The Conversation About Money You Need to Have With Your Spouse

The Conversation About Money You Need to Have With Your Spouse

Nobody likes to talk about money.

In many ways, finances are the last big “taboo” in our society.  There’s even some research to back it up – a study from University College London surveyed 15,000 men and women in Great Britain a few years ago and found that people are seven times more likely to tell a stranger details about their sex life than they are to tell a stranger their salary.

One of the central missions of my work is to help millennials get more comfortable talking about money.

Because it’s absolutely critical that we do so, particularly as we enter serious relationships.  As a generation, we are moving in with partners and getting married at a later age than our parents and grandparents did.  Which means that couples have more established habits around money when they start to combine finances.  And that, ultimately, can lead to friction in a relationship.

There’s been some research done on this subject, too.  And it isn’t good news.  Money issues are the number one cause of stress in relationships and can be a leading indicator of divorce.

As uncomfortable as it might be to have a serious, in-depth conversation around money with a boyfriend/girlfriend/fiancé/spouse, we need to learn how to have these discussions.  And more importantly, we need to learn how to have these discussions in a way that doesn’t cause us to fight.

[This article is one of a fourteen part ongoing series about the way managing your money changes when you get married that will be released from November 2017 to February 2018.  But, there’s no need to wait!  Click here to download your free Newlywed Money Checklist, that will walk you through each of the steps to take with your finances when you get married.  Click the link to get it today!]

What a Money Conversation Should Cover

Talking about money with a partner should be an open dialogue.  To make it easy for you, I’ve prepared a list of fifty-four questions about money that I think every couple should discuss.

Before we talk about what it should cover, though, we need to talk about what this money conversation shouldn’t include.  Primarily, judgment.

This needs to be a judgment-free conversation.  Your objective is to understand your partner’s habits and values as they relate to money, not to criticize them.  Once everything is out on the table, only then can you begin to craft financial strategies that will work for your family.

I truly believe that this is the only way to reduce or prevent conflict around your finances.  Have a serious, no-judgment dialogue about your history with money, and use the perspectives you get from the conversation to shape your family’s financial vision.

Here’s what you need to cover, as I outline in this free checklist:

Your Money Histories

Who you are as a person is often a direct reflection of how you were raised.  The way you handle your finances today is the result of your history with money to date.  Therefore, you need to know your spouse’s money history in order to understand and appreciate how they interact with money.

Before you start making big financial decisions with your partner, it’s critical to understand “where they’ve been” when it comes to money, and vice versa.  Doing so will help give you perspective on how they make decisions that might be different from those that you would make on your own.  Which, in turn, can reduce fighting about money.

Your Money Habits

If the discussion about your money history is about where you’ve been in the past when it comes to finances, the discussion around money habits reflects where you each are today.

Even if you’ve been together for years and have fully integrated your finances, this is still an important discussion to have.  At the absolute worst, this discussion will help you better organize your finances.  At best, you’ll learn some critical details about the current state of your finances.

Your Money Goals

We’ve covered where you were in the past, and where you are today when it comes to your finances.  Now, we need to talk about where you’re going.

What is it that you want to accomplish financially in your life?  What does your dream life look like as a family?  We often just go through the motions of our day-to-day life without thinking too much about these things in detail.  I think that this is a mistake.

Use my free question list to have a real discussion about what it is that you each want out of your life.  Once you’re able to articulate these things in detail, you’re that much more likely to actually make them happen.

Your Investing Philosophy

The discussion about your money goals can be a really fun exercise for couples.  But once you’ve talked through some of these goals, you need a roadmap to get you there.  And that typically will involve some sort of investing decisions.

How comfortable are you making investing decisions?  How much risk are you willing to take?  It’s critical to have a discussion about these topics with your partner up front, to reduce conflict about these items later.  Even if you don’t know that much about investing, you still need to be comfortable with the amount of risk you’re taking.

The Important Stuff

I’ve saved this set of questions for the end, even though these are the most important things you’ll discuss.  The last piece you need to address in your money conversation has to do with the role money should play in your lives.

My favorite question to ask whenever I meet with a new client is simply, “Why is money important to you?”  And when I ask this question, I refuse to accept a one word answer like “freedom”, or “security”.  Why does freedom matter to you?  Why does money make you feel secure?  You need to go deep – really deep – into these questions to fully understand the role that money will play in your family.

This isn’t just fluff.  I’m giving you some of my best stuff in this free download.  I’ve had multiple clients literally burst into tears when they go through some of these questions. Not out of sadness, but out of the realization that it’s within their power to use their money to live their dream life.

I truly believe that you can live your dream life too.  But, this only happens when you’re intentional about aligning your finances with that vision.  This list of questions to discuss with your partner is a critical step to help you get there.

Money Conversations are Important for All Couples

I know what some of you are thinking: this conversation isn’t one that you need to have.

Maybe you’re just at the point where you’re thinking about moving in with your boyfriend or girlfriend, and feel uncomfortable bringing money up so early in a relationship.  Or, maybe you’ve been married a few years and think you know all of the important stuff about your spouse’s finances.

Here’s the thing:  it’s never too early to start talking about your future if you’re in a committed relationship.  Money will play a pivotal role in the success of your partnership.  It’s an uncomfortable subject to discuss, but using the questions in this guide will make it easier.

And if you’re already married, you’re absolutely right that you know a lot about your partner’s financial situation already.  Of course you do.

But 99% of the couples I’ve met with have a very superficial knowledge about their partner’s finances.  They know the key numbers and financial data points, but not the why behind the decisions they make with their money.  And it’s this why that’s so important to understand if you want to avoid fighting about money later on.

You might know your partner’s answers to some of the fifty-four questions in this guide.  But I guarantee that if you go through the rest of them, you’re going to find some big surprises.

It’s Awkward, But Critical

Money might be awkward to talk about, but when you’re in a committed relationship, you must talk about it.  The good news is that money can be a powerful tool in your toolbox that you need to use to live your dream life – if you have proactive conversations about it with your spouse.  Use this guide to help facilitate a conversation with your spouse about money.

Where to Keep Your Savings When Interest Rates are Low

Saving might be a virtue, but it’s not one that the market tends to reward.

Even as interest rates in the economy as a whole have risen over the past few years, savings account interest rates generally haven’t followed suit.  Banks are quick to raise rates on things that make them money (such as interest rates on loans), but haven’t been nearly as quick to raise savings account rates.

Simply put, savings accounts are terrible right now.

Ask your parents or grandparents where they keep some of their spare cash, and they might tell you that rather than keep money in savings, they put money into Certificates of Deposit (CDs) or into a Money Market Account.  The only problem?  Those rates aren’t very good right now, either.

So, is all hope of earning some decent return on your savings lost? What’s the best place to keep your savings?  And how much do you really need to keep in your savings accounts?

[This article is one of a fourteen part ongoing series about the way managing your money changes when you get married that will be released from November 2017 to February 2018.  But, there’s no need to wait!  Click here to download your free Newlywed Money Checklist, that will walk you through each of the steps to take with your finances when you get married.  Click the link to get it today!]

You Need to Keep Some Money in Cash

Please don’t misinterpret “Savings accounts are terrible” to mean “You shouldn’t keep any money in savings”.  You should.

You need to keep enough money in savings to cover three to six months of living expenses, just in case you lose your job, your car breaks down, or you have unexpected health expenses.  There’s no getting around it, you need to have cash that you could access at a moment’s notice.

If both you and your spouse have good paying jobs or your fixed monthly expenses (like your rent or student loan payments) are relatively low, three months of spending is usually sufficient.  If your household only has one source of income, or your fixed expenses are relatively high, you should shoot to have six months of spending in a savings account.

Don’t Let That Number Scare You

Three to six months of living expenses is a big number.  If you don’t have that much money in savings today, it can seem like an impossible target to reach.

Rather than focusing on the end target, start by working toward something smaller. Instead, calculate your average spending for one month, and focus on saving that much.  Once you have that amount in the bank, try to double it.  And so on, until you reach your target savings about.

Start small, and focus on saving a month’s worth of expenses at a time.

Once You Have Your Emergency Fund Established, Keep it There

Once you’ve saved three to six months of living expenses, which we call your “emergency fund”, don’t keep adding to it.  Leave your emergency fund alone until you need to actually withdraw funds in a pinch.  (Of course, once the emergency is over, you’ll want to focus on building up this savings back up to three to six months of living expenses.)

But, you still should check in on this account from time to time.  Once or twice a year, you should review your budget to make sure that your spending hasn’t drastically changed.  If you’re spending more than you used to, you may need to add some money to your emergency fund, and vice versa.

In fact, most people will need to add to their emergency fund periodically over time.  Why?

Because savings accounts are terrible.

Simply put, the stuff we buy tends to get more expensive faster than banks raise interest rates on savings accounts. Long term inflation (the rate that prices rise) is around 3% per year in the US.  If the money in your savings account only earns 0.2% interest per year, you’re essentially losing money by keeping money in a savings account.

Which is why it’s so important to review your spending and add to your emergency fund as needed so you could still cover three to six months worth of expenses if you had to.

Beyond Emergencies

We’ve talked about why I don’t like savings accounts, but also why you need to use them anyway for your emergency fund.  We’ll talk through ways to make the most of savings accounts in a bit.

But what about the rest of your money?  Once you have your emergency fund, where should you be putting your savings?

It Depends on When You’re Going to Spend Your Savings

When deciding what to do with your non-emergency savings, the first question you need to answer is, “What’s it for?”  Are you saving money for a down payment on a house in a year or two, or for something more long term?

Unfortunately, finding a place for your money that will earn a higher rate of return than savings accounts will involve taking risk.  And as a general rule, the sooner you actually need the money, the less risk you should take with it.

For example, I usually recommend that most people in their 20s and 30s invest almost all of their retirement savings in the stock market using low cost mutual funds. These are relatively high-risk investments, but they also produce much higher average expected returns every year. If your retirement account were to drop in value by 20%, you might certainly be upset… but since you aren’t going to retire for several more decades, it wouldn’t be catastrophic since you have plenty of time to earn the money back.

