Financial Tips for Newlyweds: Part 1

Many engagements occur during the holiday season.When a couple decides to gets married, they usually comingle at least some of their personal finances. Some of the biggest challenges a couple will face include joint goal-setting, establishing accounts at financial institutions, deciding how to pay bills and manage money, and filing income taxes as a married couple. Below are five recommendations to consider:

• Set Joint Financial Goals- Make a list of short- and longer- term needs and wants. For example, one spouse may need a new car within a year and, together, a couple wants to buy a house within three years. Determine the cost of each goal and the amount that needs to be saved each month to achieve it on time. As an initial financial goal, plan to save at least 3 months living expenses for emergencies such as car repairs.
   
• Develop a Spending Plan- Prepare a spending plan (a.k.a., budget) that includes savings for financial goals. Review and revise it as needed. A simple spending plan includes monthly net income, fixed expenses, flexible expenses, and occasional expenses that are paid less frequently than monthly (e.g., quarterly insurance premiums).

• Develop a Cash Management Plan- Decide if and how you want to merge financial accounts (e.g., savings and checking). Some couples prefer one joint account while others prefer two separate accounts or a combination of separate and joint accounts. Factors to consider include convenience, a desire by each spouse for some personal “spending money,” and the minimum balances required by financial institutions to avoid fees.
   
• Develop a Payment Plan-Decide how to divide household expenses. If the incomes of two working spouses are fairly equal, bills can be split 50/50. If there is a substantial difference in earnings, bills can be pro-rated. For example, the spouse who earns 70% of household income would pay 70% of the couple’s expenses. The other spouse who earns 30% of total income would pay the remaining 30% of the bills.
   
• Come Clean About Credit- Review each other’s credit reports prior to marriage. If a spouse-to-be has a poor credit history, don’t apply for a joint loan (e.g., mortgage) or credit cards. Keep your credit histories separate until negative information drops off the poor credit report, usually in 7 years (10 years for bankruptcy). If one spouse co-signs a loan for the other, he or she becomes legally responsible. Similarly, if financial accounts are merged, assets of the spouse with a good credit history can be seized by creditors.

Research Findings from the AFCPE Symposium

I recently reviewed the proceedings (published papers and abstracts) of the 2018 symposium of the Association for Financial Counseling and Planning Education (AFCPE). Below are five take-away messages that caught my attention:

A study of college students’ money management behaviors found that they lack financial knowledge and tend to over-estimate their knowledge of personal finance.

Another study found evidence that financial knowledge is negatively related to financial stress. Knowledge about inflation and taxes was significantly associated with lower financial stress levels.



A third research study found statistically significant relationships between diet (eating habits), sleep, and physical activity, respectively, with an index of 10 financial management practices.



A fourth symposium workshop discussed differences between male and female finances. For example, the average monthly Social Security benefit for female retirees is 79% of what it is for male retirees.



Another session discussed research that found that indicators of financial knowledge and their application had a significant impact on financial well-being.

 

What can be learned from these AFCPE Symposium presentations?

Clearly one take-away is that financial knowledge is power. Another is that conscientiousness in one area of life (e.g., personal health habits) might provide useful insights into another (e.g., personal finances). Finally, women face unique financial challenges (e.g., lower average incomes and longer life expectancies) than men and should make financial plans accordingly (e.g., saving as much as possible for retirement and working longer to earn a higher Social Security benefit).

Concurrent and Sequential Goal-Setting

Last week, an article about financial goal-setting by Liz Weston that I was interviewed for was published by The New York Times. The key point of the piece is that people can save for multiple financial goals at the same time rather than sequencing them one by one. By doing so, compound interest is not delayed on savings for long-term goals, like retirement, that come later in life. The earliest savings that people set aside will have the longest amount of time to grow.


Interestingly, some readers questioned this premise and argued for a strategy of tackling financial goals one small step at a time. Thus, I decided to explore financial goal-setting a bit more detail in this post.

Basically, there are two ways to approach the achievement of financial goals:

• Concurrently; i.e., working on (saving for) two or more financial goals at the same time (multi-task)
• Sequentially; i.e., working on one financial goal at a time in a series of steps (single task)
   
  Each method of addressing financial goals has pros and cons.  For example, you can intensely focus on one goal at a time with sequential goal-setting. It is also simpler to set up and manage single-goal savings than plans for multiple goals.
   
