I got married on Masters Saturday this year, and the experience did nothing but exceed our expectations. I don't recall how many people told us to "enjoy the moment" and that "it flies by" but they hit the nail on the head. We couldn't have imagined a better day with our family and friends.
With all of the planning that goes into a wedding, my role as the groom was to say things like "yes ma'am, no ma'am" and "I love that idea." So far, that strategy and dialogue seems to work in our marriage as well! However, when it comes to a critical component in our lives and in our marriage, we both know that it takes us working together as a team with open, honest communication and trust to make the best decisions for our future.
One of the things my wife Melinda and I had to begin discussing around a year ago was not only planning for our wedding and combining our everyday lives, but also the process of combining finances. Knowing this is a sensitive subject, the first thing that needs to be said is that finances are a precarious and emotionally charged subject. A conversation about this between newlyweds or fiancés has to start with unconditional love and support.
Having just entered this phase of life myself, I have current and firsthand knowledge of navigating this tricky subject! There’s no one size fits all strategy, so keep an open mind and seek to understand your spouse or partner. Take the time to come together to do it right; don’t judge. It will help you now and for years to come. Conversely, if the initial conversations are filled with judgement, animosity and anger, it sets the tone for negativity and a fear of even discussing the subject.
Let’s take a look at the important pieces surrounding this topic – the who, what, when, where and why of newlywed finances.
The Who of Newlywed Finances
Clearly, the who will mainly consist of the two spouses who are combining finances. Perhaps the third leg of that stool could be a financial expert. It can be helpful to have an outside party who is not partial to either spouse to take the emotional component out of the sensitive topic of money and to see both sides of the equation or (in some cases) argument. Numbers are the first thing that come to mind when you start thinking of financial matters, but emotion is important to consider as well. Having someone to be a sounding board can sometimes allow spouses to be more open, and it removes the emotional burden from the future spouses. My experience working with young couples has shown me that once everything is out in the open, real progress begins to be made.
The What of Newlywed Finances
Sometimes the easiest place to start is the what. Though it may seem logical to have one combined account from which all bills and expenses draw, you can have more freedom and clarity around your goals if you have accounts with different purposes. For example, you might choose to have multiple accounts that are purposed something like this:
- Shared checking account that all incoming monies dump into – a “family checking account." This account is designed for shared expenses such as your mortgage or rent, utilities, insurances, groceries, cable, gas, going out to eat, etc.
- Shared long-term savings - We call this our "wealth coordination account." This account is designed for future wealth building outside of the 401(k) you might have at work. In my experience, 15-20% savings towards the long term have proven to be the most effective. The idea is every time you're paid, you PAY YOURSELF FIRST* and move 15%-20% aside to this account. Then, live on the rest of the money left in your checking. If you're already contributing to your 401(k) at work through a paycheck deduction, then you're already on your way towards that 15%-20% total savings rate . The wealth coordination account is designed only to be touched for true emergencies or other wealth building activity such as investment or retirement account contributions, money to your business, real estate or other assets you may be adding to your financial picture.
*The "pay yourself first" strategy I describe above isn't new information or rocket science. This is a proven economic strategy that is more than 100 years old. If you've read classics such as The Richest Man in Babylon or The Millionaire Next Door it should sound familiar.
- Shared "future spend" savings. This account is for things that are bound to pop up in the next 6-18 months. These little life emergencies could include car expenses such as new tires, family vacations, holidays, etc. The benefit of this account is having separate savings to pull from so that you can avoid the habit of pulling from long term savings. Most people are in a revolving door of building up and pouring out their long term savings and struggle to gain traction.
- An optional addition could be individual checking or savings accounts for fun, miscellaneous expenses or gifts for one another. My wife works next to a boutique that she loves. I know she likes to be able to splurge every now and then and not have me see the transaction. I tend to be the same with golf. This is just for "walking around money."
Again, these are just examples. However, the more we compartmentalize our money and earmark it for specific reasons or goals, the more clarity and freedom we have with the money left over. Together, you can figure out a mark you can hit of gross income being saved including qualified plan contributions.
The When of Newlywed Finances
Combining financial lives won't happen overnight. There isn't an exact time frame to have every piece of your finances tied together. The important thing is to be honest and take steps on a cumulative timeline that each spouse or partner is comfortable with. Adding each piece and each account may take weeks or months; move at a speed with which you're both comfortable.
A delicate balance also needs to be struck between spending for now and saving for the future. No matter what stage of life you are in, that tension will exist. As a newlywed couple, you may dream of a big, beautiful home to fill with future children. But, should that be an immediate purchase, or will living in an apartment be enough for the moment? It is important that you and your fiancé or spouse communicate what you want and expect, and answer these questions together. Put together a plan for hitting a goal, lay out the desired timeline, and pursue it together. This could be buying your first home, hitting a specific net worth, paying off debt or a targeted amount in your emergency fund.
The Where of Newlywed Finances
Where might be the least important of the five pieces, but it is something to consider. Find a private, neutral location where you can be open and honest. Whether it is in your home or with a financial advisor, working on your finances together creates a 50/50 partnership that will serve you well in the years to come. I prefer to meet with clients at my office in a conference room to limit any distractions.
The Why of Newlywed Finances
As a newlywed myself, I had some idea of what was coming when my fiancé and I sat down to have this conversation, but there were things I did not know and that’s okay. Regardless, I knew that we had to work on our finances together. It had to be clear that I was in her corner unconditionally and was there to work with her no matter how good or bad her financial life looked like before we got married.
A common objection I hear from people is, "Why not keep things separate?" When your finances are separate, you don’t have all the information you need to make important, joint financial decisions. Separate finances tend to create separate goals; there tends to be a lack of clarity and it's not a true partnership. You can’t meet goals when both people don’t have the same picture in front of them.
One of the interesting things I've seen while working with families is that most of the time, one of the spouses is more financially inclined than the other. There isn't anything wrong with this. What I've also found is that the non-financially inclined spouse can appreciate and be happy with simply being included in the decision and having a voice, even if they're not the true CFO of the family. I've seen some couples where if the financially inclined spouse would simply include the other in decisions, the difference in camaraderie and togetherness would be night and day.
Marriage is give and take, and the realm of shared finances is no different. A sense of compromise and being on the same page with long and short term goals will help ensure that individual habits won’t take away from what you’re trying to accomplish. It can be more of an art than a math or science; finance is just as much an EQ (emotional quotient) as it is an IQ (intelligence quotient) related subject.
I played team sports my entire life and its important to me that my wife and I are on the same team in every of area or our lives, even finances. Though helping clients with this is what I do for a living, we are a team. Instead of one person controlling the finances and one feeling left in the dark, we talk openly about, we dream together and we work together towards our dreams. I hope you are able to do that with your spouse or partner as well.
If you're ready to have these conversations, it's never too early or too late. Reach out to me or your trusted advisor and take the first step.