However, if you were planning on using your savings to buy a house a year from today, and your savings were to drop in value by 20%, this would be a much bigger deal for you since you’d have much less time to earn the money back.  While long term growth rates in the stock market tend to be good, they can and do fluctuate up and down in the short term.

All of this is a long way of saying:  when deciding what to do with money you’ve saved beyond your emergency fund, the primary thing to consider is when you’re going to spend the money.  The longer you want to keep the money saved, the more risk you can afford to take.

Some Rules of Thumb

Now that we’ve discussed how to think about risk with the money you have saved, consider the following options for your short and longer-term savings.  There are pros and cons to each of these strategies that you should consider before making a decision- if you have any questions about these strategies, shoot me an email.

Short Term Savings (You Expect to Spend the Money in 0 – 2 Years)

For short term savings, you should take as little risk as possible to minimize your risk of loss in the account.  If you’re still up to take some risk, you might consider investing 20% of your short-term savings into stock mutual funds, and the other 80% into bond mutual funds.  This portfolio mix will still fluctuate with the market, but it should offer you a decent expected long run return.

Better yet, you might consider only investing in bond mutual funds and skipping the stock component altogether.  Bond funds still go up and down in value like stocks, but tend to be less volatile in most environments.  A money market mutual fund could also work well, but will offer a lower expected return (in exchange for less volatility).

If you’re looking for places to put your money that don’t pose a substantial threat to drop in value, you could consider a short term individual savings bond or a CD that matures by the time you need to withdraw the money. While rates on these vehicles tend to be relatively low, they are still a safe place to put your savings.  And particularly for 2 year CDs, rates tend to be much better than you’ll get on a savings account.  But, beware:  using either of these investment option, you’re tying your money up for the full term of the bond or CD.  If you buy a 2 year CD, you shouldn’t plan on taking the money out of the CD until the full two years are up.

Finally, particularly if you are looking to use your money in the next few months, you may be stuck keeping your savings in cash.  We’ll talk about ways to improve your returns on these types of funds shortly.

Medium and Long-Term Savings Goals

While any of the short-term strategies I described above could be used for longer term savings goals, I recommend investing your longer-term money into stock and bond mutual funds.  A longer-term CD or individual bond could work for you, but you’ll likely be better off putting your money into the market.

Since stock mutual funds offer more risk and more reward than bond funds, the longer you are looking to invest for, the higher the percentage of your investments should be in stock funds.

For example, if you are looking to buy a house in five years, you might consider investing 50% of your money for this goal into stock mutual funds, and 50% of your money into bond funds.  If you’re looking to invest for your newborn child’s college education, you might invest 80% of your savings into stock mutual funds, and 20% into bond funds.  And if you’re saving for your retirement that’s 35 years away, you might invest 100% of your retirement savings into stocks.

One final note about this, though.  As you get closer and closer to realizing these longer-term goals, you want to make sure that you gradually shift your investments into more conservative positions, all else being equal.  If you want to buy a house five years from now and you decide to invest your savings 50/50 in stocks and bonds, as you get closer to the point in time when you want to buy a house, you should shift your account away from the stock funds and into more bond funds or CDs.

This is All Well and Good, but Where Do I Keep My Cash?

You know the options for where to put your savings beyond your emergency fund, but that still leaves us with the same fundamental problem we had at the beginning.

If savings accounts are terrible, is there another option for where we can keep our emergency fund and maybe even our savings for our short-term savings goals?

The answer is, “sort of”.

Ditch the Traditional Savings Account and Open a High Yield Savings Account

Like just about everything else in our lives, the internet has drastically altered the landscape of personal finance options.  A few decades ago, you would have needed to work with a stockbroker to invest in a stock or mutual fund.  Now, you can open up an account at TD Ameritrade and place a trade on your own with just a few clicks of a button.

The same thing has happened with savings accounts.  A few years ago, you had no other option than to keep your savings with the local branch of a national bank, or maybe a more regional bank or credit union.

No longer.

Over the past decade, several banks have opened high yield savings accounts.  These aren’t banks that you could go to visit in person; instead, they operate 100% online as a way to keep their costs low.  This, in turn, allows them to pay significantly higher interest rates than the traditional savings banks.

Three of my favorite high yield savings accounts are

As of this writing, all three of these banks paid the same interest rate and they have been regularly raising their rates over the past few years.  They also have no monthly fees associated with them, and are FDIC insured.

Best yet, the interest rate on these accounts is literally over 4,000% higher than the interest rate paid on a Bank of America savings account at the time of this writing.

Most savings accounts just aren’t good in today’s interest rate environment.  And even with high yield savings accounts, I still don’t recommend keeping your medium- and long-term savings in one of these accounts.

But, if you’re looking to get a higher return on your emergency fund and even your short-term goal savings, a high yield savings account is the first place I’d start.

Should You and Your Spouse Have the Same Health Insurance Plan?

It’s the most wonderful time of the year…  health care open enrollment is upon us!

Ok, ok, so picking a health insurance plan isn’t super exciting stuff.  Fair enough.  But, we all know that health insurance is important, and picking a plan is a critical step to protect our finances (and, of course, our health) in the coming year.

For couples, though, making decisions about health insurance is much more complicated.  Should your family have one health insurance policy for both of you, or separate policies?  Before you drop your health insurance plan and add yourself to your spouse’s, let’s discuss a list of things to consider to determine the right steps for your family.

[This article is one of a fourteen part ongoing series about the way managing your money changes when you get married that will be released from November 2017 to February 2018.  But, there’s no need to wait!  Click here to download your free Newlywed Money Checklist, that will walk you through each of the steps to take with your finances when you get married.  Click the link to get it today!]

Your Goal: Get the Best Benefits for the Lowest Cost

At a high level, this doesn’t seem all that complicated.  You want the best health insurance policy you can get at the lowest overall cost.

If your spouse’s company offers much better health insurance than yours, you may want to drop your coverage and get added to your spouse’s plan.  On the other hand, if the coverage of each of your policies is similar, but yours is less expensive, this might be a reason for your spouse to join your policy.

Sometimes, the quality and cost between your plans will be negligible.  It probably isn’t worth the time or effort in these cases to make a change.

But Unfortunately, It’s Not That Simple

When evaluating the cost of a policy, there are a lot of other factors to consider rather than just the premium amount.  You need to sit down with your spouse and really dig into each policy to figure out which one is going to give your family the best benefits at the lowest cost.

There are many factors to review:

Your Expected Medical Expenses

Consider your overall level of health.  Are you the type of person who hasn’t needed to see the doctor in years?  Or, are you regularly working with specialists on a particular health issue?

Take stock of how often you usually have sick visits to the doctor, whether you are working with any specialists, and any prescriptions that you take.

You want to compare coverage of the services that you know you’ll be using under all of your available health insurance plans.  If you have no underlying medical conditions, a High Deductible Health Plan (HDHP) with minimal coverage and low premiums might be a great fit for you.  But, if you make frequent doctor’s visits, you may find that a more comprehensive policy is a much cheaper option for you than a HDHP, even if the monthly premiums are more expensive.  This analysis should be one of the primary factors to consider when choosing between your health insurance plans.

Make Sure You’re Protected in an Emergency

Beyond your expected medical expenses, make sure that you know how much you’ll need to pay in the event of an emergency.  Comprehensive plans often cover most of the cost of emergency care.  Under a HDHP, you’ll likely pay for 100% of the medical cost up to a specified dollar amount.

Review both of your insurance policies to understand how they handle emergency treatment prior to deciding.  While it probably won’t be the basis for your decision, it’s critical to know what’s covered and what’s not.

Understand How Much You’re Expected to Pay When You Visit the Doctor

Different health insurance plans will expect you contribute different amounts toward your health care.  While reviewing your options, you should identify the deductible, copayments, coinsurance, and maximum out of pocket expense for each policy.

  • The deductible of your policy refers to how much you’ll need to pay for your health care before the insurance company starts to “kick in” money. For example, if you have a $1,300 deductible on your policy, you are responsible for paying for the first $1,300 in healthcare expenses this year.  When reviewing healthcare plans, a higher deductible means that you’ll have to pay more for health care before insurance starts to cover your medical expenses.
  • Copayments, or “copays”, are flat-fee dollar amounts that you’ll need to pay when you see a doctor or get a prescription (after you hit the deductible). For example, a sick visit to your doctor might cost you a $20 copay per visit.
  • Coinsurance is another way of calculating your required payment for medical care after you hit your deductible. Rather than paying a flat fee (like the $20 copay example), instead you pay a fixed percentage of your care.  So, a visit to the doctor’s office might cost you 10% of the total visit under a coinsurance model.  Note that under most insurance plans, you’ll have to pay a copay or coinsurance- not both.
  • Finally, health insurance policies have a maximum out of pocket expense. This is the total maximum amount you’ll have to pay for your health care this year.  Once you pay this amount, your insurance company will cover 100% of the remaining cost of care for the rest of the year.

When you review the health insurance options available to you and your spouse, you should review each of these terms in detail when estimating the total cost of the insurance, and choose the option that’s best for you.

Compare Premium Costs

Finally, you should compare the cost of your premiums for the insurance options you have available.  In particular, you should answer the following questions:

  • Do either of your employers pay a portion of your health insurance premium? If so, you’ll lose this benefit if you decide to not use this insurance policy.
  • If either of your policies make you eligible to have an Health Savings Account (HSA), does your employer make contributions to your HSA? If they do, giving up that policy is giving away free money.  It still might make sense to do this if the other policy has better benefits, but it is certainly a factor you’ll want to consider.  We’ll talk more about HSAs in a minute.
  • How do your premiums change when you add a spouse to your policy? In other words, is there a cost difference between a) having both of you on your insurance, b) having both of you on your spouse’s insurance, or c) having separate insurance plans?
Review Coverage Provisions

Picking a health insurance policy for your family needs to be about more than just picking the lowest cost policy.  You’ll also want to review the coverage levels that each insurance offers.  Specifically, consider:

In-Network vs Out-of-Network Providers

Many health insurance plans have a list of doctors and specialists within their network.  If you go a doctor within your health insurance’s network, it will cost you less (via copay or coinsurance) than it would if the doctor is outside of your network.

