Financial questions many newlyweds ask
April 10, 2015
Soon after the wedding is over – and the chaos of planning had subsided – many newlyweds start asking themselves questions related to their financial situation. Should we buy a home? Should we merge accounts? Who pays the electric bill? How much should we be saving for a rainy day? Can we afford to take a trip? It's smart for newlyweds to take some time to focus on establishing their new financial lives together. Here are the answers to four common questions from newlyweds:
What are the pros and cons of merging finances? How you go about commingling finances is something that all new couples should carefully consider. Some couples merge everything, others prefer to keep things separate and some choose a combination of the two. The most important factor is that both spouses feel comfortable with the arrangement and that you have a process set up to ensure you pay your bills on time and maximize your finances.
Start by having a conversation about money habits and styles. How have you handled money in the past? Is one of you a spender and the other a saver? If two individuals have very different ways of managing money, keeping some accounts separate and preserving some independence can be a way to maintain a healthy relationship while protecting your joint financial wellness. If you're on the same page – both savers, for example – togetherness in all things financial can create some efficiency.
In addition to careful budgeting, a good compromise is to have one checking account in which a couple deposits their income, and then a separate account for each holding an agreed-upon amount that comes from the shared pool that each spouse can spend as he or she wishes – no questions asked. It's also important that the couple agrees on how much money they will save together, and to establish an auto-transfer from the shared pool so that saving is easy and automatic.
Equally critical is for couples who are blending their finances to consider different "what if" scenarios. Discuss how much each partner would be comfortable spending on things like new furniture, or how they would financially approach an unexpected situation such as a relocation.
Unfortunately, there is no one-size-fits-all solution for blending finances, so having regular conversations about how to approach their finances is important for any couple.
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How do you determine when you can buy a home?
Buying a home with your new spouse is a significant and exciting event. It's also a major financial milestone, so you should talk candidly about what you want for your family and decide how much you can commit to a down payment and monthly mortgage payments. Research together as to what the interest rate and terms of your mortgage might be and then decide how your monthly expenses and budget will be affected in the short- and long-term.
Newlyweds should first ask themselves if they plan to stay in the same area for the foreseeable future. If a move – due to a career change, desire to be closer to family or other reasons – is something you've seriously considered, home ownership is probably not right for you at this time. The transaction costs and market risk make it hard to guarantee that you'd break even should you decide to sell your home in the next few years. Renting and saving more for a down payment in your new location may be a better option for couples in this circumstance.
Secondly, talk about the type of homes you like and what you can maintain. You both need to feel comfortable with the style and the amount of upkeep or maintenance required. You may want to also discuss the neighborhoods you'd prefer, and even your plans for having children. If you are thinking about starting a family in your new home, you may want to research school districts before making a decision.
A general rule of thumb is that you can afford housing about two and a half times your annual salary. It is typical for a bank to require a 20 percent down payment. You may qualify for less, but this will make your monthly payment larger, so calculate carefully and be sure the monthly mortgage payment is affordable. Keep in mind that what seems affordable now may be less so as you start a family, make a career change or go back to school, and take on other financial obligations. Also be sure to factor in taxes and insurance. Talk with your banker about your interest rate, the right length for your mortgage and make sure you understand all the details about your mortgage choices.
How can you ensure you don't go over budget? Having one joint household budget makes it easier to monitor spending and stay on track. First, create a monthly and annual budget, taking into consideration your income, monthly fixed expenses (like rent or mortgage, utilities, insurance and basics like groceries) and your savings goals. Then determine how much you can afford for discretionary expenses (like clothing, travel and entertainment). If one person is "in charge" of the budget or finances, it is important for the other person to communicate about his or her unplanned purchases. But, even the best laid plans can go astray – be sure to have overdraft protection in place to cover any purchases that fall through the cracks.
Who does what?
Communicate openly and often about your money. Financial disagreements or misunderstandings can fester, so making sure you keep the lines of communication open is important. Have a clear process for who does what and when. One individual may have more of a propensity or interest in financial management; if that's the case and both spouses support that arrangement, it may be the best for your family – but make sure that both parties are informed about their financial situation. It can be helpful to have a set time each month to pay bills, do record keeping, and discuss overall financial issues. Consulting with a financial advisor early in your relationship is another way to create a mutually agreeable plan and to have regular sessions to track your progress towards financial goals and talk about money.
Rick Gross is a Financial Advisor and Private Wealth Advisor with Ameriprise Financial Services, Inc. in South Lake Tahoe. He specializes in fee-based financial planning and asset management strategies and has been in practice for 18 years. To contact him visit http://www.rickgrossadvisor.com, 530-542-1571, or 591 Tahoe Keys Blvd Ste D2 in South Lake Tahoe.