> Calculator: How Much Life Insurance Do I Need?
> Taking the Next Step
Marriage usually means romance, not finances, right? Maybe not. After all, you already know your spouse-to-be has a million dollar smile, but will that charm extend to his or her finances and bills after marriage?
Couples who are getting married are often focused on wedding day preparations, but those who wish to maintain marital bliss after they say “I do” should also make time for a candid discussion about merging their money, said Jamie Hopkins, retirement income program co-director at the American College of Financial Services, a nonprofit educational group.
“Be upfront and set expectations from the beginning,” she said in an interview, noting financial mishaps are a common cause of marital rifts.
Indeed, a 2013 study by Kansas State University found that couples who argue about money in the early years of their marriage, regardless of income, debt or net worth, are more likely to get divorced.
Full Financial Disclosure
These days, many couples are waiting longer to get hitched, which means they bring to the marriage an established financial discipline, multiple bank accounts, and often debt. Full disclosure is key, said Hopkins.
Roughly 20 percent of married individuals hide financial decisions from their spouse, said Hopkins, a form of financial infidelity that can undermine the health of the relationship. “Any secrets erode trust over time,” she said.
Individuals who are altar-bound should divulge their bank statements, balances in personal savings and retirement accounts, real estate holdings, and any outstanding debt they owe on car loans, student loans and credit cards. They should also reveal their income, which impacts household taxes and net worth.
If it’s not his first marriage, does he owe any alimony or child support? Does she owe back taxes, or have any judgments against her for which creditors may garnish wages? Before you get married, find out.
It’s also important for both spouses to share credit scores.
That three digit number, derived from your payment history, makes a big impact on your ability to borrow money. Lenders use it to determine whether to qualify borrowers for loans, such as mortgages and car loans, and the interest rate they should charge.
Generally, a rate of 720 or above is considered good.
Contrary to popular belief, your existing bank and credit card accounts don’t merge when you marry, but credit activity on any new debt you incur together (mortgage loans and joint credit cards for example) will be shared. Thus, if you forget to make a payment, your spouse’s credit score may suffer.
The reverse is true, as well. A spouse with a poor credit score may benefit by being named a joint account holder on a loan or authorized user on a credit card with their partner who has a better score. Just be sure that payments are made on time and spending is kept in check.
Couples who are headed for the altar should also discuss their financial priorities.
Your partner, for example, may value paying off high interest debt or student loans, while you place greater importance on buying a home.
Perhaps you wish to retire early and intend to max out contributions to your 401(k), while your better half prefers to put long-term savings on hold.
Your betrothed may also be philanthropic, donating 10 percent of her salary to her church or a favorite charity. That needs to be accounted for in your family budget.
Finally, if kids feature prominently in your long-term plan, do you hope to fund their college education, or do you believe they will value their degree more if they pay for it themselves? Does your partner agree?
Once you are married, you will need to update your insurance policies - and potentially purchase different coverage.
If you both have health insurance through your employers, for example, determine who has the better benefits. In some cases, it makes the most sense to keep your coverage separate, since employers may assess a surcharge for spouses with access to coverage through their own employer.
For the first time, you will also need life insurance to ensure your spouse is provided for in the event you should die prematurely, said Hopkins in an interview. Life insurance, which may be provided by your employer, is designed to help replace one’s income and pay off debt, such as a mortgages and college costs for your kids, allowing the surviving spouse to maintain their standard of living.
How much you need depends on your income, debt, and personal goals, but many financial professionals recommend purchasing coverage for seven to 10 times your annual salary. (Life Insurance Calculator)
Nonworking spouses who stay home with the kids should also have coverage, though typically less, since the breadwinner would have to pay for childcare if they passed away.
And don’t discount the importance of disability income insurance, said Beth Walker, a certified financial planner with the Las Vegas-based Wealth Consulting Group.
Such policies provide income if you are too sick or injured to work and thus unable to earn a paycheck. “If you are earning income for your household, you want to be sure you have a safety net in place to (help) replace your paycheck if you can’t go to work,” said Walker in an interview, noting the probability of experiencing a disability is far higher than a premature death. “People often fail to recognize that their single greatest asset is their ability to earn income.” (Calculator: How a Disability Would Affect My Finances)
Update Your Will and Beneficiaries
While you’re at it, you should also get your estate planning ducks in a row.
For starters, you’ll need a will, which outlines your wishes for how to distribute your assets when you die.
It’s equally important to designate powers of attorney. A durable power of attorney identifies the person you’d like to manage your money if you are unable to make decisions for yourself due to physical illness or cognitive impairment. Most often, that’s your spouse.
Similarly, a medical power of attorney document authorizes an individual to make healthcare decisions on your behalf in the event you become incapacitated.
Lastly, newlyweds must update beneficiary forms for any insurance policies (life, health, auto and home), annuities and retirement accounts they own, including IRAs and 401(k)s. That’s an important step as beneficiary forms trump whatever is written in your will.
Co-Mingled or Separate?
As you discuss your financial union, decide together how you will manage your future bills in marriage.
If you plan to co-mingle your money, for example, who will handle the monthly bills? That may differ from the spouse who deals with long term investments.
If you opt to keep your money separate, on the other hand, you’ll need to decide how joint bills, like the rent, mortgage or utility bills, will get paid…equally or based on a percentage of income?
Some couples also set a threshold, say, $200, for which expenditure should be jointly discussed.
Financial planning is unique to each couple. What works for you may not work for your friends. The key to making it work, however, is to communicate often, avoid secrets, and ensure your safety nets are sufficient to protect the ones you love.