The implication here:  if you drop your insurance coverage and get added to your spouse’s, you may need to switch doctors if your current doctor isn’t in your new health insurance’s network.  Or at the very least, it might be more expensive to continue seeing your doctor.

For every doctor or specialist you see, you want to make sure that switching health plans won’t put yourself out of network.

Coverage Exclusions

All health insurance policies cover the basics-  preventive care, immunizations, and emergencies.  However, if you have specific health care needs, you want to make sure that your policy actually covers them.

Many health insurance policies have certain conditions that they exclude from coverage.  “Preexisting conditions” were a particular type of exclusion that has been in the news a lot over the past few years; Obamacare eliminated the exclusion for preexisting conditions, but there are other exclusions that are still allowed.  So, you should review your policy options carefully to make sure you can get the coverage you need.

Beyond Costs and Benefits

Costs and benefits are the two primary drivers behind picking a health insurance policy for your family.  However, there are a LOT of other things you might want to take into account before picking your family’s health insurance plan(s).

Review ALL of Your Options

I’ve touched on this in passing a few times, but when you’re deciding whether or not to combine health insurance plans for your family, you really shouldn’t just look at the plans that you and your spouse are currently on.

Take this as an opportunity to review ALL of the insurance plans that your company offers.  While HDHP plans have become increasingly popular over the past several years, some companies still offer more comprehensive (but more expensive) policies that may appeal to you if you go to the doctor a lot.  Review the options at each of your employers, and pick the best plan for you.  Don’t just limit yourself to what you’ve done before.

Do You Want to Use a Health Savings Account?

Health Savings Accounts (HSAs) are savings and investment accounts specifically designed to be used to pay for health care expenses.  You (or your employer) contributes to these accounts, you decide how you’d like to invest the money in the account, and can withdraw the money at any point to cover medical expenses.

There are a few reasons why I highly recommend HSAs for many new families.  First and foremost, they have a lot of tax benefits.  Any money you contribute to the account (up to $6,750 per year for a family, or $3,400 per person in 2017) isn’t counted in your taxable income for this year.  What’s more, the growth of your money in the HSA isn’t taxed, and as long as you spend the money on medical expenses, it isn’t taxed when you spend it, either.

Particularly for families with low medical expenses, HSA’s can be a great way to invest for the future.  By investing the money in your HSA now, you have a source of tax free money in the future when you need to pay for your medical expenses.

But, there’s a catch.  You can only contribute to an HSA if you have a High Deductible Health Plan (HDHP).  So, if you currently have an HDHP and switch to your spouse’s (non-HDHP) plan, you would no longer be eligible to contribute to an HSA.  You’ll still be able to spend the money you’ve already put in your HSA on medical expenses for either you or your spouse… you just won’t be able to add any more.    If you like the flexibility that an HSA provides and like the idea of investing money specifically for future healthcare expenses, you may want to think twice about giving up a HDHP policy.

Other Considerations

Finally, there are a handful of other things to consider when picking a health plan for your family:

  • Job Security- if one of you has a much more secure job than the other, it might not make sense for you to both use the health insurance policy of the spouse with the insecure job.
  • Complexity- Having two health insurance policies means twice as much paperwork to deal with, and two different sets of bills to pay. If you value simplicity in managing your household finances, it might make sense for you to combine.
  • Coverage Gaps- Most health insurance plans start on January 1. But, if either of your plans have a different start date, you want to make sure that you don’t have a gap in coverage if you choose to combine.  For example, let’s say that Bob’s insurance plan starts on January 1, and Amy’s starts on July 1.  If the couple decides they both want to be on Amy’s insurance plan, they will need to make sure that Bob is covered by his insurance plan from January to July.

This is a decision with a lot of factors to consider before making the right decision for your family.  To learn more about other big financial decisions to make once you get married, download our free Newlywed Money Checklist.   Ultimately, evaluate all of the points in this article to weight the pros and cons before making a decision.

 

Don’t Panic About Proposed Public Service Loan Forgiveness Elimination

Executive Summary

Public Service Loan Forgiveness (PSLF) is a specific student loan payment strategy for individuals with high student loan debt who work for the government or a registered non-profit.  This includes government employees, employees of traditional non-profit entities, teachers, and even doctors and nurses who work at teaching hospitals.  Under this program, if you make 120 student loan payments on certain types of loans loans under a qualifying repayment plan, the remaining balance is forgiven after 120 payments.

Originally created under the Bush administration, there have been many rumored changes to PSLF program over the years.  In 2012, the Obama administration proposed putting some caps on the loan amounts that can be forgiven.  And recently, a proposed internal budget memo was leaked indicating that President Trump’s Department of Education is proposing eliminating the program all together.

In this video, I discuss the proposed threats to the PSLF program, and why I don’t think there’s any need to panic about these changes yet.  Ultimately, I believe that the chance that this proposal could become law is incredibly low both in its current form and in the current legislative climate in Washington DC.  And even if it does become law, it almost definitely would need to apply to future borrowers only.  If you’ve already taken out student loans and are counting on PSLF, you very likely have it in writing in your promissory notes that your loan servicer will honor PSLF in the first place!  Which would create massive legal challenges if the government were to revoke that at this point.

Nevertheless, it’s absolutely critical that you pay careful attention to the PSLF fine print if you are counting on this forgiveness.  To make sure you qualify for the program, you need to do a very detailed loan-level review to make sure your loans qualify for the program in the first place, since many of them don’t.  You also need to make sure your loans are on a qualifying repayment plan to be eligible for PSLF.  Finally, you need to submit an Employment Certification Form annually to your loan provider.  Ultimately, remember, this is on you to make sure you qualify!  For more information on qualifying for PSLF, click here and download my free student loan guide.

(Bill’s Note: This video, and the lightly edited transcription below, was originally released as a Facebook Live broadcast on May 18, 2017. If you want to participate in our next Facebook Live session, head to our Facebook page, hit “like”, and you’ll get the announcement the next time we go live.  Most of the content comes from questions submitted by my readers and viewers, so if you have a topic you’d like to hear more about, send a message to our Facebook page and we will get back to you as soon as we can!

Finally, click here to grab a copy of the FREE 30 page student loan guide mentioned in this video to learn more about how to qualify for Public Sector Loan Forgiveness.]

Pacesetter Planning Facebook Live Transcript

Welcome, everyone!

I was in the process of filming some things that will be going live at pacesetterplanning.com later today when I noticed the news that came out yesterday about the potential changes to the Public Sector Loan Forgiveness (PSLF) program by the Trump administration.  Particularly, the proposed elimination of the Public Sector Loan Forgiveness program.  I wanted to share a few quick thoughts on this.

Trump Administration Proposes Elimination of Public Sector Loan Forgiveness

In case you missed the news, the Department of Education’s internal budget memo was leaked yesterday to the Washington Post.  And it looks like that this proposed budget will essentially eliminate PSLF.  For those of you who don’t know, this is a specific student loan program that allows people who work for non-profits, or the government, or even some hospitals to be eligible to have the balance of their student loans forgiven after 10 years.  And, essentially, it looks like the Trump administration is going to try to eliminate this program.

Interestingly, that’s not the only thing that was actually proposed in this document.  They also proposed some changes to the Income Based Repayment plans that are available as well.  Those [repayment plans] are typically for people who are either pursuing loan forgiveness or those who don’t have the necessary monthly income to pay their “standard” student loan payment every month.  Under these programs, you have the capability to peg your monthly student loan payments as a percentage of your current income.

The Washington Post leaked that the Trump administration will be changing some of the specific percentages of your monthly income that would make you eligible for this program, as well as the length of some of these income based repayment programs.

There’s nothing new in that particular proposal.  Actually, I wrote on the blog back the week that Trump was elected about that specific change in policy.  It’s something that he campaigned on.  And, I wrote about it on CNBC’s website as well a few months ago. So, there’s nothing new there.  The real news is that this Public Sector Loan Forgiveness program may end up being eliminated.

This isn’t Something to Panic About… Yet

There’s been a lot of panic about that, and justifiably so at first glance, but I wouldn’t panic about this yet. And there’s a few reasons for that.

This Proposal Needs to Go through the Standard Legislative Process to Become Law.  Good Luck with That

First and foremost is that this is not an actual budget that was released.  This is not the law of the land.  If you go back to your 8th grade social studies classes (Schoolhouse Rock, and all that good stuff!), any budget bill has to be originated in the House of Representatives, passed through the Senate, and then signed into law by the President.  So just because the Department of Education has released this as their blueprint or vision for the future, doesn’t mean that it’s actually policy. And in fact, I think it’s probably unlikely that, in its current form, it will ever become policy. I’m not a legal expert, obviously I’m not in government, but based on what I’m seeing right now, I don’t see how that the elimination of PSLF really could possibly be eliminated as they’re proposing.  At least in its current form.

Interestingly, the Obama administration a few years ago actually did try to make changes to the program.  Rather than allowing your entire loan balance to be forgiven in 10 years, they were proposing to put some caps on it as a cost savings device, and that didn’t get through.  So, if that didn’t happen a couple of years ago under the Obama administration, particularly under the legislative climate that we’re in today, I just don’t see this actually happening right now.  Which is good.

This is Unlikely to Affect Borrowers who Already Have Student Loans

And even if it does, there’s a second piece of good news for all of you out there who took out these loans, are in public sector jobs, and are counting on this loan forgiveness.  And that is, that, quite frankly, it is against all precedent in student loan policy that, if this change were to go into effect, it would affect current borrowers.

Going back through all of the different changes in student loan policy over the past 15-20 years, I can’t think of a single one off the top of my head where people who already had loans originated now were affected by the changes. Typically, when these changes go into effect, they are for new borrowers. The good news, is that if you have loans in existence right now and are on track for loan forgiveness, I would just be shocked based on the precedents that have been set and the way these things work, if this were to actually affect you.

