July 28th, 2016
5 Smart Investment Moves to Make Before Marriage
It’s important to have a financial discussion about your future.
By Dawn Reiss | Contributor
Having an honest conversation about personal finances can be difficult for anyone, especially for a couple that is planning a wedding.
“No one likes to talk about it,” says Steve Dudash, president of IHT Wealth Management in Chicago. “Because it’s not fun.”
Most married couples quickly realize their financial futures are tied to each other. Like everything else in life, financial experts say communication is the key and finding a healthy balance.
Discuss expectations and what is important. Before getting married, it’s important to learn your partner’s attitudes on money.
To understand their financial upbringing and mindset, ask your partner how their parents and grandparents handled money, says Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network.
Then have a conversation about your priorities and expectations for the future. Talk about savings and savings goals. How financially secure do you want to be when you retire and how much do you want to spend? What type of lifestyle do both of you want? Does that include buying a house, traveling, returning to school or starting a business? Maybe one spouse wants to train for a marathon or another wants to build up savings before starting a family. What everyday priorities are important, such as going out to eat or frequently buying new cars?
Having a conversation about short- and long-term life goals translates directly into financial priorities, Gallegos says. Then discuss how much you will need to accomplish these goals and write them down.
Learn about your partner’s current financial situation. Have a clear understanding of how much other person earns, their total assets, how much debt they are carrying and their philosophy on using credit cards. “The big one is checking someone’s credit report,” says Meredith Carbrey, wealth advisor for Bedel Financial Consulting, an Indianapolis wealth management firm.
Make sure to discuss student loan debt before getting married, especially if a spouse works for a government agency or nonprofit and is targeting the Public Service Loan Forgiveness Program, where loan debt will be forgiven after a 10-year period, says Joseph Orsolini of College Aid Planners, a financial planning firm in Glen Ellyn, Illinois.
“I am amazed at how many people get engaged and even married without ever having a conversation on student loan debt,” Orsolini says. “This is especially important if one of couple is on an income-based repayment plan. Adding a spouse’s income will impact eligibility for IBR and may cause their payment to increase.”
It’s OK to keep separate bank accounts. “Couples are getting married later in life and it’s harder to release control when you’ve been in charge of your own finances for a while,” Dudash says. “It’s fine to keep separate accounts as long as anything isn’t secret.”
Instead, he says both spouses should direct deposit a pre-determined amount – either a percentage based on their respective incomes if one person makes significantly more or an equal amount – into a joint account for anything related to the home, including rent or mortgage payments.
Dudash also encourages couples to open a joint credit card for household expenses from buying furniture to groceries. Then autopay the credit card from the joint checking account, which can simultaneously help build a couple’s joint credit score or improve a spouse’s score if it’s significantly lower.
Accept that your future spouse likely will have a different risk tolerance. “Rarely do you find a couple where both people are actively interested in investing,” Dudash says. “It’s usually one or the other.”
That’s why it’s important for couples to have an annual meeting with their financial advisor who can give an overview to the less-involved spouse about what has happened in the past year, coupled with a larger conversation about goals and objectives.
Before blending any investing accounts, it’s also important to assess each other’s risk tolerance.
Have an honest conversation about how each person will react when the market pulls back during normal market fluctuations which can cause a brokerage account to lose thousands of dollars. If one spouse is very aggressive and one is conservative, it’s going to be hard to blend investing strategies, Dudash says, because the more conservative spouse will worry about any losses and the more aggressive one will get upset about not making enough return.
To decide how much to invest, start by looking at your joint account and assessing any major expenses, including buying a house or car, you plan to make in the next 24 months. Then subtract that amount from useable funds for investing, Dudash says.
Talk about a prenuptial agreement. Besides discussing how investments are going to be made and bills are going to be paid, consider a premarital agreement.
“It’s very easy to get into marriage and very hard to get out it,” says Christopher Melcher, partner of Woodland Hills, California-based law firm Walzer Melcher. “A lot of divorce problems come from expectations that weren’t communicated, premarital discussions you should have had that become a harsh reality later on.”
Whether you have a prenup or not, having a conversation about it clarifies everyone’s assets and expenses, says Melcher, one of the lawyers who handled divorce cases for actress Katie Holmes and singer Frankie Valli. Even without a prenup, a person can typically maintain their premarital assets as separate property.
Most states follow equitable distribution laws, where the court has more discretion on how to divide things. Nine states, including California, Texas and Wisconsin are community property states with more definitive rules on how assets acquired during marriage are jointly owned.
Melcher also cautions against adding fault-based provisions. “I’ve seen all sorts of weird stuff, from how often sex should occur to nondisclosure agreements to prevent tell-all books,” he says. “Most of that doesn’t belong in a prenup.”
Although a nondisclosure agreement is enforceable, “anti-cheating” personal conduct provisions can later backfire and may invalidate an entire premarital agreement and all financial protection, Melcher says. Instead, he urges couples to create an equitable partnership, even if that means putting real estate into a joint account.
“I had a client who had a successful restaurant chain,” Melcher says. “He planned to open up restaurants during his marriage. He wanted his fiancee to be supportive of him and be excited about his business.”
That doesn’t happen if only one person benefits from a financial win. “It’s very important to create a team atmosphere and a sense of community,” he says. “The only way to do that is to create something together.”