You are in love, and it is time to get married, at last! Life is so exciting! Party time!!
But, there are always a lot of things that happen along with getting married! Buying a house together, going on a honeymoon, start considering a family, etc. Not to mention the expense of the wedding itself. I know this because it happened to me! I moved provinces, started a company, and got married, all in one summer.
I am one of those people - and I think this is fairly common - who grew up learning very little about financial literacy. It is not something that is well taught in school (nor has it ever been) - and so there is often some fear or stigma when it comes to talking about money. We thought it would be interesting and helpful to ask an expert what are some of the financial considerations around getting married.
My friend Reid Anderson is one such expert, as a Regional Vice President with PFSL Investments. He agreed to put together his thoughts on some of the financial things to consider. This is all in his own words, and there's a lot of great information, so to make it easy to navigate here are some links to the main points:
- Emotion and Money
- Start With a Plan(ner)
- Share Expenses
- Talk About Debt
- Your Financial Independence Number
- Tax Advantages
If you're looking for some advice from Reid (it is totally free!!), email him here.
Without further ado, below is Reid Anderson's take on finances and marriage.
Reid Anderson on Marriage and Money
So consider this…
The average couple will spend 13 to 18 months planning a wedding event that lasts 12 hours.
That same couple will spend less than 24 hours planning for retirement which will last, on average, 20 YEARS!
We are the products of a ‘buy now, pay later’ culture and, for many, it is costing us our retirement.
All I knew going into my marriage is that my wife had less debt than me and a higher income. SCORE! So that was great… unless you were her. (Don’t worry, I’m making it up to her)
There’s an interesting formula I’ve developed with respect to a human’s emotional relationship with money.
Fear+Money=Disaster.
So in a marriage it would be:
F+$=Disaster2
It’s all derived from these facts:
Humans are emotional creatures
We generally fear what we don’t understand
We avoid what we fear
No one is born with an understanding of money, therefore
Most of us avoid/fear learning about money.
And followed to its logical conclusion – because of fear and ignorance we are doomed to make the same mistakes our parents made and curse our children to make the same mistakes we did.
When it comes to your family’s finances, allowing emotion to rule, can be devastating. And because so many of us are not equipped - we ignore… and that is a mistake. The good news is that it’s really not that hard to get a handle on and it’s really only a matter of learning a few things.
Aside from health, our financial lives underpin virtually everything we do or plan to do in life. When will we retire? What are we doing for the kid’s education? How many vacations can we take this year?
But there is the even more mundane issue of monthly bills, expenses and unexpected cash calls.
New couples (and make no mistake – most mature couples) may struggle to understand how to best approach and organize their finances. This is due, in part, to the fact that our financial situations are nuanced and unique. There is no “one-size fits all” scenario.
But there are some CONSTANTS that can be easily applied to every situation.
So here are a few things to consider when approaching marriage and money:
Start with a plan(ner)
If you don’t know the answer to any of these three questions, I very highly recommend you sit down and speak with an advisor. And don’t worry, if you choose the right advisor, they won’t charge you a fee. (And don’t go to a bank for this... More on that later)
What is your FIN? (Financial Independence Number)
What is your DFD? (Debt Freedom Date)
What is your IPV? (Income Protection Value)
Vanguard put together a great deck on why using an advisor is critical, citing data they have amassed over decades. Their data bears out the benefit and necessity of having someone who will coach you through the ups and downs of life and the markets. Our behaviour is our biggest risk! Having a coach will make a big difference to our net worth upon retirement.
When you are assessing advisors, look for one with a demonstrable track record, preferably not an employee at a bank. Many times in my career I’ve heard complaints about bank “advisors” who are simply using their position as a stepping stone into the “high net worth” positions. There are few things more frustrating than going through the motions of explaining your life to a stranger only to return 12 months later to a different face behind the desk.
Prior to visiting an advisor, take the time to understand your overall financial priorities. This will serve as the foundation of your eventual financial plan. Have an open conversation about your short and long-term goals. You’ll also want to establish a common footing on what types of things each of you consider to be important expenditures and unimportant expenditures. (Vacation vs. Project Car, Tattoos vs. education fund contributions etc).
Having a BASIC understanding of your partners dreams and expectations will go a long, long way toward setting up a successful life together.
Share expenses
This is obviously not absolutely mandatory, but I will go so far as to say that it levels the playing field to a great degree and sets your marriage up as a true partnership. Sharing finances means that you can both enjoy the benefits of a shared/combined income. There are tax benefits (income tax, Spousal Investments), huge debt-management benefits (interest evaporates the faster a debt is paid down) as well as the inherent security and stress-relief of knowing you’re a team, attacking the world together.
On my wedding day my sister offered me one of the best pieces of advice I’ve ever heard with respect to human relationships.