In fact, I’ll even take it a step further. For many of you, if you go back to the promissory notes that you signed when you were 18 or 19 years old and took these loans out (you probably didn’t even understand half the stuff because they do a terrible job walking you through it…), the PSLF program is often enshrined in those documents.  So literally, for them to eliminate this program right now, in my opinion (and some of the legal experts I’ve followed since this has come out), I don’t see how they could legally do this.  And in fact, I think this would create a lot of legal programs, if they were to eliminate the program for people who have already taken out these loans and are on track for loan forgiveness.

I think it’s more likely that they might eliminate the program for future people, which certainly could be a problem for folks, but it’s certainly not at the crisis magnitude that cancelling it for people who have all this debt and are really counting on this program being around at this point.

So, I think that a lot of the panic I’m seeing, while it might be justified at face value, really doesn’t justify panic just yet, to be honest.  Because first of all, it’s not on the books. It’s not even close to being on the books at this point. And I think that it would create so many legal headaches for the government to cancel this program that they’ve promised people in writing over the past 10 years, that I just don’t see it happening.

But, You Still Need to Pay Attention to PSLF

That being said, if this is something that you’re counting on, there are a few critical things that you need to do.  And that’s really why I wanted to talk about this today while this topic is in the news.  While I would continue going forward expecting this forgiveness program to be in place until we see anything different (and if we do, we’ll talk about it), if you’re on track for it now, you need to be doing a few things to make sure you do qualify.

Part of the reason that people are so scared about this is because, well, let me ask you- if I was to ask you how many people have qualified for PSLF over the past several years… the answer would be zero.  Because, the law was passed in October 2007.  So, it hasn’t even been ten years since it went into effect.  So, nobody has been eligible to qualify yet. That’s going to be changing later this year and early next year [Note: the application for forgiveness was released in early September 2017, as predicted in this video].  The very first group of people who are eligible for this program are really reaching the end now. But because it’s never been actually implemented, there’s a little bit of uncertainty here.

And so, what I wanted to do was talk through some of the things that, driven by this uncertainty, you should be doing to make sure you’re being taken care of.

You Need to Make Sure Your Loans Qualify for PSLF Under the Current Law

First and foremost, you need to make sure you actually qualify for the program.  We know that you need to hold a public sector/nonprofit type job, but you also need to make sure that your individual student loans qualify.  Because, one of the biggest misconceptions and mistakes that I’ve seen since I founded Pacesetter Planning is people who think they’re on track for PSLF and don’t even qualify for forgiveness in the first place because their particular student loans don’t qualify.

Over the past ten years, student loan policy regulations have changed every few years.  So, you really need to do a deep, loan-level analysis to make sure that you actually qualify.

I’ve made it as easy as I can for you to do that.  Click here to download a free student loan guide that walks you through the steps you need to take. Everything you need to make sure that you can qualify for this program under the current law as it exists, is detailed in that guide.  So, I highly encourage you to download that guide (it’s free, no cost for this!) and do the analysis that is listed there to make sure that your student loans qualify for this program. Because if they don’t, that’s going to be a whole other conversation.

You Need to Make Sure You’re on a Qualifying Repayment Plan

Second of all, this is a little less common of a problem, but make sure you’re on a qualifying repayment plan. If you’re on a standard 10-year repayment plan, it’s very likely that you’ll have paid off your loans by the time 10 years is over. So, double check with your loan servicer what type of repayment plan you’re on, and specifically make sure that this payment plan makes you eligible for PSLF.

This is particularly an issue, I’ve found, with people who have graduated medical school, who are residents but aren’t yet “full doctors”. For those of you who don’t know much about the medical industry, people who graduate medical school typically have over $250,000 in student loan debt, then they go into three (or four, or five, or six or seven) year residency and fellowship programs, where they make a fraction of what they’ll make as full doctors.  Because having a nonprofit hospitals jobs would qualify for PSLF, what I see happen a lot is people who defer their loans while they don’t have a big income during residency, but count that, in their head at least, as counting toward that ten year PSLF qualification.

Just to be clear, that’s not going to work. Because technically, it’s not ten years that qualifies you for PSLF, its 120 payments.  You need to make 120 payments on your student loans in order to qualify for this program.  So, it’s really not enough to go into residency, put your loans on deferment, and start counting the time.  Because if you’re not actually making the payment, it’s not going to count for you. So again, make sure that you know if your payment plan is going to qualify you, and that every payment you make is going to count toward that 10 year (120 payment) goal.

You Need to File an Employment Certification Form Annually

And finally, last thing, unfortunately this is on you to make sure you qualify for this.  Your student loan servicer and the government are certainly not going to be looking out for you to make sure that you’re doing what you need to do in order to qualify.

So, the last piece I recommend is that for people who are in qualifying jobs (working for a nonprofit or the government or things like that), you need to be filling out an employment certification form.  Every year. And submitting it to your student loan processor.  It basically shows that you hold a job that will qualify you, for all the payments you are making this year, toward those 120 payments that would qualify you for PSLF.  If you don’t have that form, click here or send a Facebook message to the Pacesetter Planning Facebook page, and I will send you a copy of that form. But you absolutely need to be filling it out every year.

The Government Accountability Office (GAO) released a study recently that said that 4 million people are “qualifying” for PSLF, but less than 1/8 of them are actually filling out that form.  I think that’s a huge mistake.  And other than having loans that don’t qualify in the first place, which I already talked about, not filling out that form and proving to the government and your student loan servicer every year that you qualify, is the number one mistake I see people make that could potentially lead to problems for them down the road.  So, definitely make sure you do that. I have no issues whatsoever with sending you this form if you send the Pacesetter Planning Facebook page a message.  I’ll make sure we get the form to you.

Conclusion: Worry About Complying with the Current Laws around PSLF, Not About Proposed Future Changes

Anyway, that’s about it.  Like I said, potential scary headlines about the future of this program.  We don’t really know what’s going to happen yet.  But based on the reasons that I detailed, I don’t think there’s any reason to panic yet.  I think it’s definitely something to keep an eye on. But, like I said, this is not law, it’s not part of the budget at all (in fact, we’re many, many months from even getting to that point). I don’t think this is likely, in fact it’s been tried in some ways before and it hasn’t gone through. Particularly with the climate in Washington DC right now, I just don’t see it happening. And more importantly, it’s against all precedent in student loan policy to affect current borrowers. If they were to eliminate the program, I think it’s much more likely that it would be eliminated for people who are taking out loans in the future, not people who are already on track.

But.

You need to make sure, if you’re counting on PSLF, you have to make sure you’re doing everything you can to qualify. You need to make sure your student loans qualify in the first place, you need to make sure you’re on the right repayment plan for those loans, and you need to filing an Employment Certifiction Form indicating that you work for a nonprofit or government agency, every year, for ten years to show that you’re qualified.

Again, if you have any questions about this, I highly encourage you to either send me a Facebook message on the Pacesetter Planning business page, or download that free student loan guide.  There’s a ton of detail in it and it’s going to give you just about everything you need to know.  Thanks for taking the time today- have a good day!

What To Do If You Have a Worse Credit Score Than Your Spouse

When most couples talk about money, the topic of credit scores usually isn’t one that gets them fired up.  It’s much more fun to focus on a goal like buying a new home than it is to dwell on your credit score.

But, building your credit is one of the most critical steps to take in your 20s, since your credit score impacts most of the other parts of your financial picture.  The interest rates on your future mortgages and car loans directly depend on your credit score.  And, credit takes time to build, so even if you don’t need to take out a mortgage soon, the time to focus on this is now.

It’s very common to see a husband and wife have very different credit scores.  What steps should the person with the lower score take?

[This article is part of an ongoing series about the way managing your money changes when you get married in the coming months.  But, there’s no need to wait!  Click here to download your free Newlywed Money Checklist, that will walk you through each of the steps to take with your finances when you get married.  Click the link to get it today!]

Differing Credit Scores Can Be a Huge Challenge for Couples

There are a lot of decisions couples need to make about how they handle their finances together when they get married.  Typically, these decisions involve deciding whether (and how) to combine financial accounts, how to manage monthly cash flows, and how to save and invest.

Credit scores aren’t one of the topics that tend to come up right away.  Unless you’re in the process of buying a home, they just aren’t a topic that tends to be on the top of people’s minds.

But, this doesn’t mean that it isn’t an important topic for couples.  On the contrary, being in a marriage where one partner has a significantly higher credit score than the other can be a huge source of stress on your relationship.  And, it can complicate the process of taking out a mortgage, since you will need to use both of your credit scores when applying for the house.

It’s important, therefore, to be aware of your partner’s credit score and to get out in front of any areas for improvement before you actually need to use the credit score.

How Do You Fix It?

The good news is that this is a fixable problem.  The bad news is that it can take a good amount of time to improve your credit scores significantly.  Which is why it’s critical to start as soon as possible.
This isn’t an exhaustive list, but if you’re looking to improve your credit score, start with these strategies:

Download your Credit Reports Every Year

Knowing is half the battle.  Use a free service like Credit Karma to pull your credit reports once a year.  And, make sure to look at reports from all three credit bureaus- Equifax, Experian, and Transunion.  It isn’t common, but sometimes there can be erroneous items on one report that aren’t listed on any of the others.  You can also get your credit reports through the website of each of these credit bureaus.

Dispute Errors As Soon As Possible

We’ll touch on this in a bit, but it’s so important that I wanted to call it out right away.  You’d think that the three credit bureaus are infallible, but unfortunately, they are far from it.  I’ve caught three different errors on clients’ credit reports in the past couple months alone.  If you see something that you know is a mistake on your report, use the link on the relevant credit bureau’s website to file a dispute immediately.  These things can take some time, but it is possible to remove factually incorrect information from your reports.  And, as I said, this is unfortunately a more common problem than you’d expect.

Recognize that Making Changes to Your Available Credit Usually Involves Taking a Step Backward Before You Take a Step Forward

This is crucially important.  If you open a new credit card and use it the right way (more on that in a bit), over time your credit score will likely go up.  But, whenever you request new credit, this creates what’s called a “hard check” on your credit that causes your credit score to drop for the time being.

Again, in the long run, this will be outweighed by you using your new credit wisely, but be aware that if you’re planning to take out a loan sometime this year, now isn’t the time to be opening new credit cards.

