Newly engaged couples spend a lot of time dreaming about the future — how many kids they'll have, what kind of house they'll live in, the exotic places they'll explore together. What they don't spend much time talking about is how they'll pay for it all.
But according to several studies, not talking about finances before saying "I do" is the single biggest mistake a couple can make.
"Money is the number one source of tension in relationships," says Monica Mazzei, a family law attorney at Sideman & Bancroft. Unsurprisingly, a 2012 longitudinal study found it's also the top predictor of divorce, since financial stress and fundamental differences in values tend to put a strain on the marriage.
Despite the importance of hashing out money issues early, only 38% of couples say they plan together for retirement. "We're not taught how to talk about money with other people," Mazzei says . "But it drives a lot of major life decisions."
If you're considering tying the knot, the most important thing you can do to increase your chances of having a long and happy marriage is to have a frank, open discussion about money. Here's a guide to the crucial conversations every couple should have.
What's your money philosophy?
Before there's any talk of joint bank accounts or wedding venues, the first thing couples should do, advises Andy Smith, a CFP and financial advisor at the Mutual Fund Store, is sit down and describe their upbringing. "Start talking about your backgrounds, where you're coming from," Smith says. "Try to get a sense of how the other person approaches money." What are their attitudes toward money? What are yours? What did your parents teach you about spending, saving, philanthropy?
For many people, Mazzei says, this is the first time they've thought about their own money habits, let alone tried to align them with someone else's. It's bound to be uncomfortable to start, but as Smith says, once you're married, "you're going to be in some uncomfortable situations. If you never had that conversation from the beginning, you're fighting two battles: you're fighting the financial battle and you're fighting the emotional one trying to salvage that particular part of the relationship."
To make sure you and your partner are on the same page, Mazzei and Smith recommend tackling three key topics:
1. Financial priorities : Just because you may now have two incomes doesn't mean you can afford everything you want. "There are some needs and wants that are more equal than others," says Smith. Whether it's paying for frequent vacations or owning nice cars, your values won't always match up. Draft independent lists of your wants and needs so you can spot potential conflicts before they arise.
2. Life goals : Does one partner plan on staying home with the kids for a period of time? Is there debt that needs to be paid off? What are you hoping to accomplish in the short term, and where do you want to end up 20 years from now? You may not have a clear timeline sketched out in your head, but the earlier you start talking about your ideas for the future, the more likely you are to achieve what you want.
3. Retirement plans : "When people go from one-income families to two-income families, the temptation is there to start doing some of the things you've always wanted to do or...[rationalize] changing your savings regimen," says Smith. "This is absolutely not the time to do it." Instead, couples should think carefully about when and where they want to retire, and how much they want to have saved up by then. That way, every decision is made with that end goal in mind.
In some cases, just the process of asking these questions can cause couples to rethink their engagement, as has happened to two of Mazzei's clients. "They realized they didn't see eye-to-eye," she says. It's better to know early than embark on a marriage that's doomed from the start.
What are your assets?
Once you've talked about the big picture, it's time to lay out the facts — all of them. "Couples need to be totally transparent about their financial situation," says Mazzei. Whether you've got student loans, child support payments, or a trust fund you never told your partner about, it's time to come completely clean and make sure your partner knows exactly what's in your name in case something happens to you.
Here are some essential issues that should be covered:
1. Saving accounts : By the time they get married, individuals often have one or two old 401(k) accounts from prior jobs, a current 401(k) or IRA account, and other accounts created for them by their parents. Sit down with a financial advisor who can go through all of the accounts in your name and determine what needs to happen with them, and make sure your partner has a clear understanding of them in case something happens to you.
2. Beneficiaries : For every existing 401(k), IRA, or investment account, individuals will have already listed a beneficiary in the event of their demise. "Now that you're coming together as a couple," Smith says, "you're going to need to rethink [those beneficiaries] based on what's appropriate for your particular situation."
3. Debt : In the short term, says Dan McElwee, CFP and executive vice president at Ventura Wealth Management, understanding what the debt situation is helps determine what a family unit can afford to spend. " Student loans, car loans, credit card bills, etc. can add up quickly," he notes. It's also important to understand what happens to an individual's debt after they die, a process that varies by the type of debt in question, the state in which they reside, and the name on the loan. Take the time to learn about the property laws in your state so you have a better understanding of what you might be responsible for in the event that something happens.
Once you've spoken with a financial advisor and identified your individual assets, write everything down and keep it in a place where your partner can find it. Include login information, phone numbers, and anything else they would need to access those assets.
Should we get a prenup?
"The prenup conversation is almost never a fun one," says McElwee. "For young couples without children and few assets entering their first marriage, we very seldom recommend getting one. However, when there are significant assets at stake from one or both partners, or if there are children from previous relationships, having a layer of protection is not a bad idea."
In situations where one partner is much wealthier than the other, or when there are special needs in the family, Smith says couples should at least have the conversation even if they decide not to go through with it.
Regardless of whether you get a prenup, Mazzei recommends all couples go to pre-marriage counseling with a therapist who can help them talk about these sensitive issues.
The Bottom Line
"We see the most successful situations where people from the very beginning start having those conversations," says Smith. "The earlier that you can talk about this stuff, the better. Talk while everybody's healthy. Have these conversations while you're still renting or trying to buy a house. Have these conversations without the kids, before you have all this other stuff."
Start by laying out your personal philosophies toward money and what you envision for your future together. Then sit down with a financial advisor who can itemize your assets and make recommendations about who else you should consult.
If you take the time to have honest financial conversations early, you will set yourself up for a long, healthy marriage to come.
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