Money issues rank high on the list of reasons for divorce, right behind infidelity, according to Marriage.com. While there's no guarantee that financial planning for engaged couples will create perfect harmony, completing a financial checklist before marriage may pave the way for more open communication around money in the future.
Alan Wolberg, a senior wealth planner with City National Bank, sometimes finds it surprising that his wife agreed to marry him 25 years ago. At the time of their marriage, his financial situation was less than enticing. However, Wolberg and his wife did one important thing that helped their new marriage: They talked about their goals and values in financial terms, not just about their dreams of a rosy future.
“The important thing is that we were both completely transparent about our finances," said Wolberg.
Irene Damaryan, a senior wealth planner with City National Bank, agrees on the importance of discussing the financial aspects of any relationship, whether a couple is married or not.
“It's important for couples to be on the same page about money, because financial disputes can cause a marriage to sink or swim," said Damaryan. “You need to get comfortable discussing money from the beginning. It's also a great exercise to build trust before the marriage begins."
The biggest issue for couples is when one partner keeps things a secret, said Wolberg.
“The failure to communicate can lead to conflict, and if both spouses don't open the lines of communication the odds are higher that you'll get divorced," said Wolberg. “Good communication leads to compromise, which makes for a healthier marriage."
Completing a financial checklist before getting married can open the lines of communication for a couple. Below, you'll find a checklist of items all couples need to consider before tying the knot.
If you're combining households for the first time, you'll need to create a financial plan that incorporates your income, assets and liabilities. You'll also need to determine whether expenses will be split or shared moving forward.
“Each partner needs to be open about everything and clearly state what they're bringing into the marriage," said Wolberg. “Honesty is key."
Creating a combined balance sheet and budget is important. Consulting with a financial planner can help start this process, especially if one or both spouses have been married before or have complex finances..
“Some people naturally understand finances and take on the responsibility of managing finances, but if both spouses have that inclination, they might need to compromise and cooperate," said Damaryan. “If neither likes to handle finances, then they need to figure out who will manage their money. If you don't have a wealth planner, it can be helpful to meet with a planner who works with your parents or grandparents."
Things to discuss when budgeting as a married couple include:
“When discussing financial plans, choose a neutral location and try to have a one-on-one meeting without in-laws or others present who could influence your discussion and decisions," said Damaryan.
Planning for a wedding and honeymoon can be an entry point for couples to understand each other's values around money. No matter who is paying for the wedding, you'll need to discuss the budget, the location, the number of guests and other details.
“If you're paying for the wedding yourselves, you'll need to talk about from where the payments are coming from and whether your wedding expenses will impact other future funding goals you may have," said Damaryan.
A similar discussion is required for your honeymoon. Couples need to decide how much to spend, where the money will come from and whether any concessions need to be made based on wedding costs.
“Planning around your wedding and honeymoon needs to be considered in the context of your budget going forward," Wolberg commented. “If you plan to buy a house or invest in a business, you need to think about how much you can spend on your wedding and honeymoon without compromising those goals."
Whether a prenuptial agreement, is recommended depends on each partner's life stage and finances.
“If neither spouse has a significant net worth or is expected to inherit a significant estate, then there's likely no reason to consider signing a prenup," said Wolberg. “Typically, they're done by wealthy people or requested by an engaged couple's parents."
Wolberg recommends a prenuptial agreement when one partner has wealth and the other doesn't. They can also help when both partners have assets that they want to protect. A prenup can be particularly important for a second marriage, especially if one or both spouses have children from a previous marriage or relationship.
A prenuptial agreement can cover all types of assets, including income, savings, investments, real estate, jewelry, fine art and heirlooms.
Transparency about assets and liabilities is extremely important, especially if either spouse was previously married or has responsibility to make payments, including alimony or child support. A new marriage may impact existing legal agreements, making it essential to address commitments such as child support and alimony.
If you're uncertain how your new marriage will change any existing alimony or child support, it's important to contact a family law attorney and plan accordingly. When a marriage is likely to increase a person's income or standard of living, any existing court orders might be modified.
Before marriage, an important conversation to have is whether you both want to have children.
“This is at first an emotional decision, and then it becomes more of a financial conversation to have about being able to provide for and take care of your children," said Wolberg.
Suppose a spouse or both spouses come into the marriage with children. In that case, they will need to decide whose responsibility it is to pay for their care, including their education and medical expenses.
Create an Emergency Fund
Couples need to decide how much of an emergency fund they feel they need and how much of that money each will contribute. Damaryan recommends an emergency fund of three to six months of expenses that can easily be accessed from a liquid account.
Expenses that influence your emergency fund might include:
Combining finances or keeping them separate is a decision each couple must address. Some couples comingle bank accounts completely, while others prefer to keep them entirely separate. Others choose a hybrid approach with some combined accounts and some separate.