And as an FYI, “hard checks” typically remain on your credit report for two years.

Have Enough Credit Available…

This one is particularly important for those people fresh out of undergrad or a grad school program.

Double check how much available credit you have on each of your credit cards.  Typically, most people new to the working world have credit limits in the $300-$500 range.  Frankly put, that’s not enough to build a great credit score.  Request a credit increase to give yourself more of a foundation to build your credit history.

…But Don’t Use (Much of) It

One of the primary drivers of your credit score is how much you use the credit you have available.  A good rule of thumb is to always use 30% or less of the total amount of credit you have available on each credit card.

In other words, if you have one credit card with a $10,000 credit limit, never let the balance on that card get higher than $3,000.  And of course, pay off the balance every month.  Speaking of which…

Set Reminders

It’s hard to keep track of your finances when you’re busy.  So, make it easy on yourself!  Set reminders to pay your bills every month.

One of the easiest ways to mess up your credit score is to accidentally miss a payment.  Set calendar reminders to yourself to make sure you don’t forget!

Check Your Reports for Any Overdue Bills (And Either Pay or Dispute Them Right Away)

When you do your annual review of your credit report, pay close attention to any bills (medical bills are common examples) that have accidently or allegedly gone unpaid.

If you have a bill listed as in collection that has gone unpaid, first do some research to make sure the bill is actually yours, and if it is, that it actually wasn’t paid.  John Oliver did a great report on erroneous credit reporting not too long ago that is worth taking the time to watch.

If you have a reason to contest the charge, do so as soon as possible.  If you realize that you just forgot to pay the bill, take care of it ASAP.

Don’t “Shop Around” for Loans and Credit Cards….

Or, at the very least, be careful not to get firm quotes from more than one lender at a time.

As mentioned above, every time a lender does a credit check on you regarding issuing you a credit card or loan, this creates a “hard check” on your credit that hurts your score.  If you go to five different credit card companies requesting a credit card, that’s five “hard checks” that will appear on your credit report, even if you only open one card.

By all means, do your homework and shop around, but only begin the application process once you’ve made a decision.

Beware Retail Credit Cards

I’ll confess- I’ve goofed on this one myself.

Stores generally offer pretty good perks to entice you to open up a store credit card.  But, having retail credit cards directly impacts your credit score, and not in a good way.

Lenders view retail credit cards as a negative indicator, so it’s almost always a best practice to say no to the discounts that the retail stores offer you in order to save money on your mortgage down the road.

Give it Time

In most areas of financial planning, we can usually implement a pretty quick fix.  Whether it’s acting on a need to save more for retirement or to refinance a loan, usually the recommendations I provide to my clients can be acted on quickly and you can see immediate results.

Unfortunately, improving your credit score just doesn’t work that way.

Don’t get me wrong, there are things you can and should do today to improve your credit score.

But, it’s not a quick fix- it might be two years before you see substantial improvement.  Trust the process and give it time, and your score will improve if you manage your credit the right way.

 

Whole Life Insurance Is a Terrible Investment For Most Millennials

Several months ago, I wrote a post on this blog that was… shall we say, somewhat critical of using whole life insurance as an investment.  To be clear, that’s not to say that I think life insurance itself is bad.  Life insurance is important if you have a spouse or children who depend on your income, or if have a mortgage.

But, there’s a big difference between getting life insurance because you actually need insurance versus getting a whole life insurance policy as an investment.  If you have an insurance need, you absolutely have to get a term life insurance policy to cover that need.  I emphasized this in my original post, and I’ll touch on it again below. If you are considering whole life insurance as an investment vehicle – or worse, if a life insurance salesman is trying to convince you that you need one – well, to borrow a phrase from my last article, you should run like hell.

Turns out, saying this didn’t win me a ton of fans in the insurance sales business.  I heard from a few people who make their living from selling these whole life insurance policies, who had a lot of arguments against what I said in my last post.  I even spoke to two of them on the phone to hear their point of view.

The points they made in favor of investing in whole life insurance (I’ll detail them all, with my responses, below) sound good at the surface, but their arguments flat out don’t hold up for almost all millennial investors.  In fact, I’ll go so far as to say that while there are some specific cases where whole life insurance could make theoretical sense for a handful of people out there, these cases are so few and far between that 95% of my readers shouldn’t even consider it.  If someone tries to sell you a whole life policy, and you aren’t a member of the 1% or trying to set up your estate for your heirs to inherit, you should run like hell.  Quickly.

Simply put, if you have an insurance need, you should buy term insurance.  It’s significantly cheaper, so you can invest the difference between the whole life premium and the term life premium.  With the right investment strategy, you should come out light years ahead of where you’d be with a whole life policy, as we’ll see below.

And if you don’t need insurance, just invest the money until you get married, have a child, or get a mortgage.  No need to buy a whole life insurance policy if you don’t need the insurance piece to begin with.

There’s a lot of information here, but it’s important.  I hope you use this post as a reference in the future as needed.

The Sales Gimmicks Life Insurance Salesmen Use are Just That- Gimmicks

A good salesman wouldn’t get very far without some good stories to convince (or worse, to scare) you into buying a whole life insurance policy. When I discussed my previous article with two sales reps from reputable life insurance companies, I heard several common reasons that they use to convince people to invest with them.  Let’s walk through them one by one – consider this your one stop shop for turning away a whole life insurance salesman.

Reason 1: Withdrawals from Life Insurance Investments are Tax Free

I start with this one because, frankly, it’s the best argument out there in favor of investing in life insurance.  It’s true- when you invest in life insurance, the policy builds up a “cash value” from which you can withdraw on a tax-free basis.  This “cash value” is the investment component of a whole life insurance policy.

Is it the only tax free investment out there?  Absolutely not.  In fact, there are several other options out there if you’re looking for a way to have tax free income in the future:

  • Roth IRAs are by far the most common type of tax-free accounts. There are annual contribution limits ($5,500 per year for millennials) and income limits (you have limited eligibility to contribute to a Roth IRA if your income exceeds $118,000 for individuals and $186,000 for couples in 2017).  But, if you are eligible to contribute to a Roth, this is my recommended tax-free-growth investment of choice.
  • Municipal bonds are investment vehicles that allow you to lend money to cities or towns, in exchange for interest payments. Those interest payments are tax free at the federal, state, and local level.  These aren’t particularly good long term growth investments (although we’ll compare their performance to whole life policies in a little bit). But if tax free income is what you’re after, a series of good, investment-grade municipal bonds will do the trick.
  • There are several other investment options that aren’t completely tax free, but are significantly tax-advantaged compared to more traditional mutual funds. Specifically, these include:
    • US Government bonds (taxable by the federal government, but not state and local governments)
    • Dividends– Investing in high-dividend, blue chip stocks that pay dividends isn’t tax free, but stock dividends are taxed at much lower rates than your standard income tax for most investors.  (As a side note, a “dividend” is like an interest payment that some companies pay to investors who own their stocks).

Yes, investing in whole life insurance gives you some tax advantages down the road.  But, so do other investments – and these alternatives don’t have the disadvantages of whole life that we’ll address at the end of this post.

Oh yeah, and did the life insurance salesman you were talking to about one of these policies mention that even though the withdrawals are tax free, you’ll be charged interest when you draw down the cash value of your life insurance policy?

I didn’t think so.

Reason 2: Whole Life Insurance Investments are a Good Way to Diversify

I get it, this sounds appealing at the surface.  “I’m putting most of my money into stock and bond mutual funds, and I know I shouldn’t put all of my eggs into one basket, so why not put a portion of my investments into a life insurance policy?”

Nope.  This one doesn’t work at all, for two reasons:

  1. If you put 20% of your portfolio into a life insurance policy, that means you are entrusting a single company with 20% of your assets. What if the life insurance company who runs the policy goes bankrupt in 10 years?  What happens then?   It might be a different type of investment vehicle, but you shouldn’t let a large percent of your portfolio ride on the successes of any one company.
  2. The way whole life insurance policies work is that you give your money to the insurance company, they invest the money for you, and direct a portion of it to build your cash value in the policy (the “investment” component), a portion to cover the policy’s death benefit (the “insurance” component), and a portion to cover their operating expenses.  How are they investing your money?  In the same stock and bond mutual funds that the rest of your investments are in.  If all of your money is invested in the same stuff, it doesn’t matter that the life insurance agency is the middle man.  Adding the middle man doesn’t really diversify you.  And remember, you’re losing a portion to cover their business expenses.

Next.

Reason 3: Everybody Needs Insurance

No, no they don’t.  I addressed this one in my last article.

If you have a family member (spouse, child, etc.) who depends on you for income, you need life insurance.

If you have a large debt that needs to be paid off (like a mortgage) even if you were to pass away, you need life insurance to cover that debt.

If you don’t have any financial obligations that would need to be covered if you were to die, you don’t need life insurance.  Period.  That might change in the future, but you don’t need it now.

But even if you do need life insurance, a term life insurance policy will do just fine for almost everyone.  In a term insurance policy, you specify how long you want the coverage to last.

Which is a good thing.  And, in fact, the entire point.  Most people don’t need life insurance in their 80s and 90s.

Once you’re retired, most people don’t need life insurance.  If your mortgage is paid off, your kids are grown and supporting themselves, and you’re living off of your retirement assets and managing them well, there’s no need for you to have insurance.  So, why pay for a whole life insurance policy that will be many multiples more expensive than a term insurance policy, if you won’t need the insurance coverage when you’re most likely to die?  It’s just a waste.

Reason #4: Whole Life Insurance Is a Good Investment for Some People

Sure.  Maybe.

But not for your typical millennial.

Whole life insurance policies can be a good way to transfer money to your heirs.  If you don’t have heirs (or a ton of money to leave them), like most people who read this blog, this doesn’t apply to you (yet).

And, as we’ll discuss in a bit, two of the three big downsides to investing in whole life insurance are that the premiums are very expensive, and you’re essentially locked into paying them for life.  You might be able to afford to pay these insurance premiums now, but what happens if you lose your job?  Or when you have children?

Simply put, there’s too much uncertainty about how the future will play out for millennials to invest in something like whole life insurance.

