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.

 

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.

 

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.