“If both spouses are coming into the marriage without wealth, then you would be more likely to open up joint accounts because you are starting from scratch and building your assets together. Marriage is about being partners and about growing together, both emotionally and financially. Jointly owning assets is a good way of showing that," said Wolberg.
Wolberg suggests that older spouses who bring wealth into the marriage or couples in a second marriage may want to keep at least some of their assets separate.
“If you're in a second marriage and have children from your first marriage, then sharing assets may be problematic when planning for your estate," he commented.
“Some couples prefer to keep inheritances separate or earmark some accounts for children from prior marriages," said Damaryan. “The important thing is to have an open discussion so both of you know what you have and why it's being kept separate."
Generally speaking, property is divided into two categories after a marriage: marital or separate. Marital property is usually anything bought by either or both spouses during their marriage. Separate property is anything a spouse brings into a marriage that they owned before it. In community property states, certain steps need to be taken to retain the character of separate property after marriage.
Debt from the past isn't the only thing couples should consider; they should also plan for future debt. This process could involve deciding if they want to share credit card accounts and what debts they're comfortable incurring together.
During the initial balance sheet discussion, both spouses need to be open about any personal or business loans they have and how they will be paid down. They should also discuss loans they may need in the future, such as a mortgage, and what it takes to qualify," said Damaryan.
Student Loan Debt and Further Education
Partners need to be equally transparent about any student loan debt, including the amount of debt and the repayment plan. In addition, you should talk about the possibility of further education, including how that would be funded and whether the studying spouse would work part-time or full-time while pursuing a degree.
Real-Estate and Mortgages
Deciding where to live is an important part of marriage planning and has a big financial implication, too. If you or your partner owns a home now, you need to decide whether you want to live there, keep it as an investment or sell it. If you currently rent, you should talk about where you want to live and whether you would like to continue renting or would rather buy a home together.
For many couples, buying a home together is the next step after marriage, so it's essential to discuss your aspirations and plan for owning a home. For those who own a home, marriage can be a good time to evaluate the real estate market and decide where to establish a home together. A mortgage is usually the largest debt a couple will have, and they should evaluate their credit history and determine what needs to be done to qualify for a mortgage loan.
Vehicles and Auto Loans
Car purchases are often the second largest expense after housing. It is important to talk about whether you have or will need to take out an auto loan. If you will need a new car in the near future, you should both discuss how that purchase will be financed.
One benefit of marriage is that you can often save money on health insurance premiums by combining your insurance under one policy, said Damaryan. She recommends comparing policies and costs to evaluate the best choice.
Whether this is a first marriage or a second marriage, both spouses need totalk about their current life insurance policies. Do either of you have a permanent life insurance policy, such as whole life or universal life insurance, or a term life insurance policy? Who is the beneficiary of your current policy? Do you plan to purchase life insurance? What is the purpose of buying new or additional life insurance?
You and your partner should share information about your current retirement plan investments, including how much you have saved and what accounts you have. Once you're married, it is important to plan for your retirement together so that you can decide how much each spouse will contribute to their respective IRAs, 401k's, etc.
Depending on what stage of your life you are in, sharing information about any IRA, 401k and pension plans you have and checking your Social Security benefits may be important. You may wish to discuss your timeline for retirement, what retirement means to each of you and where you would like to live during retirement.
For young engaged couples, estate planning may not be a top priority.
However, you may wish to consider establishing a basic estate plan when you get married, not matter your age in the event the unexpected happens.
“You each would need a will, living will with advanced healthcare directive, and a financial power of attorney set up. You may also consider establishing a revocable living trust, which in some states is also known as a family trust," said Damaryan.
For a second marriage, especially if you have children from a prior marriage, estate planning becomes more important to help determine how to equitably divide assets between your beneficiaries.
“After the marriage ceremony, it is important that a couple reevaluate the titling and how beneficiaries are named on all their accounts to make sure they are all up-to-date especially if they are changing their names," said Damaryan.
You should weave your financial goals into all of your conversations about children, housing, budgeting and retirement.
“The types of financial discussions and decisions before marriage depend on what I call 'ages and stages' in life," said Damaryan. “Younger couples who have never been married before, and don't have children, businesses, or many assets, may focus on budgeting and saving. Older couples who were previously married, or those with more complex assets and financial lives may need more assistance in combining their lives and their assets, and are more likely to need to meet with accountants, attorneys, and financial planners to help shed light on issues they should be thinking about."
Among the financial topics to discuss prior to marriage are your combined assets, liabilities, income, expenses and goals for financial independence. It is important to discuss your desire to start or sell a business, your retirement goals, whether you want to buy a vacation home or invest in rental properties, and your timeline for becoming debt-free.
City National Bank's wealth planners and investment advisors can help guide you in these conversations, review your financial situation and provide suggestions before and after your marriage to help you on your journey.
This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.