Reason #5: Life Insurance Salesmen Tout the Investment Benefits of Whole Life Insurance, but You’re Better Off Investing Elsewhere

The last common thread I heard when debating whole life insurance with these salesmen is that life insurance is a good part of an investment portfolio is that it’s “safe” or “guaranteed”.  We need to do a deeper dive into this one.

Yes, there are some guarantees associated with the buildup of cash value in a whole life insurance policy.  But, are they really better than the alternatives?  Let’s take a look:

Whole Life Investment Performance is Hard to Verify

In most cases, the performance of the underlying investments in your life insurance policy don’t match the stated rates of return that the company projects.  In fact, I’m not sure I’ve ever seen a whole life policy who’s actual investment return matches the projections the salesman showed you when (s)he tried to sell you the policy.  Finding the actual returns usually involves submitting an official request to the insurance carrier.

I spent more time than I’d like to admit trying to go through data to find a good data set to show actual performance of a sample whole life insurance policy.  Turns out, this isn’t data that the big companies like to advertise.  I could only find one set of data that looked reasonably accurate based on my experience in the industry, for a hypothetical 35 year old taking out a $100,000 whole life insurance policy:

A few things to notice here:

  • The average annual return for the policy from age 35 – 83 was about 5.5%. Not great, but not terrible for a conservative investment, right?
  • But, notice that the breakeven point (the point where your cash value is the same as the amount you pay in every year) doesn’t occur until about year ten! That means, this investment is guaranteed to lose money for you for the first ten years you have it!
  • The good returns don’t kick in until after the person who holds the policy is expected to die!
  • The premiums are expensive! On that note…
Investing in Whole Life vs. Buying Term Insurance and Investing the Difference

It’s time to get down to business.  I’ve made theoretical arguments about why investing in life insurance is a bad idea.  Let’s see some numbers to back it up.

I’m coming at this analysis from the perspective that if you’re considering investing in whole life insurance, you a) like the idea of investing conservatively, or b) like the idea of tax free investments.  So, the investment models I outline below aren’t my typical recommendations – instead, they are made with these specific goals in mind.

Simply put, can we come up with an investment portfolio with these qualities that is projected to beat the performance in the table above while also buying term insurance to make sure you’re fully insured?

Let’s take a look at two cases:

Case 1: Buy Term and Invest the Rest in Municipal Bonds

We’ve already discussed that municipal bonds are tax free, and, like “guaranteed” life insurance investments, are also appealing to risk-averse investors.  How does a municipal bond portfolio compare to a whole life insurance investment?

Take a look at the table below.  Here, we’re comparing the value of the same whole life policy we saw before with a comparable 20 year term life policy.  Notice the premium for the term life policy is about 10% of the whole life premium.  We’re taking the difference between the premiums and investing them into a municipal bond portfolio.  Since the historical average return on a good municipal bond is about 5% (rates are lower than that right now, but they’re rising), we’re assuming that the portfolio will pay 5% interest a year, tax free. Let’s take a look at how the portfolios would compare, if the investments perform as they have in the past (which, of course, is not a guarantee):

Twenty years later, the whole life policy is still underperforming a tax free municipal bond portfolio.  All while getting the insurance coverage you need.

Case 2: Buy Term and Invest in Dividend Paying Stocks

Municipal bonds are all well and good, but what if you’re a relatively conservative investor, still concerned about taxes, who wants to dabble in the stock market?

Let’s run the numbers one more time, this time against a portfolio of ten of the most boring stocks I can think of.  First, a disclaimer:  I like investing in individual stocks, but only as a complement to a more well-diversified portfolio.  You shouldn’t put 100% of your investments into the kind of portfolio I’m about to show below.  But, if you’re thinking about putting 20% of your portfolio into a life insurance policy as an investment, something like this might be an alternative worth considering for a small portion of your money.

What counts as a boring stock?  Specifically, I’m thinking of massive companies with a long track record of success that generate reliable dividend payments to investors every year.  In this analysis, we’re looking at big companies across many industries: Chevron, Aqua America, John Deere, Wells Fargo, Pepsi, AT&T, McDonalds, Johnson & Johnson, Disney, and Proctor and Gamble.  Pretty boring companies, right?  (Ok, maybe Wells Fargo has been less boring of late.  But you get my drift).

The average annual return for these stocks, combined, over the past 20 years?

8.96%

Again, past performance does not equal future returns.  But given that the 8.96% takes some good years (the late 1990s and the past five years) and some bad years (the early 2000s and of course the market crash in 2008-2009), it’s not the worst point of comparison against how this particular whole life insurance policy performed.

So, what does this comparison look like?

Now, keep in mind that this portfolio is taxable.  So, taxes will reduce these numbers a bit.

But, hopefully I’ve made my point.  There are better long term ways to invest than either of the options I presented here.  But starting from the perspective that a) you need to have insurance, and b) we want to invest in either tax free and relatively safe ways (municipal bonds) or in relatively secure companies (my “boring stocks”), whole life insurance just doesn’t hold up.

Whole life insurance is a bad investment.  Period.

A Bonus Three Reasons to Hate Whole Life Insurance

In my conversations with life insurance salesmen, there are three key points that they didn’t bring up as reasons to invest in their policies, even though they are critically important.  See if you can figure out why they might not have emphasized these characteristics to me…

Whole Life Policies are Complex

If you’ve made it this far, you’ve seen a lot of information on whole life insurance policies and are possibly (or even likely) overwhelmed with the details of these policies.  How does cash value build up in a life insurance policy?  Wait- what exactly is cash value in the first place?

There’s a lot to these policies.  It’s way more complex to invest in life insurance than it is to invest in just about anything else.  And, in my opinion, complexity doesn’t give you any value here.  It actually does the opposite.

In the spirit of Newton and Archimedes, I’d like to call this Nelson’s First Principle of Personal Finance:

“The more complex the investment, the worse it is for the average investor”

And whole life insurance policies are certainly on the “complex” end of the spectrum.

You’re Locked into Whole Life Policies

If you buy a whole life policies, you’re typically locked into paying these high premiums until you’re 100 years old.  If you miss a payment, your policy will lapse.  And, you could lose the “benefits” that made you buy the policy in the first place.

If you’re a young investor, this should scare you.  If you don’t know for sure where your life will be in 10 or 15 years (spoiler alert: you don’t), you shouldn’t mess with locking into a policy that (as we’ve seen) has poor returns for the first several years.

I’ve already shown how your investment returns could be greater by buying term and investing the difference.  And that analysis assumes that you don’t let your policy lapse.  If you do, the difference is all the more clear.

Life Insurance Salesmen Have Huge Incentives to Sell Whole Life Insurance (And Have No Incentives to Sell You Term Insurance)

I point blank asked a life insurance salesman how much more he gets paid to sell a whole life policy than a term life policy.  They didn’t even know, because their pay for selling term life insurance is so low that they’ve never bothered to sell one.

This is a HUGE problem.  Life insurance agents are paid way more to sell whole life policies than term life policies.  A “financial advisor” who works for a life insurance company has zero incentive to show you a portfolio of term life insurance and a municipal bond portfolio like the one I showed you before.  Zero.

There’s a reason that trust in the financial services industry typically polls somewhere around levels of the criminal justice system.  And selling bad life insurance policies to people under the age of 40 is, in no small part, a reason why.

This is a huge part of the reason I started my own firm, among many others.  I believe that the best financial advice you can receive is paid based on a level fee.  In other words, the fees you pay should not vary depending on what the advisor recommends to minimize conflicts of interest.  Life insurance salesmen don’t operate that way.

Conclusion

There’s a lot here.  But this stuff is important.

It can be very easy to be talked into investing in life insurance.  The facts and figures salesmen use make it seem appealing.

But unless you’re in the top 1%, you should get your insurance needs covered with a term policy.  There are better investment options elsewhere.

How to Take Control of Your Finances after Graduation

[Don’t miss the two free giveaways in this post!  Click here to access our new retirement calculator, and click here to download our comprehensive student loan guide!]

The first 90 degree day of the year (at least here in Philadelphia) means a lot of things to different people.  Memorial Day Weekend.  Weekends at the park or pool.  And, of course, graduation season.

Congratulations to everyone in Class of 2017! If you are finishing your undergraduate career this month, welcome to the working world!  If you are finishing a masters or professional degree program, congratulations on finally (probably?) being doing with school!  And if you didn’t graduate this year, stick around anyway- I have some information here for you, too.

As the excitement of your graduation weekend ends and you begin to take the next steps on your journey, whatever they may be, I recommend that you take a step back and take an assessment of your current financial landscape.  Your life is changing (for the better!), and as such, you should take some time to reflect and take action to set yourself up for financial success in your new endeavors.

There’s a lot to take in here – if you have any challenges in any of these areas, I recommend that you reach out to schedule a free consultation about a one time, quick start session!

Congratulations again, and let me know how you are doing as you progress through this list!

Negotiate Your Salary

If you’re still working on lining up your first job out of school, make sure you prepare yourself to negotiate your salary before you accept a job.  If you already have a job lined up, file this one away for your next performance review.

I’ve discussed this in much more detail before, but it’s absolutely critical that you negotiate your salary when starting a new job.

Over 60% of millennials aren’t negotiating with employers at all regarding their salary.  And the worst part?  Three out of four employers have room to negotiate salary by as much as 10%- but only if you ask for it.  And, truthfully, hiring managers and HR are expecting you ask for it.

I know it’s uncomfortable, but you have to do it.

Set a Student Loan Paydown Plan

The bad news? T-minus six months until your first student loan payment is due.

The worse news? The vast majority of millennials are told by their loan servicer how much they owe and automatically start paying the bill, without double checking to make sure they’re paying down their loans in the smartest way possible.

The good news?  You have the power in your hands to make sure you’re handling your student loans with the care they deserve.

I highly recommend downloading my free guide on managing student loan payments. In it, you will learn:

  • How to review each of your student loans and determine what payment plans each is eligible for.
  • How to know if you are eligible for a loan forgiveness program, and what you need to do to qualify for the program under current law.
  • When you should refinance your student loans, and when you absolutely should NOT refinance your loans.
  • How to set goals around your student loan payment strategy (i.e., should you try to pay down your loans as fast as possible, or should you try to minimize your monthly payment?)
  • … and much, much more!

