Thursday, April 12, 2007

Organizing Finances for Married Couples

Even if you have the most stable marriage, you may encounter difficulties when finances enter the picture. After all, when you were single, you probably managed your finances in a way that was comfortable for you and you alone. As a married individual, you need a system for budgeting money and paying bills that both you and your spouse agree on.

Can we talk?

Your first step on the road to organizing your finances should be to agree to talk to one another about your financial situation. Then, sit down and begin that talk by determining your net worth. In order to figure out your net worth, start by listing your assets (what you own--e.g. a car, cash in savings account) in one column and your liabilities (what you owe--e.g. mortgage debt, student loan debt) in another column. Now add up each column. Subtract your total liabilities from your total assets. You have determined your net worth.

Your net worth can give you a good idea of your overall financial picture, because it indicates how much money you would have left over if you sold all of your assets and paid off all of your liabilities. If your net worth is negative, don't be discouraged. Simply use the information to help you and your spouse develop and implement a financial plan.

You should also be sure to discuss your financial goals. Make a list of your short-term goals (e.g. saving for a family vacation or car) and long-term goals (e.g. saving for a child's education, new house, or retirement), and prioritize each goal by matter of importance. Then, ask yourself these questions for each of your goals: What will it take to accomplish this goal? How much will my spouse and I need to save? Which investment should we use to help us reach this goal? The end result will be a mapped-out strategy that will assist you in achieving all of your financial goals.

Note: Developing and implementing a financial plan may require you to seek professional advice from a financial planner or to do some research on the Internet, etc.

Looking at the numbers

Your next step should be to prepare a monthly budget that lists all of your income and expenses throughout each month. Preparing a budget is a good way to keep track of where your money goes and to make sure that you are spending within your means.
Begin with your sources of income (e.g. salary and wages, alimony, child support, interest). Next, list your expenses (e.g. rent or mortgage payments, student loan payments, groceries, car repairs).

Note: You may need to review several months' worth of entries in your checkbook to be sure that you include everything.

Add up your expenses, then add up your sources of income. Compare the two totals. The result should be that you spend less than you earn. If you don't get it right the first time around, review your expenses and try to trim down your spending. Finally, be sure to monitor your budget periodically and make adjustments when necessary.
Note: It may make more sense to prepare an annual budget when planning for long-term investment goals (e.g. retirement).

Bank accounts: To each his/her own?

Whether you choose to have separate bank accounts or maintain a joint account is a matter of personal preference. The advantages of consolidating your funds into one checking account include easier record-keeping, reduced maintenance fees, less paperwork when applying for a loan, and simplified money management. Keep in mind, however, that it is generally more difficult to keep track of how much money is in a joint checking account when two individuals are writing checks. To minimize confusion, or if you desire some degree of financial freedom from your spouse, you may want to maintain separate checking accounts.

Note: Be aware of the pitfalls that can go along with maintaining a joint account. For example, if you and your spouse split up, both of you can access the funds that are held in the account. In other words, your spouse can take the money and run.

Credit: For better, for worse

At some point in your marriage, you may want to apply for joint credit with your spouse. If you and your spouse have joint credit, however, you will both become responsible for 100 percent of the debt. Keep this in mind before you co-sign a loan with your spouse or add your name to your spouse's credit card account.

If you decide to maintain separate credit, the general rule is that spouses are not responsible for each other's debt if the debt is incurred by one spouse alone (not jointly). However, there are exceptions. Many states will hold both spouses responsible for debt that is incurred by one spouse if the debt constituted a family expense (e.g. child care, groceries). In addition, community property states will hold one spouse responsible for the other's debt if both spouses have rights to the property that underlies the debt.

Note: Consider keeping your credit separate if either you or your spouse had bad credit prior to marriage. That way, the other will not negatively impact whichever of you has the good credit rating.

Looking down the road: Retirement plans

If both you and your spouse participate in employer-sponsored retirement plans, you should be aware of each plan's characteristics. Plans may have different matching contributions, investment options, and loan provisions. If you are on a budget and can't afford to take advantage of both plans to the fullest, you should review each plan carefully, determine which plan provides the best benefits, and make that plan the focus of your investment strategy.

Insuring a happy marriage

A mistake that married couples often make is failing to recognize the impact marriage has on their health benefits. For example, the coverage offered by your spouse's employer-sponsored health plan might be inferior to your own (e.g. higher deductibles and co-payments, fewer benefits). If that is the case, compare the benefits offered under each plan to determine whether you should continue to keep your coverage separate.

Chances are that both you and your spouse own separate cars. If you also have separate auto insurance companies, you may want to consider pooling together your auto insurance policies with one company. Many insurance companies will give you a discount if you insure more than one car with them.

Whether you and your spouse own or rent a home, you need insurance to protect yourself from both the loss of your property and claims against you if someone injures him or herself on your property. Consider having the same insurance company provide coverage for your home or apartment and your car. Many insurers will give you a discount if you carry more than one type of policy with their company.

Note: As for other types of insurance (e.g. disability, life), you'll want to review your insurance needs periodically in order to make sure that you have adequate coverage. For example, as you obtain more assets (e.g. purchase a house) or have children, you may want to increase the amount of your life and/or disability insurance coverage.

Note: Don't forget to change the beneficiary designations of your retirement plan and insurance policies to include your spouse.



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