Build a Future for Richer, not Poorer

How to avoid the financial perils of plighting your troth. By Rosemary Neff
     
            Jack Yu insists he didn’t really live like a monk during the 18 months before his wedding last July 4. But judge for yourself: he rented a cheap apartment (utilities included), asked his parents to ship his boyhood furniture from home (with moving expenses paid by his employer), and prepared most of his own meals (including bag lunches).
      And the result was certainly soul-satisfying: His frugal lifestyle allowed him to pay $1,000 a month on his student loans. By the time he married Cathy Wen, the $16,000 debt was history. "Without having the loans paid off, it didn’t make sense to start investing money, or to use it for anything else but getting rid of that debt," says Jack, an engineer who works on Web-site design for Eastman Kodak, in Rochester, N.Y.
      Now the Yus can afford a few creature comforts--they’ve moved up to a two-bedroom apartment in the suburbs and bought some new furniture. But Cathy shares Jack’s commitment to living debt-free. "You just can’t spend more than you have," says Cathy, who also works for Kodak making products easier for customers to use.
      Being fiscally in step helps get newlyweds off on the right foot. "I think it’s important that couples at least agree on their perception of money," says Charles Parker, a financial planner in Houston. "They can conquer any mountain if they’re in agreement on the ground rules."
      Finances are a key element in the pioneer premarital counseling program of the Marriage and Family Therapy Clinic at Colorado State University. Couples are asked, for example, to create a budget, both for the immediate future and for five years into the marriage. "That forces them to consider whether they’ll be making mortgage payments or supporting a child," says Christi McGeorge, a therapist at the clinic.
      It also helps to take an inventory of what each of you owns and owes, and to become familiar with how your spouse-to-be spends money. "When you’re dating you have a chance to see what’s going on there," says financial planner Sharon Rich of Belmont, Mass. "Don’t assume that style will change once you get married."
     
SETTING YOUR GOALS
      The Yus have decided on at least two major financial goals: purchasing Jack’s 1996 Toyota Camry when the lease expires in January, and buying a home in the next year or two. "We talk about major expenditures, and usually we’re thinking the same thing," says Jack.
      For Avril and David Burg, it helped to consult a third party soon after they were married last June. Financial planner Rich helped the Burgs set their goals: to buy a home and to have a child in the next few years. David will graduate this month from the Weatherhead School of Management at Case Western Reserve University; Avril works as a headhunter for a placement agency. Now that they’ve decided to stay in Cleveland, where the cost of living is significantly lower than in New York City, where they used to live, they think their goals are affordable. "We don’t know exactly how we’re going to reach every one, but we’ve committed to living within our means," says David.
      The Yus have actually put a rough budget on paper, "but it’s not like we examine and reexamine it," says Cathy. Fundamental to their plan is a 10% tithe to their church. That and living expenses come out of a joint checking account, which Cathy manages, along with a special money-market account that currently yields 5.55%. "We try to keep as little in checking as possible," says Cathy.
      Parker even suggests that couples have their paychecks deposited directly into their savings accounts. "Psychologically, it’s tougher to withdraw from savings," he says. "What results is more cash accumulation." (For newlyweds or engaged couples, Citibank offers a free brochure, To Love, Honor and Budget; call 800-669-2635.)
      Whether you and your spouse combine bank accounts is a personal decision. The Burgs, for instance, set up a joint household account, but Avril keeps a savings account in her name. It’s important for her to control money of her own because she’s working while David is in school. "He wants me to be more conservative, and he’s right, but I’ve never had to think of a ’we’ before," says Avril.
      "Some people need to keep all their money separate," says Rich, "and some just throw it all in one pot." Either way, she says, "I tell them that’s okay."
      Only one spouse needs to be in charge of paying the bills, balancing the checkbook, and maintaining the family’s paper trail. Cathy Yu took on that role because she didn’t have an outside job for the first nine months of her marriage.
      But both spouses should be accountable for spending within the guidelines they set up. And both should know what’s going on, even if it means having regular meetings to talk about money.
     

IT’S STILL A GOOD IDEA for each spouse to keep a credit card in his or her own name--especially if one of you has a significant balance.

