Marriage is an important step in anyone's life and brings many challenges with it. One of those challenges is the management of your finances as a couple. The money decisions that you make now as a couple can have a lasting impact on your financial future together. Careful planning of your finances can ensure that together, you achieve financial success.
Budgeting your money
When you were single, you managed your finances in a way that was comfortable for you and that you understood--no one had to approve or disapprove of your financial decisions. Now that you are married, however, both you and your spouse have to agree on a system for budgeting your money and paying your bills.
Discuss financial situations
You and your spouse must discuss your respective financial situations and expectations, and take stock of your individual assets (what you own) and liabilities (what you owe). Revealing your financial situation is an important step when budgeting as a couple. If either of you has a financial problem, it is best to identify it now and begin solving it together. This is the time to address questions such as what do each of you earn, and what additional sources of income do you have? What do you own? Will both of you work now that you are married? Who will hold title to property acquired before and after the wedding? In addition, be sure to disclose all of your financial commitments. If you pay child support, let your partner know the amounts. If you have to repay student loans, discuss that as well.
Discuss financial goals
After you discuss your financial situations, you should discuss your financial goals. You can start by each making a list of your short- and long-term financial goals. Short-term goals are those that can take anywhere from three to five years (e.g., saving for a down payment on a home or a new car). Long-term goals are those that take more than five years to achieve (e.g., saving for a child's college education or retirement). When you have each determined your individual financial goals, you should review your goals together to achieve common objectives. You can then focus your energy on those common objectives and strive to attain those goals (short- and long-term) together.
Decide on the type of bank account(s) you will keep
Decide whether you and your spouse will have separate bank accounts or a joint account. Advantages to consolidating your checking funds into one account include easier record-keeping, reduced maintenance fees, less paperwork when you apply for a loan, and simplified money management. If you do choose to keep separate accounts, consider opening a joint checking account for household expenses.
Caution: When sharing a checking account, be sure to keep track of how much money is in the account at all times since both of you will be writing checks or using a debit card for expenses.
Prepare an annual budget
One step in developing a financial future together as a couple is to prepare an annual budget. The budget will be a detailed listing of all your income and expenses over a period of a year. You may want to designate one spouse to be in charge of managing the budget, or you can take turns keeping records and paying bills.
Tip: Make sure that you develop a record-keeping system that both you and your spouse understand. Also, keep your records in a joint filing system so that you can easily locate important documents.
1. Begin with your sources of income--list salaries and wages, alimony and child support, interest, and any other form of income that you and your spouse may have.
2. List your expenses. It may be helpful to review several months' worth of bank statements to be sure that you include everything. Put all the expenses that are paid monthly into one category, and put all other expenses (every other month, quarterly, semiannually, annually) into another. Some common expenses are:
- Rent or mortgage payments
- Student loan payments
- Pet care
- Car payments
- Alimony/child support
- Household items
- Personal care/grooming
- Major purchases
- Car repairs
- Tax payments
- Medical expenses
- Automobile gas
- Child daycare
- Entertainment/dining out
3. Estimate your expenses for each category. How much money do you spend on these items on a monthly basis and on an annual basis? Try to come up with a realistic amount for what you think you will spend in a year's time. Add another category to the irregular expenses list, and call it Contingencies. This can be a catchall category for expenses that you might not anticipate or budget for.
4. Add your sources of cash and uses of cash on an annual basis. Hopefully, you get a positive number, meaning that you are spending less than you are earning. If not, review your expense list to determine where you can cut your spending.
Create a cash flow system
After you have developed a budget, create a system for managing your monthly inflow and outflow of cash. It is a good idea for both you and your spouse to become involved in this process--at least at first--so that both of you have a clear understanding of the costs of running the family and household.
Cash flow systems like the one described below are simple and painless to operate. Once they are established, you will find that making financial decisions becomes much easier because you have done your homework.
- Separate your regular monthly expenses from irregular expenses (every other month, quarterly, semiannually, annually) by using a different bank account for each. Otherwise, you may be tempted to use money that has been earmarked for something else.
- Each time you get paid, consider depositing some money into an account for irregular expenses, so you will have the money for the outlay when it arises. The rest of your paycheck could then go into your main spending account, to be used for regular monthly expenses, and some set aside in a separate savings account.
- One variation to this system of cash flow management is to establish one or two additional bank accounts for one or both of you for personal spending money. Allocate the budgeted amount for personal expenses to this account. This way, you are free to spend the money in this account in any way you like without having to worry about meeting regular monthly expenses. However, all of these bank accounts may have fees.
Saving and investing your money
At some point in your married life, you will almost certainly encounter some large expenditures, such as a new home, your own business, or a college education for your children. Chances are, you won't be able to meet these expenditures from your current income. You and your spouse must discipline yourselves to set aside a portion of your current income for saving and investing.
Save a percentage of your earnings
When figuring out your budget, savings should be considered one of your monthly expenses. Think of savings as a fixed payment (like a car payment) that must be made every month. If you don't and you wait until the end of the month to save whatever you have not spent, you'll find that nothing ever seems to go into your savings account.
Build an emergency cash reserve
The savings that you accumulate can serve as an emergency cash reserve. Ideally, you should have in savings an amount that is comfortable for you to fall back on in case of an emergency, such as a job loss. When determining how much cash should be in your emergency fund, a major factor is your comfort level. If you and your spouse feel secure with your jobs and are confident that if you lost your current jobs you would be able to find a new one fairly quickly, an emergency fund of three to six times your monthly expenses may be sufficient. However, if either of you has an unpredictable income, you may want to have an emergency fund that is equal to 12 times your monthly expenses.
Investing your money
In addition to having a savings account and emergency reserve, you may want to invest your money to target your financial goals.
No matter what your investment goals are, your overall objective is to maximize returns without taking on more risk than you can bear. You'll need to choose investments that are consistent with your financial goals and time horizon. A financial professional can help you construct an investment portfolio that takes these factors into account and help you consider appropriate long-term financial strategies. However, there is no assurance that working with a financial professional will improve investment results.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
Establishing good credit
Establishing good credit is an important step on the path toward a solid financial future. Good credit history can enable you to make credit purchases for items that you might not otherwise be able to afford. Most creditors will require a good credit history before extending credit to you. If you do not have a credit history, it is important to establish one as soon as possible. If you have a poor credit history, you should take steps toward improving it right away.
Individual or joint credit
Married couples can either apply for credit individually or jointly. One of the benefits of applying for joint credit is that both you and your spouse's income, expenses, and financial stability are considered when a creditor evaluates your overall financial picture.
However, applying for separate credit has its advantages. If you and your spouse ever run into financial problems (e.g., illness or job layoff), separate credit allows one spouse to risk damaging his or her credit history while preserving the other spouse's good credit. In addition, separate credit can also protect you and your spouse from each other. If you and your spouse cosign a loan or apply for a credit card, you are both responsible for 100 percent repayment of the debt. In other words, if your spouse does not pay his or her share, you can get stuck with paying the whole amount. On the other hand, if your spouse takes out a loan or applies for a credit card on his or her own, generally your spouse is solely responsible for the debt.
Tip: While the general rule is that spouses are not responsible for each other's debts, there are exceptions. Many states will hold both spouses responsible for a debt incurred by one spouse if the debt constituted a family expense (e.g., child care or groceries). In addition, in some community property states, both spouses may be responsible for one spouse's debts, since both spouses have equal rights to each other's incomes. You may want to discuss your state's laws with an attorney.
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The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal professional.
LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.
This article was prepared by Broadridge.
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