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Financial Literacy Month: Budgeting for Newlyweds

by Christopher Burns, CPA, CFA | Apr 06, 2017   ()

For newlyweds, creating and sticking to a shared household budget can be one of the biggest transitions of their new life together.

Ease this transition by starting discussions about budgeting and money management early. If you are considering a marriage, a civil union or a domestic partnership, you would be wise to communicate openly about money matters and work together to establish short, medium and long-term financial goals. This article will introduce a few best practices for starting these conversations and for establishing your financial goals.  

Short-term financial goals address the next few months. These may include saving money or paying off credit card debt, which often comes with higher interest rates than other types of loans or credit. How much should you save? Couples should consider setting a goal of saving three to six months of their expenses in an emergency fund. You can then tap these savings in the case of a true emergency or loss of income. Because this money is meant to cover surprise expenses, it should be held in an easily accessible account, like a checking or savings account. Discussing whether to have individual or joint bank accounts, or both, is also an important conversation to have prior to the ceremony.

Short-term goals for couples should also include setting realistic goals for funding the cost of their wedding or ceremony. With an average wedding cost of more than $31,000 1, it’s becoming more common for couples to borrow money or take a loan to fund their ceremony. I would advise against borrowing money for this purpose. Setting a budget for the ceremony can help couples make smart choices about prioritizing spending. If you are thinking about borrowing money to have the ceremony, consider whether a better use for this money is your medium-term goals, which will be introduced next.  

Medium-term goals address the next year to the next few years down the road. The payoff of student loan debt is one example. It is important to discuss student loan debt with to your partner before tying the knot. As the average borrower leaves college with over $30,000 in debt2, planning for these payments is very important.

Making a large purchase, such as a home or a car, may also require medium-term planning. It is important to start saving for a down payment and to start checking credit scores early. If your medium-term financial plans do include a large purchase, having an open dialogue about the state of your credit scores will help avoid any surprises. Building or rebuilding one or both of your credit scores will help you get financing and secure a reasonable interest rate on your mortgage or other loans.

Planning to have a family can raise both medium and longer-term financial planning discussions. Before beginning a family, couples should work to understand the medium-term expenses involved and should consider some long-term goals, such as starting a college savings account. One common type of account for college savings is a 529 plan, an account designed specifically for college savings.

Finally, saving for a secure retirement should be a couple’s ultimate long-term savings goal. If your employer offers a 401(k), you should strongly consider contributing enough to maximize any matching dollars offered by the employer. Starting retirement savings early also allows you to take advantage of compounding interest, which is key to maximizing your savings potential.

Once you have established your short, medium, and long-term goals and objectives, the next step is to make a budget that prioritizes these goals and balances your day-to-day spending needs with your savings plans.

I suggest prioritizing in the following order:

  1. Start an emergency fund and work toward saving three to six months of expenses.
  2. Keep this money in an easily accessible account so it is available for unexpected expenses.
  3. Get a handle on debt, starting with the loans that carry the highest interest. Often this starts with paying off credit cards, then student loans, then car payments and other debt.
  4. Some interest payments, like certain student loan debt, are tax-deductible (subject to some limitations). It is wise to consider those tax breaks when prioritizing which loans to pay off first.
  5. Next, work on your medium to long-term goals. These may include saving for a down payment on a home or working to improve credit scores.
  6. Finally, look at your long-term goals, which may include contributing to retirement accounts like 401(k)s and IRAs or saving for starting a family through, for example, college savings accounts like 529 plans.

There are many other financial considerations for newlyweds. If one party enters the partnership with children or with significantly more assets than their partner, a prenuptial agreement may be in everyone’s best interest.

Couples should also discuss insurance needs as they begin their lives together. These include adding a new spouse to employer-offered health insurance, making sure auto insurance covers all cars and drivers and considering life insurance to provide financial stability in the event of one partner’s untimely demise.  Having a will and making arrangements for powers of attorney are other crucial discussions.  

I understand that these can be difficult conversations to broach. Engaging a trusted third party, such as a pastor or priest, a close friend or family member, a Certified Public Accountant or an attorney can be helpful in opening these discussions gently. These advisors can often lay things out on the table in an objective way, which is less likely to lead to hurt feelings. If you engage a professional advisor, be sure to establish a fair price for their services in advance and to evaluate their education and credentials to make sure you receive high-quality advice.

About the author: Chris Burns, CPA, CFA is a fixed income analyst at Greenleaf Trust, a state-chartered trust bank headquartered in Kalamazoo. Greenleaf specializes in wealth management, trust administration and retirement plan administration. He can be reached at CBurns@greenleaftrust.com. 

Endnotes:

  1. Jacobson, I. (n.d.). Average Wedding Cost Hits National All-Time High. Retrieved April 04, 2017, from https://www.theknot.com/content/average-wedding-cost
  2. Student Debt and the Class of 2015. (2016, October 18). Retrieved April 04, 2017, from http://ticas.org/content/pub/student-debt-and-class-2015
Source: MICPA
Source: MICPA

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