     
      CONTROLLING DEBT. Given the Yus’ marathon debt-reduction program, it’s not surprising that they’ve been loath to take on any more IOUs. They use two separate credit cards that they got when they were single but pay their balances in full each month. The only time they came close to their credit limit was when they intentionally charged wedding expenses on Jack’s US Airways Dividend Miles Visa to earn free airline tickets.
      Starting a new life together with an old credit card might be a mistake for many young couples. Cards issued to college students typically carry high interest rates; with a little shopping around you could find a better deal (see "Yields & Rates," on page 76). It’s still a good idea for each spouse to keep a card in his or her own name--especially if one of you has a significant balance. For better or worse, if you add your name to your spouse’s account, you become responsible for his or her debts, says Robin Leonard, a Berkeley, Cal., lawyer and author of Money Troubles: Legal Strategies to Cope With Your Debts (Nolo Press). It’s better to open a new, joint account for shared purchases.
      FEATHERING YOUR NESTS. Like the Yus and the Burgs, most newlyweds will probably want to buy a home. If that goal is only a year or two away, it’s best to keep your assets where you can get your hands on them quickly, such as in a money-market fund or a short-term-bond fund. If it’s going to be four years or more before you make the move, you have other investment options (see "Best Funds for Your Goals," March).
      But if you’re a two-career couple, you’re probably also a two-401(k) couple, and you should continue to fund those accounts as you did before your marriage. "So often I see money that should go to feathering a couple’s retirement nest being used instead to spruce up their new nest" with furnishings, says Dee Lee, a financial planner in Harvard, Mass.
      Now that you’re a pair, think about your investments in two retirement plans as a whole. "Couples need to treat their individual portfolios as part of a family portfolio," suggests Lee. If your plan has a better international fund than your spouse’s, for instance, you might invest heavily in that choice, knowing that it’s balanced by domestic investments in your partner’s plan.
     

DESPITE the so-called marriage tax penalty, most couples are better off filing their tax return jointly, rather than separately.

     
      BRACING FOR TAXES. Even if you were married for only part of the year, you’ll file your income taxes as married. Despite the so-called marriage tax penalty, which could force you to pay more tax together than the two of you paid singly, most couples are better off filing jointly rather than separately (tax software such as Kiplinger’s TaxCut or Intuit’s TurboTax makes it easy to compare the alternatives for yourself).
      To avoid a nasty shock next April, adjust your withholding (ask your employer for a new W-4 form). If each of you has been claiming one exemption, for example, one or both of you might reduce that to zero.
      COVERING YOUR ASSETS. You probably also have life insurance through your employers, and that’s all you need until you have a child or a mortgage. Just be sure to change the beneficiary so that your spouse gets the proceeds.
      If you each have health insurance coverage at work, it may be less expensive to maintain separate plans until you need family coverage for a child. But your decision should be based not only on premiums but also on the type of plan. For example, if one of you has access only to an HMO and the other has a fee-for-service option, you’ll need to decide which style of health care you prefer. It probably won’t pay to carry duplicate family coverage because insurance companies coordinate benefits; rarely will one make up what the other doesn’t cover.
      If you have a choice at work, or if you are shopping for a policy on your own, consider one with a high deductible and low premiums; you can bank on your youth and good health to hold down routine medical bills and leave insurance coverage for a true catastrophe.
      David Burg is probably typical of most newlyweds when he admits that he "hadn’t given much consideration" to disability insurance--something that planners say is just as important as health insurance. Any coverage you have through your job may not be adequate, and if you buy a supplemental policy yourself, benefits will be tax-free.
      LEAVING A LEGACY. When you’re starting a new life, you’re not inclined to worry about what would happen if it were cut short. "I just spoke with a young woman who became a widow with a small child at age 32," says Lee. "Before they had even met, her husband had named his mother as beneficiary of his 401(k) account, and had never gotten around to changing it. There was nothing we could do."
      How you title your assets is critical to how they pass on, says Kathleen Stepp, a financial planner in Overland Park, Kan., who developed the Citibank brochure. But even for newlyweds with no dependents, there’s no substitute for a will to guarantee that your property is distributed according to your wishes.
      For about $500, you can have a lawyer prepare two wills, along with living wills, health care proxies and durable powers of attorney, each naming the person you trust most to make financial and medical decisions for you--presumably the person to whom you have just pledged your undying love. l
      Reporter: Catherine Siskos