| By George MarutOf all the promises you’ll make on your wedding day, the “for richer or for poorer” bit is likely to cause the most problems. According to a survey by the Association of Bridal Consultants, more than 67% of newlyweds believe the most serious conflict in their first year of marriage is over money. (Problems with in-laws rank a distant second.) Financial experts are full of anecdotes about young couples and financial discord. It’s often the details that drive people crazy. Small problems often grow into larger ones, because some people find it easier to talk about anything other than money. That, of course, is the worst-case scenario. But merging your finances does require a lot of work initially. And it takes a lot of maintenance to keep everything up to date and both spouses informed. But taking a few easy steps will save you a lot of headaches – and arguing – in the long run.
1. Cash Flow
Managing cash flow is an important lesson taught at all top business schools but one often learned the hard way when it comes to managing family finances. “Getting in over your head” is an expression that often times is used to describe poor case management. Everything you purchase from you home, car(s), and various items on credit carry a corresponding debt on your family’s financial balance sheet. The importance of proper cash flow will affect how well you can complete the next steps.2. Meet the Marriage Penalty
In testimony before the House Ways and Means Committee on February 4, 1998, June O’Neill, then Director of the Congressional Budget Office (CBO)said, “the incompatibility of progressive rates, equal treatment of married couples, and marriage neutrality results in a continuing tension within the tax code.”
Bush’s latest tax cut provided some much needed marriage-penalty relief. Now the 15% tax bracket is exactly twice as wide as the 15% tax bracket for singles. And the standard deduction is now double what it is for singles as well.
But assuming you and your new spouse earn more than $56,801 (in 2003) and you plan to file joint returns, you will still experience some tax punishment for tying the knot. So prepare to pay more come April 15.
One thing you shouldn’t do is run to your human-resources office to change your W-4. At least not if you and your spouse are both working. Once you indicate that you’re married, the rules assume that one spouse doesn’t work. As a result, your withholding will actually decline. And that’s just the opposite of what you want. If you’re both working and you don’t own a home, it should be ‘single, one’ all the way according to most CPAs.
3. Pay Down the Debt
It’s a common scenario: One person comes into a marriage with a lot of savings, another enters the relationship with credit card debt up to the ears. “Opposites attract. That’s what makes it exciting,” says Ruth L. Hayden, a financial educator and author of Richer for Poorer: The Money Book for Couples. But “when it comes to money, we wish we were married to a clone.” Even though the thrifty spouse is not liable for debt incurred before the marriage, the free spender’s history is sure to affect a couple’s chances of obtaining credit in the future. And if you’re in the market for a new home, you’ll probably be applying jointly. That should be motivation for you to pay down the debt together.
4. Examine Your Balance Sheet
Before you can make any decisions about budgeting, investing or saving for a house, you have to know how much you own and how much you owe. We tell our clients to put together a combined balance sheet, on which they list assets and debts, and update the list semiannually.
You should also check your overall portfolio and rebalance if necessary. You may discover that together, you’re overweighted in one particular stock or sector. You’ll also want to look ahead to retirement and figure out a way to maximize contributions and invest as aggressively or conservatively as you should given your age and goals.
5. Protect Your Incomes
What you do need is insurance, both life and disability, especially if you’re relying on both of your incomes. You might get insurance through your benefits plan at work that will cover 60% to 70% of your income, but It’s probably a good idea to supplement that. Brian Biederman, CFP from Raleigh advises clients about the taxability of Disability Insurance. A key point of Disability Insurance that most people miss is the tax implications. Regardless of who pays the premiums, (you or your employer) you get at most 70% of pre-disability income. If you (the employee) pay the premium the benefits are Tax-Free. So, the real question is whether you want 70% of your income, taxable or tax-free. It can be expensive, but It’s worth your attention. If your spouse can’t work, passes unexpectedly, can’t leave the house even and needs home health care and so on, you have to pay for that.
6. Paperwork, Paperwork, Paperwork
You thought planning the wedding took a lot of organizational skills? Wait until you try to track down everything that has your name on it – or that you named a beneficiary for – a mortgage, 401(k)s, IRAs, disability insurance and life insurance. If you have a will already, you’ll want to change it, if not you need to have one drawn up. These decisions are especially important for second marriages in which there are children involved.
7. Talk Money
Above all, It’s important to communicate regularly and openly about money. If that means setting aside a time each week or each month for a state-of-the-finances chat, then do it. (We suggest rewarding yourself with a dinner out or a movie after each financial-planning session.) But It’s essential to keep each other informed, especially if one person tends to deal with all the money maintenance, while the other handles different tasks.
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