individual funds as well. For couples in which both are working, paychecks can be deposited into individual checking accounts, and – based on what each spouse makes – a certain percentage of each check can be moved into the joint account each month (based on the budget). If only one spouse works, the system can work backward by depositing the wage earner’s paycheck into the joint account first, then transferring money into each individual account.
It’s hard to get somewhere if you don’t know where you’re going. And it’s hard to convince yourself – let alone someone else, even if it’s your spouse – of the importance of saving if you can’t envision how you’ll use those savings. Write down your goals – both direct finance ones (like saving for a trip to Europe or for retirement) and time-related ones that have impact on finances and working (like having time to train for a marathon or just a daily walk). Saving with a specific goal in mind is much more achievable. Revisit your goals at least yearly if not more often, and modify as needed.
While it makes sense for one spouse to handle day-to-day financial tasks, like bill paying, budget together to avoid financial woes and stress. Creating a budget need not be rocket science. While plenty of budgeting and family finance software is available on the market, people can just as easily make, and keep track of, a budget with old-fashioned paper and pencil. Track expenses daily for a good look at exactly where your money goes, enter expenses into the budget weekly, and take time – even just an hour – once a month to review, see where you could trim the budget, and analyze progress toward the goals you outlined.
Few investments can top the rate of return for eliminating debt. Paying off credit card debt at typical interest rates effectively makes an investment that returns 20 percent or more per year. The only caveat: Be certain you change your mindset as well. If you pay off debts, only to charge up the credit cards or sign for a new car loan a few weeks or months later, you have ultimately gained nothing. Work payments into the budget. While it’s critical to allocate some savings for an emergency fund as well, remember that having no credit card debt is in itself a financial cushion.
Close to 80 percent of people report, when surveyed, that they have lied to their spouse about spending money. Newly married couples can start out on the right foot by setting some ground rules for talking about finances. By creating, and then reviewing monthly, a simple budget, they can avoid much of the stress finances can bring into a marriage. Being upfront and honest about money matters will pay off in many ways.
Some people believe that once they get married, they should cancel cards in their own names, since they now might have some joint accounts. However, everyone (married or not) should think twice about canceling a credit card with a (and positive) long history. The longer you hold a card, the more valuable it is in your credit score determination.
In the budget, make sure to include a category for savings. Whatever the allocated amount is for savings – 10 percent, more if possible, less if necessary – stick to a percent that works for you. With each check that each spouse receives (whenever that is – this works for self-employed/freelance/commission-based employees too), set aside a predetermined percentage, based on your budget, for savings and investment. If and when you receive extra money (from a freelance job, gift, or even activities such as a yard sale), save rather than “blow” the excess money. You can also take advantage of automatic deduction plans. Some financial institutions let you arrange automatic withdrawal from your checking account to a savings account. If necessary, start with a small amount like $25 or $50 per month and increase it whenever possible.
Many newly married couples get wrapped up in the throes of buying, decorating and maintaining a home. Many are paying off student loans, and many also have credit card debt. Retirement seems a long way off, and saving for retirement goes on the back burner. Mistake! Many financial experts believe adults’ No. 1 challenge is preparing for retirement. No matter what you earn, put aside a portion of savings for retirement. This is one time it makes sense to take advantage of your employer too. Take advantage of any retirement savings plan you may have at work: defined contribution plans such as 401(k) plans or defined benefit plans such as pension plans. They provide tax benefits as well as easy ways to save. And if your employer matches any part of your contributions, it’s additional savings to you – absolutely at no cost to you. Save more in an Individual Retirement Account (IRA) if possible.
Easier said than done, but basically, this means to live within your means, and ideally, a bit below your means so you can save and find some financial freedom. The issue of responsibility for debt in a marriage can get complicated. Debt that a person acquired before the marriage does not automatically attach to the new spouse. But, a new spouse can feel the impact of their partner’s debt depending upon how finances are handled after marriage. If couples commingle their assets once married, for example, a creditor can attach those assets in an attempt to collect on any pre-marital debt. In the case of the IRS, the agency can place a lien on any refunds due because of unpaid taxes, student loans or other government loans. Some married couples filing their first joint tax return are surprised to learn that an expected refund is going toward those unpaid debts.
Whether spouses are liable for each other's debts depends in large part on where you live. In states with community property rules, most debts that one spouse incurs during the marriage are owed by both spouses. In states that follow common law property rules (which include most states), debts incurred by one spouse are usually that spouse's debts. Exceptions may be for items deemed to be family necessities (e.g., food or shelter).
The best advice? Consult an attorney in your state for your specifics. And avoid debt. Period.
Discussing these do’s and don’ts is a good start. Chances are good that as you discuss them, others will arise. Take the opportunity to open an honest dialogue about your finances – past, present and future. If you find that you need more support to work out these issues, educate yourself with the wide variety of online and offline financial resources, and/or speak with a financial planner.