Money tips for newlyweds
Set your financial goals and max out your retirement plans
NEW YORK (CNNfn) - You spent a year planning the perfect wedding. There was chamber music, ice sculptures and a plane that spelled "just married" across a blue sky. But the honeymoon was over sooner than you thought.|
You're a saver and your spouse likes designer clothes. You can't agree on a weekly grocery budget, let alone what mutual funds you should choose or how much you should save for retirement.
A lot of people think love will be enough when they get married, but nothing kills a fairytale romance faster than disagreements over money.
"The most common reason for divorce is money," said Judy Martindale, a certified financial planner from San Luis Obispo, Calif. "Couples don't usually sit down and say, "How do you feel about debt and savings?' "
A couple should hammer out financial goals long before they head down the aisle, financial planners say. Do they want to save for a house? Do they plan to have kids? Will they combine their money or keep separate accounts?
They should share their views about investing, since chances are good that a husband and wife won't have the same philosophy about stocks and bonds. One may like risky tech stocks, and the other might not sleep at night when the market is plummeting.
"Most couples have different attitudes about money," said Wendy Hobbs, a certified financial planner from Tucson, Ariz. "It's a matter of how to compromise."
Ron Pearson, a fee-only certified financial planner from Alexandria, Va., said new couples need to be realistic about their goals.
Pearson worked with one newlywed couple, both doctors fresh out of medical school, who were so naïve about money they thought they could take six vacations a year.
"They hadn't even gotten their first paychecks yet," Pearson said. "My biggest thing was giving them a sense of reality and what costs would be. We outlined costs and a budget, and by the time we finished they said they could take maybe one vacation a year. They started to understand reality versus their dreams."
One of the worst ways to start a marriage is with debt, Martindale said. A bride and groom might have splurged on a lavish honeymoon, or they may have nagging school loans that they haven't paid off.
Credit cards seem to be too readily available – especially among younger people, who are often too willing to use them.
"I had one new couple who had $20,000 in credit card debt," Martindale said. "They couldn't make their monthly payments."
Pearson recommends a new couple try to chip away at debt while building their savings and retirement. But he acknowledged it isn't easy getting pulled in so many directions.
"It's not easy, the money only goes so far," Pearson said.
Martindale said a new couple should also start by building an estate plan, which includes a will and registration of assets. You can register virtually any asset – a bank account, stocks, a piece of property.
For example, you can register a bank account as community property with rights of survivorship, which means if one spouse dies, the survivor gets the money without going through probate, Martindale said.
If your spouse dies suddenly and hasn't register a bank account, then you won't have access to the money if you need it, Martindale said. You'll have to wait for a probate judge to decide where the money goes, and often it goes to blood relatives, not spouses.
"There are lots of ways to register assets, but you need to decide which way is best for your marriage," Martindale said.
Couples should max out any retirement plans first because they're less likely to touch that money for emergency expenses, Hobbs said.
You can contribute $10,500 or up to 15 percent of your salary to a company-sponsored 401(k) plan. If that's too big of a bite, at least invest enough to get the company match. In most cases, companies will generally match 50 cents on the dollar up to 6 percent, for a total of 3 percent of your salary. If you don't put in enough to get the match, it's like passing up free money.
The 401(k) turns 20.
IRA survival tips
Likewise, open a Roth IRA or a traditional IRA. With a Roth IRA, the contributions aren't deductible but the withdrawals are tax-free. You must make $150,000 or less as a couple to qualify. With a traditional IRA, you'll pay taxes on the withdrawals but chances are good you'll be at a lower income tax level.
The U.S. House of Representatives recently approved a bill to raise savings limits to $15,000 for 401(k)s and $5,000 for IRAs. The plan faces a tough fight in the Senate, but supporters hope it will get to President Bush's desk by the end of the year.
"The bump up to $5,000 for IRAs is huge," Pearson said. "It will have a big impact in retirement savings."
With either a Roth or a traditional IRA, you can withdraw up to $10,000 towards the purchase of a home before age 59-1/2 without penalty, said Ed Slott, a nationally-known expert on IRAs and author of the newsletter Ed Slott's IRA Advisor. It applies to anyone who hasn't owned a home in two years, and the lifetime limit is $10,000.
The rule applies to money that would otherwise be subject to taxes, meaning contributions or earnings in a traditional IRA and only earnings for a Roth, Slott said. (You can withdraw contributions any time you want from a Roth because that money is already taxed.)
"It's not a great move," Slott said. "When you buy a home, the expenses are just beginning...You're dipping into your pension."
Martindale said she recommends couples build a money market account with 10 percent of their adjusted gross income. And don't forget about insurance – renter's or homeowner's for your house, and disability insurance in case you can't work, Pearson said. If you're in a high-risk profession you might also consider liability insurance, he said.
Most newlyweds don't have much disposable income left after funding their retirement accounts and rainy-day funds, but if you're lucky enough to have more cash, there are other options.
You can start a regular investing plan into a mutual fund – just put the deposit slip in with your bills and treat it like any other expense you have to pay every month, Hobbs said.
Other financial pros say you can make automatic deductions into the account every month directly from your paycheck. You're less likely to miss the money if you never see it.
One danger, however, is newlyweds who aren't disciplined about money will spend too much and end up having to stop the investing plan, or even worse, sell the shares, Hobbs said.
A good place to start is with a total stock market fund, Hobbs said. After they've accumulated several thousand dollars in the fund, they can branch out to another.
Do you have a question about financial planning? E-mail our experts this week at email@example.com as part of CNNfn.com's special report: "Weddings: A guide to getting hitched."
If they're more aggressive, and they have a long investing window, they may want to choose a riskier option, like a technology fund, she said.
Pearson said some other options include Fidelity Puritan, Janus Balanced, and Pax World Balanced, a socially-responsible fund.
A balanced fund might be a good alternative for people who don't have a lot of money to invest who want diversification and don't want to take on too much risk.
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Pearson said he has about 50 different index and actively-managed funds that he recommends, including Artisan International for international exposure, Clipper for large value, and Janus Growth & Income for large growth.
Pearson likes Weitz Value for mid-cap value, Royce Opportunity for small value and RS Diversified Growth for small-cap growth.
"My comfort level for young people is 80 percent stocks and 20 percent bonds," he said. He'd put the stock funds in the retirement accounts and the bonds in the taxable account.
In some cases, Pearson recommends exchange-traded funds (ETFs) for taxable accounts like Select Sector SPDRs.
Martindale likes the low cost of index funds, and also likes Fidelity Blue Chip Growth, as well as funds that invest in Europe, among others.
And baby makes three
If you're planning on starting a family, you won't be able to open an education IRA or a state-sponsored 529 plan until after the baby is born.
You can save $500 a year with an education IRA – or even open your new baby a Roth IRA, some experts say. You can contribute up to $10,000 a year to a 529 plan. (Click here to read more tips for a young couple who wants to have a baby).
You'll have to plan for the loss of one income if you or your spouse intends to stay home with the baby, Martindale said. That will mean finding places in your budget to cut costs.
Whether it's planning for a baby, or any other big expense, it comes back to making sure you have a good financial plan in place.
"It's expectations about savings and debt and their values," Martindale said. "What's underneath is trust."