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The Financial Questions a Couple Should Answer Before Saying "I Do"
In an article originally appearing on Carolina Money, Wedding Season has arrived in the United States and the South, and when a young couple decides to tie the knot, there are many decisions to be made. Some may appear obvious, from what flowers should go in the arrangements to the flavor of the cake. But when two people join together some other important questions must be answered: do we need a pre-nuptial agreement? What does our debt look like? Are we saving for our retirement or our home after the honeymoon?
A survey from Wells Fargo in February 2014 revealed that 44 percent of Americans find the topic of personal finances the most difficult, over the age-old controversial subjects of death, politics or religion. But Jean Ballentine, a certified financial planner and managing director of investments for Wells Fargo in Columbia, can say after 40 years in the industry, that finances and future planning are a conversation that couples should have long before the wedding date.
“I have seen that,” Ballentine reflects, “Where things come up fairly close to the wedding and then it’s a lot of discomfort at a time that should be very happy. I think it’s critical not only to do it, but to do it well ahead of the wedding, so you can, in fact, resolve any issues before the happy day.”
Whether both individuals are savers, or one is an avid spender while the other wants everything to go into retirement, financial compatibility is more about recognizing each other’s habits and being forthcoming about issues like debt and credit.
“I’ve really always felt that honesty and transparency is the number one important goals for any young couple, or any couple for that matter, and just putting all the cards on the table. Compatibility is good, but honesty and transparency are most important.” Ballentine says.
Though debt can be frustrating and even embarrassing, simply pulling both members of a couple’s credit report is a great starting place, Ballentine advises. Student debt is becoming more and more of a problemnationwide, with 7 out of 10 students who graduated acquiring debt in 2012. Ballentine notes that in her experience, while there are more couples entering marriage with some debt, pulling a credit report is the easiest way to determine exactly how much debt there is and who is responsible for it.
From there, Ballentine asserts that this small step is important for budgeting and future planning. Ballentine claims there is no right way, as to how debt gets paid down, whether each individual covers their own debt or the two pool their incomes to pay it down, the most important factor overall is that the debt is paid down.
“There are two criteria that will help you focus on which debt to pay down.” says Ballentine. “One, of course, is the interest rate. So you would ideally pay down the one that is costing you the most first. The other is cash flow. Do you have a debt that is going to be really detrimental to your cash flow? The quicker you can get out from under that, the better.”
The next step in creating financial harmony to ensure marital bliss is establishing a budget, and in order to do that, it is important to understand two kinds of spending. There is non-discretionary spending, which entails things that are essential: rent, utility bills, etc. The issue in young couple’s planning typically arises in discretionary spending, which includes everything else, from new shoes to a latte on the way to work. Ballentine notes that after adding up their non-discretionary expenses, it appears that couples should have plenty for discretionary spending, but they reflect that not much is left over, month to month.
Why is this? Ballentine explains that the little things we often don’t notice quickly add up, from your Netflix subscription to pet food to the dry cleaners. So she and her team advise that you really look at your spending over several months to get the most accurate depiction of your spending.
“The first thing I suggest is just go through your checkbook and your credit cards.” Ballentine suggests. “Do it for three to six months, and go back through and set up an Excel spreadsheet and list everything. It might list club dues, gym dues, everyone belongs to something. Go through and plug in the holes of everything you spent for the last three months. That tells you what you are spending. A lot of young couples don’t know what they are really spending.”
When a couple knows exactly what they should have left over from non-discretionary spending, it allows them to set goals for future spending. These can include projections for the short or long term. Ballentine explains that short term goals are the things you don’t have time to put away for, in your savings account. This can include vacation, entertainment, eating out, or perhaps a new car, if there is an emergency.
It is the long term goals that are sometimes difficult for young couples to grasp and consider. These are things that you save for, that are two to five years away or longer, like retirement, education of children, or buying a new or larger home. These goals represent your savings plan, and Ballentine advises that that plan be laid out when creating a budget.
Something that comes up every day in celebrity news and in the tabloids is talk of pre-nuptial agreements. But unless an individual has significant assets before entering a marriage, most couples will probably not need one. However, in the case that one is necessary, parental suggestion often brings up pre-nuptial agreements. Ballentine agrees that meeting with an advisor and letting the advisor bring up that topic in an advisement setting is effective and appropriate.
“It is certainly a gentler approach that is more factual rather than emotional,” she says.
However, something that all couples should consider before joining is considering individual versus marital assets. All of your assets can join, meaning that they are between both individuals equally, or certain assets can remain in an individual’s name. When a couple is young, estate planning and beneficiary designations may seem silly, but Ballentine notes that it is actually quite crucial.
“One of the important processes of going down the path of joining is meeting with someone who can help you think through the documents,” she says. “Who should be power of attorney? Health care power of attorney? A will? All of that should be in place, because if you don’t have them in place, the state has one in place for you, and you may or may not like it.”
For the couple soon to head down the aisle, all of the financial information out there can be dizzying. It can be helpful to have an outside person step in, mediate and assist in order to create a perfect union of two people and their assets. But in immediate planning, Ballentine notes that the wedding itself should not break your budget for a rocky first year of marriage.
“Weddings have gotten so extravagant in many ways,” Ballentine reflects.
“A lot of the young people are doing destination weddings. That ratchets up the expense. It’s very easy to get started with the best intentions and have it get out of hand. So, I would try to have a hard and fast rule that there’s no debt taken on to have a wedding. It is a wonderful experience, but it’s one day.”
Overall, Jean Ballentine stresses again the importance of honesty and transparency in finances and in marriage.
“Don’t be ashamed with what you have. Lay it out there, and if there is a problem, it needs to be addressed,” she advises.
“The biggest financial issue is being open and honest and agreeing on a spending plan. How much are we going to spend and how much are we going to save? Every couple should start out with some kind of a saving plan, in addition to their spending plan, however small it might be.”
Check Carolina Money for more financial news and updates on Wedding Season in the Midlands.