Part 1: Starting the Conversation
Going from dating to engaged is a time full of joy. The same can be said when you finally get married. Within one year I graduated college, started my career, and will be getting married. For me, there was something so special about walking through those many changes in life with my fiancé. As a financial guy I was chomping at the bit to get into our finances as we both accepted our first full-time jobs. Something to understand is that everyone is different. There is no magical way to handle your money, but as a leading cause of divorce, there is no denying finances are important. Starting the conversation may not be easy but making sure you and your spouse communicate is vital. I want to talk about the process we went through to get our finances in order the way we wanted.
Starting the Conversation
Starting the conversation with my fiancé was not quite as fun as other conversations but it was absolutely necessary. We started talking about how we wanted to use our money when we started working and that led into a conversation about how we would handle our finances. I recommend doing a few things starting off: list out what assets each person has, where they are located, and how much transparency you want between each other regarding financial accounts. In my situation, we talked about how much money we had, which bank we each used, and then concluded later that we wanted joint accounts in every area of our finances. Some people would prefer to have everything split individually; others want their savings together but checking accounts separate. Whatever you decide is a great place to start. Over time you can evaluate how it is working and if any changes need to be made.
What are the benefits of having goals? I believe having goals provides direction and motivation in your daily activities and habits. It gives me something to work towards on a daily, weekly, monthly and yearly basis. The first step in preparing our finances was to establish goals with my fiancé. The goals we established varied greatly in time period, intensity and priority. Nevertheless, we had goals. Here are the goals we came up with:
- Establish an emergency fund
- Save for a down payment on a house
- Give 10% of our earnings away each month
- Max out our IRA and 401(K) contributions each year
- Set aside a set amount for irregular expenses that may arise
- Save a certain amount for a yearly vacation
As you can see, the goals span throughout various time horizons, giving us something to work towards daily. On top of that, each goal has a dollar amount tied to it. I think making realistic goals is very important and will help be an encouragement as you work towards accomplishing each one.
Establishing Time Horizons for Your Goals
After establishing our goals, we knew we had to figure out the time horizon of our goals as well. This would dictate how aggressive we saved towards each goal. In part 2 we will discuss financial accounts and how to get invested to help you accomplish your goals. I split up our different horizons like this:
- Emergency Fund – Typically 3-6 months of expenses saved up.
- Short-Term – Short-term is under two or three years. Anything less than a year can be considered part of your emergency fund.
- Intermediate-Term – Intermediate-term money would be anything that is not short-term, but also not intended for retirement purposes.
- Long-Term – For me, having no children, this is almost all retirement savings, cash value life insurance policies, annuities, or other long-term vehicles intended for use later in life. Once you start having children, long-term would include education savings as well.
Some of the goals we created initially had time horizons included as we came up with them. Others, like saving for a down payment on a house, took more time to think about. We ended up deciding our emergency fund should be accomplished first, ideally within the first three months. Be aggressive saving for an emergency fund, it is important. We also settled on 5 years as our maximum timeline for putting a down payment on a house. Establishing a time horizon for each goal allows you to understand which are most important and figure out how much should be saved on a consistent basis to accomplish these goals.
Create a Budget
Not everyone follows a budget but having a firm grasp on income and expenses is vital to financial success. My fiancé and I used our financial goals to help us create our budget. We looked at our goals, the time horizons and our income levels to analyze the amount per month we could give away, save and spend. I set the budget up so the fixed expenses came out first. This includes things like rent, savings, insurance, and anything else that is the same each month. A good place to start for savings is 10% to short term savings and 10% to long term savings. As you get down my budget, the line items are more infrequent expenses (i.e. travel expenses) that we are trying to allocate money towards on a monthly basis. Be as detailed or general as you want as you create a budget. The idea behind a budget is it helps aid you in spending less than you earn and serve as a guide as you work towards your goals.
Creating a budget without consistently reviewing it is pointless. You must have a good idea of how much you’re making and how much you’re spending. Whether you sit down weekly or monthly, there needs to be consistency in reviewing your budget. As you review, analyze how you’re spending your money. If you need to change the amount budgeted for a specific thing, find an item in your budget that you can reduce to make it work. Having a good balance of savings and spending each month is so important. You don’t want to be so focused on saving that you don’t enjoy life right now.
All these steps are important in building a strong foundation. Whether you are soon to be married or already married, these steps will help assist you and your significant other as you begin combining finances. In part two we will talk through different financial accounts and general investment information to help you reach your goals.
*The information presented here is not specific to any individual’s personal circumstances. FMP Wealth Advisers is not providing investment, tax, legal, or retirement advice or recommendations in this article.
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