Go ahead and grab your free copy of “13 Steps to Take Before You Make Your Next Student Loan Payment” today.  It will be worth your while to work through the guide in order to set you up for success with your student loans.

Set Financial Goals for the Next Five Years

I remember graduating college like it was yesterday.  The last thing I wanted to do was to try to imagine what the future was going to be like.  I just had the best four years of my life, and was scared to face all of the responsibilities that I knew would fall on my shoulders in the real world.  If you had told me back then to spend some time setting goals for my first few years in the working world, I probably would have laughed at you.

But, I wish I had taken that advice.  I’ve improved my own personal financial situation significantly after I started setting financial goals for myself. (Not too long after I started my first job, luckily!)  And I recommend you do the same.

Take some time and imagine what you want your life to be like in one, three, and five years from now.  Will you be going back to school to get a graduate or professional degree?  Do you want to buy a new car or, a little while down the line, a new house? Are you gunning for a quick promotion at work, or maybe even thinking about launching a business or side hustle someday?

All of these things are great, and they are much more likely to happen if you (literally) put pen to paper to clearly articulate what you want your life to look like.  And, once you have done this, you can manage your finances accordingly to begin to make progress against these goals.

Set Up Your 401(k)

It can be easy, in the flurry of paperwork that accompanies a new job, to accidentally forget or neglect to set up contributions to your 401(k).  Don’t forget, it’s critically important.  At a minimum, you should contribute at least to your firm’s matching point.

So, if your firm matches up to 3% of your salary, you should contribute, at a bare minimum, 3% to your 401(k).  Not contributing up to your firm’s matching point is, quite literally, turning down free money.

And unfortunately, it’s not enough just to set up how much you want to contribute to your 401(k).  You need to choose how you’d like to invest the money you put into your retirement plan, too.

Unfortunately, firms usually give very little guidance to their employees on how to do this.  Which is why I’ve wrote about how to choose investments in your 401(k) in more detail on this blog.

…And If You Can, Save Beyond The Minimum for Retirement

Retirement might be a long way away (spoiler alert: it is a long way away), but that doesn’t mean you shouldn’t start saving aggressively for it now.  In fact, due to the beautiful thing that is compound interest, the more you save for retirement in your early working years, the much better your retirement picture will be.

There are other things you should be saving for as well (we’ll get to that in a bit), but if you have some discretionary income, I can’t recommend highly enough that you put some of that into a retirement account.  What type of retirement account – either increasing contributions to your 401(k), opening a Traditional IRA, opening a Roth IRA, or even a nonretirement investment account – can vary significantly depending on your circumstances. This is probably something we should talk one on one about, if you have questions.

If you’re wondering how much you should be saving for retirement, I recommend inputting your data into the free retirement calculator I have right here on my website.  And, particularly, if there’s a big gap between the yellow and blue lines or if you portfolio is projected to run out in the early stages of your retirement, we should talk about ways to close the gap.

Build an Emergency Fund

Like I said, retirement isn’t the only thing you should be saving for.  It’s critical that you gradually build an emergency fund so that if you were to lose your job, you have a way to support yourself during the transition.

The rule of thumb is that you should have enough saved to support yourself for six months (living on reduced expenses, of course – you probably won’t spend as much as you are today if you don’t have an income, after all).  But, when you’re first getting started, I think it’s silly to dwell on six months of savings.  That’s a pretty big and intimidating number for most people.

So instead, start by trying to save up to cover one month of your minimum living expenses.  Once you’ve saved that much, make your next goal to be to save an additional month of living expenses.  And so on, until you’ve hit that six month goal.  By breaking it up into pieces like this, it gives you a very clear way to take small steps, starting now, to work your way up to this major goal in the future.

Keep Your Living Expenses at College-Level For As Long As You Can

If you’re like me, there’s a good part of you that’s sad to be leaving college.  College is hard, sure, but it’s fun!

Do you have that same bittersweet feeling I did about leaving school behind as you enter the real world?  Good!  Hold on to it.  Embrace it.  And channel it into how you manage your finances.

Simply put, if you had a blast in college living on a minimal income, there’s no reason to change that up now that you have a salary.

Sure, you can have some peace of mind that you have some discretionary money at your disposal if you ever were to need it. And there’s certainly nothing wrong with splurging every now and then.

But, since you’re used to keeping your living expenses low, you should continue to do that as much as possible.  Have friends in your new hometown?  Try to get them to sign on as roommates!   Have some more free time on the weekends now that you’re not constantly writing papers and completing homework?  Spend a little of that time learning how to cook so you don’t need to order takeout seven or eight times a week.

Simply put, it’s much easier to maintain your current standard of living today than it is to increase your standard of living, realize you’re overspending, and then try to cut spending back.  You’re better off keeping your monthly spending where it is today, and saving the rest, rather than allowing your lifestyle costs to rise with your income.

And Speaking of Spending…

Yes, you need a budget for yourself.

I’m not the type of person to go through my clients (or my own) spending with a fine-toothed comb, analyzing every little expense here and there.  It’s not fun; it’s not productive; and it’s not an effective, long term, healthy way to manage your finances.

Instead, you should set budget parameters for yourself to make sure you know where your money is going, and track against those.  A free tool like www.mint.com is great for this.

You don’t need to worry if you go a dollar or two over any particular budget category each month.  But, you should pay close attention to your biggest spending areas, and try to find ways to cut back on these highest impact spending areas first, if you’re having a hard time finding the money to save for retirement and build your emergency fund.

Budgeting should be a common-sense driven exercise.  Don’t drive yourself crazy with it, but know your budget numbers and stick to them as best you can.

Increase Your Available Credit (But Don’t Use It)

It can be hard to build your credit score while you’re in college.  After all, most financial institutions aren’t in the business of giving huge lines of credit to college students who have a minimal, if any, income.

But now that you’re out of school, that changes in a big way.  As soon as you have documentable proof of income, you should open up a credit card and use it wisely to start to build your credit score.

Whatever the bank gives you for a credit limit, always keep your credit card balance below 30% of this limit.  Always pay off your bill every month.  In other words, don’t rely on your credit card to bail you out if you don’t have the cash available to make a purchase.  Instead, use it as a tool to begin to build your credit history as an excellent manager of credit.  When you’re ready to buy a house several years down the line, you’ll be happy you did.

An even better way to do this?  Find a credit card that offers some great perks. If you like to travel, find a card that gives good points toward airfare or hotel stays.  If you’d rather just have the cash, find a card that pays you cash back bonuses when you use the card.  There are a lot of options out there, and some of them are fantastic.  If you want to get some more ideas on great credit cards to use, give me a call.

This Isn’t a One-Time Thing

As you can tell, there’s a LOT here.  As you transition in the work force, it’s ultimately on you to set yourself up for financial success.

Start today by downloading my free student loan guide and plugging your numbers into my retirement calculator.  Create a budget, open a credit card, and manage your cash flow (both income and spending) wisely.

But ultimately, most of these things aren’t just for when you make the transition from school to a job.  You should periodically review each of these items to make sure you’re still on track.  Set up a free call with me to talk through how we can implement a system to address each of these items, and more.

What Millennials Need to Learn from the ESPN Layoffs

Well, this is a bummer.

The big news this week is that ESPN, once considered the fastest growing and most stable news organization in sports, is laying off numerous reporters and on-air personalities.

Layoffs are a cruel reality of the world we live in.  Unfortunately, reports of companies cutting jobs pop up in the news far more frequently than they should.  And there’s something about how public ESPN’s move was that makes it hit home all the more.

But there are a few important lessons in this story for all of us, particularly for millennials who are relatively new to the workforce.

There’s No Such Thing As 100% Job Security

No matter how quickly your company is growing, no matter how good your last performance review was- in today’s day and age, job security flat out isn’t something that we can count on.

Sure, there are a limited number of exceptions.  Tenure can help if you work in higher education.  Unions can, too.  But for the most part, it’s a mistake to treat a job as completely stable.

Some best practices to help deal with this unfortunate reality:

  • Talk to that recruiter who just hit you up on LinkedIn. Even if you aren’t looking for a new job right now, it never hurts to have the conversation and build a relationship with someone who has the capability to make hiring decisions. If you’re ever out of a job on short notice, you’ll be happy to have these connections!
  • Update your resume. If you’re anything like me, your resume hasn’t been updated since your last job interview.  A best practice is to update your resume – and LinkedIn bio – once a year.  That way, it’s ready to go whenever you need it.
  • Network, Network, Network. There’s many ways to do this one, but you absolutely have to be networking in your industry.  Attend a conference that caters to professionals with your particular area of expertise.  Use a site like Meetup or Eventbrite to find local networking events in your city.  Building relationships is the name of the game.
  • Mind your finances. Of course, there are huge financial concerns with the risk of job loss too.  Which brings us to our next major point…
You Absolutely Must Have an Emergency Fund (In Cash)

As a financial planner, I help people meet a wide variety of financial goals.  From retirement, to paying down student loans, to buying a home– there are a ton of different ways to allocate your money to improve your financial future.

But none of those things happen until you have an emergency fund.

You read that right.  Of course, you need to meet you minimum financial obligations.  Pay the minimum on your student loans each month, don’t miss credit card payments, contribute to your 401(k) until the match point.  You know the drill.  But, before you start looking to invest any “extra” money, you need to work to build an emergency fund.

The golden rule is to (eventually) build up to the point where you could support yourself for six months, without holding a job, just from your emergency fund.  But I wouldn’t focus on that right away- that’s a pretty intimidating goal for most people to reach.

Instead, calculate your average spending for one month, and focus on accumulating that much money in your emergency fund.  Once you have that much, focus on doubling it.  And so on, until you get to six months.

In other words, being so far away from reaching your emergency fund savings goal isn’t an excuse to not try to reach it in the first place.  Start small, and focus on saving a month’s worth of expenses at a time.