  However, the biggest disadvantage of sequential goal setting is that compound interest is not retroactive. If it takes someone up to a decade to get around to long-term savings, that is time that interest is not earned. The earliest years of savings toward a long-term goal are the most powerful ones. Based on the Rule of 72, you can double a sum of money in 9 years with an 8% average return. By delaying long-term saving, you can lose a full compound interest doubling period.
   
  So what is the best way to save money for financial goals? It depends. In the end, the most important thing to remember is that you are taking positive action one way or the other. Celebrate that fact, weigh the pros and cons of concurrent and sequential goal-setting strategies and personal preferences, and follow a regular savings strategy that works for you.
   

10 Financial Planning Items to Be Grateful For

On Thanksgiving, it is customary to express gratitude for good things that have happened in our lives. Often, this includes our family, friends, and shared memories, but it can also include positive events that have happened with our jobs and personal finances. Below are ten items to be grateful for on Thanksgiving. Best wishes for a wonderful holiday weekend.

• Positive Cash Flow- Consider yourself blessed if your income exceeds your expenses, including savings for future financial goals. Over one-fifth of Americans are not able to pay their monthly bills in full.
   
• Increased Savings- Having more money saved this year than last year is a very positive step forward.
   
• Decreased Debt- Having less debt to repay than last year is also a very positive step forward.
   
• A Good Credit Score- A credit score of 740+ will get you the best (lowest) interest rates on loans and credit cards. Only 45% of credit users fall within the ranges of 740 to 799 (25%) and 800 to 850 (20%).
   
• An Adequate Emergency Fund- Having at least 3 months of expenses set aside in savings provides peace of mind when “stuff happens” in life. Almost half (45%) of Americans do not have even 3 months of expenses saved.
   
• Adequate Insurance- Large losses like disability, liability, property damage, and a life-threatening illness are a lot less costly when there is a third party available to help pay some of these expenses.
   
• Good Health- Virgil once said “The Greatest Wealth is Health.” Paying attention to diet, sleep, and physical activity and having a good physical health status can help reduce costly out-of-pocket medical expenses.
   
• A Good Job- Jobs/careers provide an ongoing source of income and employee benefits such as health insurance plans and 401(k) plan matching. Even better, recent news reports indicated that many workers received a raise in 2018.
   
• Free Money and Savings- Let’s be grateful for cash-back rewards credit cards, 401(k) plan matching, promo codes on social media, door busters, and other shopping savings opportunities.
   
• New Consumer-Friendly Laws and Policies- An example is free credit freezes nationwide.  Another is new Medicare cards without Social Security numbers to reduce the risk of identity theft fraud.

Take-Aways from the AFCPE Symposium

Last week, I attended the annual Association for Financial Counseling and Planning Education (AFCPE) Symposium for financial educators and counselors. Below are five key take-aways that resonated with me:

• Brent Neiser from the National Endowment for Financial Education noted that America has a weight problem: a growing stack of financial “to-dos” (tasks). He encouraged attendees to set meaningful and attainable goals, cut options to a manageable number, take small actions toward goals, and automate actions (e.g., saving for retirement) where possible so that financial tasks are accomplished. Then celebrate “wins” and learn and repeat.
   
• A session on gambling by Cooperative Extension educators in Minnesota noted that those who gamble at a young age are more susceptible to gambling problems later in life. Studies reveal a later onset of gambling for women (age 32.4) vs. men (age 20.4). However, once gambling, women progress to having a gambling disorder twice as fast as men.
   
• Credit counselor Todd Christensen noted that income is not directly or indirectly factored into a person’s credit score. If people use credit wisely, regardless of their income, they can have a high credit score. In addition, checking your own credit, through one of the credit bureaus or www.AnnualCreditReport.com, has no effect on your credit score.
   
• Financial counselor Diana Yacob noted that “You can change the course of someone’s life with your words.” Professionals in personal finance (or any industry) can check the simplicity of their messaging with the Simple Writer web site: https://xkcd.com/simplewriter/ which encourages use of the 1,000 most common words in the U.S.
   
• Speakers from Financial Empowerment Centers led a workshop about savings counseling and noted that people who have a reason to save, save more money. Their pilot study of a financial counseling program found that the most common savings behavior that people had was to physically separate their spending money and savings.