Financial planning is (and should be) dynamic; it evolves with life events such as job transitions, home purchases, marriage, pandemics, etc. I married my best friend last October; it was beautiful and mostly stress-free. People are always so excited when you tell them you’re getting married. They talk about their wedding day, how much fun you'll have, and how great the marriage will be! What they don’t talk about are the uncomfortable financial/life conversations that come with marriage.
As a CFP, I am familiar with the money conversations necessary to have before and after you tie the knot. My husband, on the other hand, was not. So, it was left up to me to initiate the conversations and subsequent action items.
When you get married or commit to a lifelong partnership, it's important you and your partner talk about money and your personal financial situation. It might feel like a taboo subject, but money is involved in our everyday lives and, in some shape or form, it's here to stay. My husband and I have different money stories; our parents’ financial habits differ and the teachings they passed down differ. When it became clear we planned to spend the rest of our lives together, we discussed our financial habits and shared our own vision of financial success. Ultimately, we decided to combine assets and transition to a joint picture, viewing it as our money (regardless of who earned it). This is not a universal move for couples and there is no right or wrong decision when it comes down to it. However, it's critical to have a conversation with your partner before you venture to the courthouse and crucial to continue the conversation while married.
Some decisions you will have to make include:
- Do we combine bank accounts?
- What do we do about debt?
- How do we file our taxes?
- Retirement savings - what's our joint strategy?
Do we combine bank accounts?
Combining accounts allows for pooled income and easy budget tracking. It also makes bill paying easier. If you’re not interested in combining assets, then keep accounts separate and decide who’s paying what bill.
Combining bank accounts does take some effort. You need to decide whose account to keep or open a new one, and then list both parties as account owners. This allows for deposits and withdrawals to be made in either name. And make sure to list a beneficiary. If something were to happen to you and your partner, you want your money to go to the person of your choosing.
Once the joint account is established, update existing systematic withdrawals and deposits with the new banking information. This includes direct deposit of paychecks, automatic bills, mortgage payments, etc.
What do we do about debt?
Before tying the knot, make sure you understand how much debt each is bringing to the marriage, the expectation for repayment, and how you'll tackle it as a married couple. Debts incurred before marriage will remain the individual's responsibility. The share of responsibility for debt incurred after marriage is dependent on state laws and the type of debt. If you are in a community property state (CA, AZ, ID, LA, NV, NM, TX, WI, WA), debt obtained in marriage is considered a shared responsibility and you both have an equal obligation to repay. In common-law states, the responsibility of the debt is dependent on whose name is on the loan, credit card, mortgage, etc.
I encourage you to have continuous conversations about money and debt to ensure alignment in the expectation for paying it off and how much debt you're both willing to take on. If you each brought debt into the relationship, create a repayment plan, and decide how much joint household funds can be allocated to the debts. It's prudent to attack the debt with the highest interest rate first. However, make sure there is a balance in repayment allocation. If something were to happen with the relationship, you don't want to get the short end of the stick and be left with higher debt payments even though you helped pay your spouses.
If you both have student loans, think carefully about consolidating them. Consolidation makes things easy from a bookkeeping standpoint, but if one day you need to separate the debt, it is difficult and likely impossible to do.
How do we file our taxes?
While Married Filing Jointly (MFJ) is the best filing status (in terms of benefits), you still need to assess if this is the right choice for your partnership. If a spouse owes back taxes, it's encouraged they pay the back taxes before filing jointly. By filing jointly, one's student debt monthly repayment amount could be readjusted based on joint household income. When weighing between options consider individual debt, retirement savings opportunities, and tax savings. By filing jointly, you’ll receive higher income thresholds for certain taxes and deductions, and you can usually qualify for multiple tax credits. Married Filing Separately (MFS), might be a good option if you can itemize deductions or medical expenses. However, be aware, MFS typically results in ineligibility for additional retirement savings. Talk to your tax preparer. They can run the numbers for you to determine which filing status is best for your situation. If you just want to keep things separate and not be liable for your spouses’ taxes, the MFS is your option.
Retirement Savings - what's our joint strategy?
When planning jointly, it's important to understand what your partner is doing, because there are savings strategies you can do as a couple. A joint income picture typically increases savings opportunities and previously unavailable opportunities become available. As mentioned earlier, joint filers receive higher income thresholds for certain deductions and tax credits, meaning you can make more in income and possibly qualify for certain tax breaks.
Here's an example. One spouse is offered an employer-sponsored plan and the other is not. To maximize retirement savings, the spouse with the plan makes the maximum contribution and uses the other spouse's income for living expenses. If they can do additional savings, the spouse without the employer plan can contribute to an IRA or Roth IRA, depending on your modified adjusted gross income. Or maybe now you're both eligible for Roth IRA contributions when previously one was not because of wages. There are several scenarios that could play out for your situation. To help determine the best option, meet with a financial planner. That’s an area of our expertise:
Maximizing your savings opportunities while balancing the cost of life and fun.
There's a lot to consider as you embark on this next adventure of your life. We’ve all heard that money doesn’t buy happiness and, while I mostly agree, I won’t rebuff money’s role in shaping our happiness. That’s why it’s so important to understand your money, align it with your vision and goals, and utilize it to its full potential. And to do this well, the money conversations with your partner are critical.
These are just the financial conversations you need to have. We haven't even discussed the essential estate planning and insurance conversations. Stay tuned! That's a whole other blog of mine you'll want to read.
~ Rachel Bubb