And one more thing- I don’t care how low savings rates are, you need to keep your emergency fund in cash.  If you invest your emergency fund and you were to immediately lose your job just as the stock market crashes, it won’t do you much good.  Set a goal for your emergency fund, and keep it in cash.  Preferably, in a separate savings account from the rest of your savings, so you won’t be tempted to spend it.

What’s More Secure: A “Side Hustle”, or a Full Time Desk Job?

If you were to ask 100 people whether it’s safer to have a full time job with an employer, or to work for yourself, I’m guessing that over 95% would say that it’s safer to have a full time desk job.

That may well be true.  It takes a lot of work to build your own revenue streams from the ground up.

But if you start your own business as a “side hustle”, and slowly grow it over time to the point where it could become a full time endeavor for you, I’m not so sure that this type of model is less secure than working for a “real” company.

Let’s put it like this.  Pretend that you have experience designing websites and writing code.  Would it be more secure for you to A) work for a company that does web design and be paid a salary, or B) to work as a freelancer part time and (over time) build up to 50 web design clients, enough that you could quit your full time job?

In Scenario B, if a client were to “fire” you, you would lose a total of 1/50 of your income, or 2%.  In Scenario A, if your employer were to lay you off, you’d lose 100% of your income.

The point of this isn’t to try to convince you to quit your full time salaried jobs.  Rather, I’d encourage you to revisit the way you think about your income and job security.  Finding a side hustle that you are passionate about and can sell to other people is a great way to diversify your income streams.  Just as you wouldn’t invest all of your money into one stock, it’s a best practice to diversify your income sources as well.

Hopefully, This is Never Relevant to You

Obviously, I hope you’re never in a situation where you’ve been laid off for a job.  But just in case, following the steps I outlined above will leave you more prepared to handle this situation.

The Why, When, and How of Combining Your Finances With Your Spouse

“Now that we’re getting married, how should my partner and I manage our money together?”

It’s one of the most common questions I get from my engaged and newlywed clients. It can be hard enough for us to manage our own money. Adding a second person to the mix makes things all the more complicated.

First and foremost, there’s the challenge of how to manage your money together with your spouse. Which accounts to use, how to monitor your finances together- there are a lot of questions here. Enough that I created a guide to walk you through my methodology for combining accounts.

But before we get into the how of managing your money together with your spouse, we need to take a step back.

Start with Why

Whenever I discuss combining money with your spouse, the very first question I typically ask is- why do you want to combine your accounts together?

Is it a matter of convenience? It’s certainly easier for you to keep track of your family finances if everything is in one place. Or is a philosophical matter? You’re one family, after all, and many people want to manage their finances as such.

Do you and your partner want financial autonomy in your day to day lives? Or, do you view your financial future as being completely intertwined with each other. Or maybe somewhere in between?

There’s no right or wrong answer here. But the approach you should take is largely dictated by your answers to these questions.

One Important Note

Pacesetter Planning provides financial advice, not legal advice. Before you decide to completely integrate your financial accounts with your spouse, it is recommended that you consider speaking with an attorney. If you decide not to completely combine accounts, you can certainly still use my framework for managing money together.

If you do decide to keep your accounts separate, you should add your spouse as a beneficiary to your accounts as soon as possible. This way, if something were to happen to you, your spouse will inherit the assets without legal complications.

That being said, my personal philosophy is that if you’re getting married, you should be “all in”. So, I don’t have a problem if couples want to completely integrate their accounts- as long as they want to for the right reasons, as discussed above.

The Next Question- When Should You Combine Finances

You shouldn’t actually combine your financial accounts with your partner until you’re married. Period.

Couples in our generation operate differently than our parents and grandparents. These days, it seems like the norm is to take big steps, like moving in together, before you are engaged. I know and I get it- I lived with my wife for over a year before we got married.

But just because some societal norms are changing, doesn’t mean that everything should change. Particularly when it comes to legal issues.

You might view yourself as “basically married” to your boyfriend or girlfriend, and there’s absolutely nothing wrong with that. But, you bank won’t view you as married until you’re actually legally married. Nor with the courts, if you were to break up. These situations become much more complicated if you have shared financial assets that you’re trying to split between two non-married people.

There’s nothing wrong whatsoever with jointly managing your finances with your boyfriend or girlfriend if you are living together. In fact, I usually encourage it. My guide on managing your finances with your partner will show you how. But managing your finances together doesn’t mean you have to actually combine your accounts. One more time for good measure: don’t do that until you actually get married.

Hopefully, it just means you’ll have separate accounts for a few more months or years. But in the worst case scenario, it can save you a ton of trouble by waiting.

How Do We Go About Merging our Finances?

You’ve talked about why you want to combine finances with your spouse. You are, in fact, spouses, so it’s an appropriate time to merge your money. Now, how do you do it?

I have a three-tiered framework for how to combine finances with your spouse. You’ll get a step by step walkthrough of this in my free guide. In this guide, you’ll learn how to:

1. Identify your shared financial goals with your spouse, and why these are so critical to keep in mind when you set up your joint financial accounts

2. Inventory each of your current financial accounts, and create an account map that shows you exactly where your money is today and how it’s being used.

3. Choose which accounts to use and Confirm you have enough accounts in line with your goals.

There are a lot of steps to combine your money the correct way, and it’s critical that you take the time to make sure that nothing falls through the cracks. Download my free guide on combining your finances today, and you and your spouse will have a roadmap to make sure you’re set up for success.

When Does It Make Sense for Married Couples to File Taxes Separately?

Nobody likes filing taxes every spring.  It takes a lot of time to receive all of your paperwork, and even more time to calculate and review to figure out whether you’re due money back.  And let’s face it- it’s not exactly exciting stuff.

But when you get married, this process can get even more complicated.  In addition to having double the amount of information to review, you need to decide the best way to file your taxes with your spouse.

Married couples have two options when it comes to filing their taxes- to file jointly with their spouse, or to file separately.  As the name implies, filing jointly with your spouse means that income and deductions for both you and your spouse are reported on one tax return.  When you file separately, each of you files a separate tax return with just your personal information on your own return.

But which option is the right one to choose?

Most Couples Choose to File Jointly

As with most tax-related questions, the answer to this question will vary depending on your personal situation.  But, the better option for most couples is to file jointly. There are several reasons for this:

  • Married couples who file separately hit higher tax rates at lower income levels. So, your effective tax rate between you and your spouse is typically higher for couples who file separately rather than jointly
  • The standard deduction is lower for couples who file separately, and many itemized deductions are reduced or completely eliminated if you file separately rather than jointly.
  • There are more tax breaks and credits available for joint filers, such as the Earned Income Tax Credit

So, this should be a fairly easy decision for most couples.  However, there are a few key situations where it makes sense to file separately from your spouse.  I highly recommend either calculating your taxes due both filing jointly or separately, or seek the assistance of a CPA, if you have doubts as to which would be best for you.

When Would It Make Sense to File Separately?

This is not an exhaustive list, but there are a few key scenarios where it may make sense to file separately from your spouse

You are on an student loan income-driven repayment plan. If your student loans are on an income-driven repayment plan, the amount you pay per month is tied to your annual income.  Whether or not your annual income is just your personal income, or includes your spouses as well, depends on whether you file jointly or separately.

So, if you have a significant loan balance and are on one of these payment plans, if you file separately, you can base your payments on your income alone.  But, as soon as you file your taxes jointly with your spouse, your spouses income will be included the calculation used to determine your loan payments.

You still may be better off filing jointly and paying the extra amount per month toward your student loans, but you should definitely keep these consequences in mind while making your decision.

I talk about this in my free eBook, “13 Steps to Take Before Making Your Next Student Loan Payment”.  Subscribe to my newsletter, and I’ll send you a copy for free!

Either You or Your Spouse Has Significant Medical Expenses

The current tax code allows you to deduct any medical expenses that are over 10% of the income reported on your tax returns.  This income number includes your spouse’s if you file jointly, but doesn’t if you file separately.  So, if you had high medical expenses this year, you may end up paying less taxes by filing separately, depending on the numbers on the rest of your return.

For example, say that your annual salary is $75,000, and your spouse’s annual salary is $125,000.  And, let’s say that you had a medical issue last year that cost you $10,000 total.

If you file jointly, your total income reported on your tax return would be $200,000.  Since your total medical expenses ($10,000) is less than 10% of your income ($200,000), you wouldn’t be able to deduct any of these expenses.

But, if you file separately, your income on your tax return is only $75,000.  Since you spend over 10% of this on medical expenses, you would qualify for this deduction.

You and Your Spouse Have (Very) Different Salaries

If you earn significantly more than your spouse (or vice versa) it may work in your favor to calculate each of your tax burdens separately rather than combining your incomes.  If you also have a lot of investment income, such as capital gains or dividends, this scenario applies even more.

Again, in this case, I’d recommend you calculate your tax burdens both ways- jointly and separately- and compare the total taxes due in order to decide.  But if, for example, you make $250,000 a year and your spouse makes $30,000, I wouldn’t recommend automatically filing jointly.  Take the time to calculate your total tax bill by filing separately as well, and choose which one works out best for you.

Your Spouse Has Tax Debt 

If your spouse hasn’t paid their taxes in the past, the second that you file jointly, this becomes your debt, too.  If you file separately, you won’t be held legally responsible for this debt.  This is still not a good situation for your family, of course, but filing separately can give you some legal protection in the event of an audit.

Generally speaking, if you have concerns about your spouse’s financial situation, maintaining some degree of legal separation with your money might not be a bad idea while helping them to work through it.  This certainly would include filing taxes as well, even if it means you pay a bit more.

Seek Help

Particularly if you think that any of the above scenarios apply to you, I don’t recommend doing this on your own.  Either use a self-guided program like TurboTax, or seek the help of a CPA, to review your specific circumstances and analyze your potential tax burden both if you file jointly or separately.

It’s no fun, and it adds a layer of work, but there’s too much money on the table to not do your due diligence.

If you have further questions or want to talk about any of the above ideas, don’t be afraid to reach out.  I don’t prepare tax returns, but I can help you find someone that I trust to review your situation and get you the answers you need.