This piece is in honor of Valentine’s Day. It is meant for people in love who are married or live together and who have a shared or partially shared financial situation. Finances can be a strain on a relationship. The goal of this article is to provide some suggestions that may help lessen or eliminate any financial friction points that may exist in a relationship.
What follows is a brief, but hopefully comprehensive list of the areas of finance that exist for all of us. These are the things you have to worry about. I will attempt to describe “financial perfection” in each area…. something to strive for. After that, I will make some suggestions as to how to deal with all of these financial issues, regardless of the dynamics of your personal relationship and how each of you feel about finances.
Checking Accounts: Make sure more money goes in than comes out. Monitor the balance. Have no more than one (or two if you keep bill paying separate) checking accounts.
Budget: Have one. Stick to it. This is called living within your means. This is the secret to financial happiness.
Savings / Emergency Reserves: It’s not savings if you spend some of it. If your savings is shrinking, you are spending more than you make. If your savings is growing, maybe you should be investing it. Emergency Reserves are for emergencies only, and should be refilled if depleted.
Charge Cards: Have only one card each and make sure the balance is zero every month. If the balance isn’t zero in three months, you can’t afford whatever you charged. Know the interest rate and the dollars of interest that you pay.
Home Equity Line of Credit: If the balance isn’t zero, what is the plan to pay it off in no less than 2 to 5 years? If you are looking for a new Home Equity Line of Credit with a lower interest rate, you are probably in trouble.
Mortgage: Plan A is to have your mortgage retired when you are. Any other plan makes your retirement success much more difficult to achieve.
Your Home: It’s not an investment, it’s a place to live. If you added the cost of your improvements to the cost of your home upon sale, you will see what I mean. Many people suffer from TMH — Too Much House. You may be putting money in your home that should be going to your retirement plan at work.
Investments: Just about everyone needs a nest egg to retire. I hope you know how big yours has to be, and that you are on track with contributions.
Insurance: If you are working, you should carry disability insurance. If you have a young family, you need lots of life insurance and probably term insurance. If the cost of long term care insurance does not affect your life or retirement plans … buy it. Have adequate insurance on the cars and the house.
Legal Stuff: Have a Will, Power of Attorney, Healthcare Proxy and Living Will in place. Make sure your beneficiaries on life insurance, annuities and retirement plans are accurate. Be careful choosing your Executor for your will, the holder of your Power of Attorney and Guardian for your young children.
Here comes the touchy stuff! At least one person in the couple should be paying attention to all financial issues … preferably both are actively involved. Or maybe you split up these responsibilities. Have a discussion yearly on the status of each of the areas mentioned above. Are you in agreement (Peace), or are there significant differences of opinion (War), or do you have some differences of opinion but are mostly in agreement (Detente)? Maybe one of you is using the charge card too much? Maybe you can’t agree on a guardian for your children? Perhaps one of you is immortal and does not need life insurance? Spend as much time as necessary moving big differences of opinion to Detente status. War status could end a relationship and/or have some serious financial consequences. There should be clear, updated records or summaries of all financial areas kept in an accessible place for either spouse or significant other to review at any time. Information rules!
It will take some time to get your finances in order. Once you have all of this organized, that yearly review shouldn’t take more than an hour. I would schedule it just before Valentine’s Day. Financial Stability and Security is a pretty good way to show your love for your spouse or significant other. Happy Valentine’s Day!
Michael J. McNamara, Ph.D., CFP®
CERTIFIED FINANCIAL PLANNER™
*Any financial advice in this article is intended to be generic in nature. Readers should consult with their own financial advisors before implementing any advice or suggestions above.