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Financing Your Wedding
Expensive weddings are the reality these days for most
couples. The average American wedding costs approximately $19,000 for about
175 to 200 guests. And for a smaller event with at least some of the trimmings,
many wedding planners will tell you to set your minimum budget at $5,000. As
with most major purchases, the cost may exceed that price by roughly 15%.
Traditionally, the bride's
family paid most wedding expenses. Today, with higher costs and many people
marrying at a later age, those rules have changed drastically.
What are your options? You could, of course, use
your short-term emergency cash fund or sell some of your investments. But would
it be worth it? Do you really want to jeopardize your financial security for
just one day, albeit a special one? Many financial planners suggest delaying
the wedding until you've saved enough for your wedding.
But if you can't wait months to be with your intended,
and you simply must throw a big celebration with all the bells and whistles,
here are four funding sources for the big day -- with the appropriate pros and cons
-- that you may want to consider.
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Home Equity Loan
If you own a house or condominium, a home equity
loan may be tempting. But be careful. If you miss a payment, you run the risk
of losing your home. The good news is that most home equity loans run one to
three points above the prime rate and the interest may be deductible. Be sure
you understand that some loan agreements initially require you to pay only the
interest on a monthly basis, which may leave you with a balloon payment down
the road. In addition, some lenders may offer very low interest rates for the
first few months with higher rates later, triggering a corresponding increase
in your payments.
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Taking a Loan Against Your Whole Life Insurance
This is one source for quick cash, provided you've
held the policy and paid premiums for a number of years. You may be able to
borrow up to the full cash value of the policy at a reasonable interest rate
and not have to repay the loan. This action, however, will reduce the policy's
death benefit. In the event of your demise, your beneficiary would receive the
policy's face value minus the amount of the outstanding loan.
It's also important to understand that while the
advertised interest rate of the loan may be low, you don't actually borrow the
cash from your policy -- it is only collateral against your loan. In that case,
the rate you earn on the cash value may be reduced on the portion you use as
loan collateral. You not only pay interest on the loan, you reduce the overall
earnings on your policy. Of course, if your insurance policy is affected by
interest rate changes, the terms will be quite different. Ask your insurance
agent what kind of policy you have.
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Borrowing From Your 401(k)
The interest rate on any loan you take from your
employer-sponsored retirement plan is likely to be low, and you are, in essence,
paying the interest to yourself. However, you must repay the loan within five
years; otherwise, the IRS may view the unpaid portion of your loan as a distribution.
You could be responsible for taxes on the withdrawn amount and may have to pay
a 10% early withdrawal penalty, if you're younger than age 59 1/2.
In addition, should you leave your job, you risk paying
taxes and an early withdrawal penalty if you don't repay the loan within the
specific time period that is noted in your plan (e.g., 30 days). And, if the
interest on the loan is less than the rate of return your money would have earned
if it remained in the plan, you may find that you have less money for retirement.
Here's why. If you borrow money in an account earning
10% and you pay 6% interest on the loan, you may lose out on a potential 4%
return on the balance of the loan. Over time, those potential missed earnings
could add up, resulting in an overall lower account balance.
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Does a Margin Loan Make Sense?
A margin loan allows you to use your investments
as collateral. Your brokerage firm may lend up to 50% of the value of your stock
investments and nearly 90% of the value of your Treasury securities at an interest
rate that's a point or more above prime. If you purchased your mutual funds
through a discount broker, you can borrow against these investments as well.
A big risk: Should the value of your investments
decline, a "margin call" may be made on the loan. This means you'll have to
make up the cash difference, or conversely, the lender may sell some of the remaining
securities in the account.
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Average Wedding Expenses
Your wedding budget is likely to reflect the priorities and personal tastes of you and your partner. That said, consider the following costs published by The Wedding Report, a provider of wedding statistics and market research for the wedding industry.
2006 Average Wedding Expenses
Reception: $13,692
Photography and video: $2,659
Ceremony: $2,337
Wedding Attire: $1,841
Jewelry: $1,739
Flowers: $1,136
Favors and Gifts: $1,104
Music: $922
Stationery: $809
Transportation: $563
Total: $26,802
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Bargain Hints
Of course, you can reduce expenditures and still
have a memorable celebration. There are many books to assist budget-conscious
couples in planning their weddings, including:
- The Budget Wedding Sourcebook.
Madeline Barillo, 2000, McGraw-Hill, $17.95. - How to Have a Big Wedding on a Small Budget.
Diane Warner, 1997, 2002, Betterway Publications, Inc., $12.99. - How to Have an Elegant Wedding for $5,000
(or Less).
Jan Wilson and Beth Wilson Hickman, 1999, Prima Lifestyles, $16.95. - Priceless Weddings for Under $5,000.
Kathleen Kennedy, 2000, Three Rivers Press, $14.
There are also a number of specialty magazines such as
Modern Bride, and Web sites such as The Knot (www.theknot.com), that
offer tips for cutting wedding costs. Money concerns are a major cause of stress
in many marriages. Why not give you and your betrothed a gift by beginning your
new life together with minimal debt?
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Summary
- The cost of a wedding can easily exceed $19,000. Many wedding planners estimate a minimum cost of $5,000 for a wedding with a full reception.
- Many financial planners recommend saving the
money for a wedding rather than
financing it. - While a home equity loan is an attractive source of cash, some financial institutions may require you to pay monthly interest, followed by a balloon payment.
- A loan against your whole life insurance policy may offer a reasonable interest rate and not require repayment of the loan. However, if you borrow against the policy, you reduce the death benefit, as well as the earnings on the policy.
- Consider borrowing from your 401(k) plan only if your job is stable and you can repay the loan in five years or less. Keep in mind that the borrowed money will lose the benefit of compounded interest until it is repaid.
- Carefully consider the risks of taking a margin loan, which is secured by your investments. Should the value of your investments decline, the loan may be called, requiring you to make up any shortfall in your account.
Checklist
- Consider an inexpensive, nontraditional wedding venue, such as a beach or park.
- If you're considering a loan to help finance your wedding, do the math to make sure that you'll be able to afford the payments on your current budget.
- Read the fine print on any loan agreement you may be considering. If you don't understand exactly what it means, ask questions.
- Consider delaying your wedding so that you'll be able to save enough money to pay for it without borrowing.

