Ryan A. Dunn, CFP®
Financial Planning Considerations For Those About to Enter Into Marriage
Financial stress, along with infidelity and growing apart, are top reasons why marriages fail.
Many couples did not have the same financial upbringing. Be mindful of your partner’s relationship with money before tying the knot.
Establishing financial roles, creating a budget, setting expectations about joint finances and obtaining life insurance are just as important as the wedding and honeymoon plans.
With COVID-19 concerns subsiding, weddings are back in full force – including mine in September. While it’s a lot more fun planning the wedding, registry and honeymoon, you want to make sure you and your spouse-to-be are on the same page regarding financial matters. Otherwise, you’re starting your marital partnership on shaky ground and studies show financial stress is one of the main reasons marriages dissolve -- only infidelity and growing apart rank higher.
Here are nine key considerations that every couple should discuss before saying “I do.”
1. Be open and honest about each other’s relationship with money. What’s your relationship with money? That’s one of the first questions we ask new clients when first meet them. One spouse may have grown up in comfortable circumstances in which there was always enough money for everything from basic necessities and sports equipment to full tuition and exotic vacations. The other may have come from a modest background in which money was always tight. If one spouse resents the other’s carefree spending habits or inability to save money that can cause significant friction. Likewise, if one spouse resents their partner’s reluctance to spend money on the nicer things because they felt such scarcity growing up, that can also be a sore point. It’s very important find common ground when it comes to savings goals or big-ticket purchases. An independent advisor can be a helpful “referee” for these discussions before they create a permanent wedge in the relationship.
2. Create a joint budget. Planning a wedding is great way for engaged couples to see how they handle financial roles, responsibilities, budgets and spending priorities going forward. Suppose you want to renovate your kitchen in five years? How much will you each have to save in order to get there? What spending sacrifices will you need to make? Travel and dine out less? Drive used vs. new cars. You don’t want to have one spouse intent on doing an expensive kitchen upgrade and the other spouse wanting to buy a lake house in the next five years? You only have so many resources to draw on at the same time and you have to prioritize.
3. Rainy day/emergency fund. Every married couple should have three to six months’ worth of living expenses in a liquid cash (or cash equivalent) account that is only used for emergencies such as a hot water heater breaking, a tree falling on the house, a large car repair, medical expense or job loss. Just make sure you don’t overfund the rainy-day account. You don’t want to miss out on potential investing opportunities.
4. Expanding your family. You need to be in sync not only about whether or not you want children, and if so, how soon and how many. Before the children arrive, make sure you’re in alignment about childcare, public vs. private school, and how much to save for college and when to start saving. Also, whose career will take priority after the children arrive? We’ve found it’s not necessarily the higher earning spouse. If the more career-driven spouse feels stuck at home raising the children full-time that can cause tremendous stress. Likewise, if the one spouse who’d prefer to be a full-time parent feels forced to endure a long commute (or endless Zoom calls) every day just to make extra money, there’s bound to be resentment.
5. Joint bank accounts. Some couples like to keep all their money in separate accounts with each partner responsible for paying certain household bills. These couples only pool their funds together for major expenses such as vacations or a house or condo down payment. Other couples have joint accounts for everything with a “my money is your money” philosophy. For that kind of “take what you need” philosophy to work, you need to have a very high level of trust. Every couple is different. It depends on your level of comfort.
6. Agree on each other’s financial roles. I just met with a couple in which the wife pays all the routine bills (by check) and the husband manages all the bank and investment accounts (online). It’s very important that the husband knows where the checkbook is kept (and that it’s balanced) and that the wife knows the login for all the online banking and brokerage accounts. It’s not just a matter of honesty. Each spouse needs to be able to handle the other’s role if illness, injury or premature death arises.
7. Life insurance. Many think life insurance is not essential until you start having children. Actually, life insurance is very important when you’re first married, especially if one's spouse passes away suddenly. A life insurance payout can be used to pay for funeral costs, the rent or mortgage, and household bills and debts. It also can be used to help pay for childcare and, eventually, college for any children you might have. It can also leave a legacy for those you love. When you’re young and healthy, a simple term life insurance policy is usually very affordable.
8. Should the spouse with a clean financial record assume the other spouse’s debts? Before saying “I do,” make sure you understand each other’s credit scores and outstanding debts, including student loans, business debts, credit card debt and alimony to a previous spouse. That can be a big hurdle for couples to overcome if one spouse brings substantial debt into the relationship (including law school, medical school or dental school loans). Make sure you are clear with each other about which type of account will be used to pay off the debt once married (joint or the debtholder’s). Also know bringing debt into marriage can make it harder for couples to qualify for a mortgage or auto loan and can delay the process of buying a first house or starting a family.
9. Prenuptial agreements This is a sensitive area. For first marriages, prenups mainly come up when there’s a huge disparity in wealth between the two spouses and they’re in a community property state. But before thrusting an imposing legal document on your spouse to be, you need to be open and honest with them about what might happen to your respective assets if heaven forbid the marriage dissolves. We’ve found that pre- and postnups come up more often for second or third marriages when children and lots of assets may be in play.
If you or an engaged couple close to you has concerns about your marital finances, please don’t hesitate to reach out. We’ve helped many clients like you in similar situations.
RYAN A. DUNN, CFP®, is a Wealth Manager at Novi Wealth