“Don’t’ keep score”
She meant it in a general sense, but if you are a married couple keeping tabs on who paid for the last dinner out, especially if one spouse makes less than the other, you’re not exactly setting yourself up for long term harmony.
Personal opinion – not gospel.
Open a Joint Account
Regardless of how you decide to share expenses, setting up a joint bank account or credit card is usually the best way to cover costs and keep track of the bills. Many couples choose to maintain their own bank accounts for individual spending while pooling resources in a shared account for the essentials – but a means to pay shared expenses jointly is great. (I keep a separate savings account for gifts for my wife)
Also – if you possess the credit and the discipline, use a credit card with some kind or rewards attached for paying your monthly expenses where possible. It’s great getting a reward for paying the gas bill! Look for cards with low fees and practical rewards based on your needs. For example, grocery or travel rewards add up quick when fuel, groceries, utilities etc. are paid with a card.
IF, however, you are not paying that card off IN FULL every month – cease and desist! Use cash. There’s no sense in paying interest to a credit card company to reap minimal net reward.
Have the Debt Conversation
We get it. Debt ain’t sexy. But there’s a reason financial guru Gail Vaz-Oxlade called her show “Til Debt Do Us Part”. Overlooking debt will inevitably harm your relationship—or at least your bank account.
Canadians hold some of the highest household debt of any developed country (recent data indicates we spend 171% of our incomes on average), and even the most frugal spenders will likely have to borrow money at some point for larger purchases like a home or vehicle.
Your advisor can provide some great insight about how to manage debt – and don’t worry, a well-managed debt stacking scenario is easy to implement and will reduce interest payments greatly.
If you or your partner hold individual debt like student loans, decide how you’ll handle repayments. My opinion – tackle all debt together. It will minimize the overall amount of interest you pay, ergo you will have more money to put towards that vacation or your retirement.
To mortgage or not to mortgage? This is a big one, and likely has already come up. From a purely numerical standpoint, you are almost always better off renting – but that has rarely been the custom. Younger couples are actually beginning to trend toward renting, but that is largely a symptom of decreasing relative disposable income. For example, when I was born in 1976, the average cost of a home in my city represented 60% of the average annual income in my city.
Today that number is slightly different.
The average house now costs 600% of the average annual income in my city. Yikes.
So if you were beating yourself up for not being able to purchase a home this will come as welcome news.
Either way – have the discussion with your lovely new spouse and come to terms on what fits your plans and budget.
Know your F.I.N. and Work Toward it Together – Invest as a couple
In his ground-breaking book – “The7 Habits of Highly Effective People”, Stephen Covey cited “Begin with the end in mind” as the second essential habit, and it is sage advice for all matters ESPECIALLY in finance.
A good rule of thumb? Aim to invest 10% of your income together. But depending on your plans that may be too little, or depending on your debt-load, too much! You need to know your FIN and DFD.
As long as you know your FIN and start saving you’ll be moving in the right direction. The best way to build your wealth over time is to save money consistently as you earn it (say, every paycheque, for example) and to invest those savings in a diversified portfolio.
Your own financial situation and goals will help guide the level of risk you should take and the type of account you should use to achieve each of your goals. For example, if you need to use money in the short term, you may want to hold cash savings or a conservative portfolio in an unregistered investment account. On the other hand, if you are saving for your long-term retirement income needs, a higher risk portfolio in an RRSP combined with a TFSA might make more sense since you have more time to ride out the short-term swings of the market.
---A word about Tax Free Savings Accounts. For some reason banks and some advisors love to sell the idea of a TFSA as a short-term savings account. This is absolutely asinine.
The very nature of a TFSA is to remove the obligation of an investor to pay tax on the growth of an investment! Why not use this in a long-term scenario and earn a lifetime’s worth of tax-free interest rather than using it for short-term savings (in which case you will see virtually no growth)?
Tax Advantages – Know them
This is where having a great accountant pays for itself. If you have a simple tax scenario and don’t require one, consider having a one-time consultation in which you can get some great advice that will pay dividends.
For example - for couples who have significantly different incomes - The higher-earning partner can contribute into a spousal RRSP and claim the contribution themselves – ergo, the couple enjoys a larger tax advantage because the contributor is in a higher tax bracket.
Conversely, you can pool your charitable donations, medical expenses, public transportation costs, and childcare expenses onto the person’s return where the savings are maximized.
Enough Already
The biggest piece of advice I can offer is simply GET A PLAN. It will help to eliminate emotion from your financial decision making. Do not start into married life just assuming that “it will all take care of itself”. The very nature of finance is that there is a high benefit to acting early and a high cost to waiting. Incidentally, Stephen Covey’s #1 essential habit is “Be Proactive”. So there you go.
You may think it’s complicated but really it’s not. Find someone you trust and over a few short conversations your fear and hesitation will vanish and you will be amazed how easy it was.
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