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Wednesday, November 2, 2011

YOUR’S, MINE, & OURS: Tips on Combining Income with Your Spouse/Partner: Part 2: Home from the Honeymoon…

Congratulations!  You’re married!  Hopefully you had a chance to get away with your new husband/wife.  I know after all the stress of planning your wedding; you were due for some rest and relaxation.  Now you find yourself dropped off into the reality of actually being married. 
The purpose of this post is to share my thoughts and advice on building a strong financial foundation for a new marriage or commitment.  I am not trying to dictate whether you should start a family or buy a house as soon as you land home, you are free to disagree with me. Everyone’s situation is different.  All I know is what I went through when I first “came home from the honeymoon” and what I learned from it. 
So here it goes:
1)      DO NOT BUY A HOUSE
You just got off the roller coaster of Engagement and the last thing you need is a house! Believe me…never be in a hurry to make so many commitments at the same time.  Unless you have a unique situation (like you lived together before you were married) or one of you already owns a house, I would hold off buying a house for at least a year.   A house brings so much financial stress (unexpected expenses, repairs, etc.), and this is a time to get to know each other and to get a financial system (yes it’s a system) established.  If this is the first time you and your partner have ever combined incomes, you have a lot of adjustments to make and its way more enjoyable without a mortgage hanging over your head.   EVEN if it is cheaper to buy then rent, EVEN if you are paying through the roof in taxes, EVEN if everyone is doing it and they think you are crazy to rent “in this market”, I don’t care if you are 25 or 45, DON’T DO IT!  
The Ms Money Guru has a checklist to determine whether you are ready to buy a house (more on this later) and it is IMPOSSIBLE to have that completed by year 1 anyway…so forget about it!
2)      INSURANCE

Seems very obvious, but still worth mentioning.  You are now a REAL household and you need to make sure you are adequately protected. Now that you are married, you need to reexamine all of the needed insurances because your situation has changed…in some cases, your premiums may go down!

 I recommend everyone get 5 types of insurances:

Life Insurance:  20-30 year term life insurance, 8-10x your income…if you or your spouse dies the insurance payout can be invested in a mutual fund earning an average of 10%, should replace the spouse’s annual income.  Why only 30 years? The goal is to be able to self insure after 30 years.

Auto:  In my opinion, you should at a minimum carry full insurance with 100/300 ($100,000 per person, $300,000 per occurrence).  Some people will argue that is a lot of insurance, when I was first married we were so broke we only had 15k in liability…that is way too low. What if we hit a brand new BMW or even a Chevy Tahoe? Everything above 15k would be our responsibility. So until you can “self insure” (with a healthy emergency fund) against all these “what ifs”, it’s wise to just get the best coverage you can.  I’ll leave the size of the deductable up to you. 

Renters:  Since you are NOT buying a house, you need to insure the items inside your unit; your landlord will only cover the structure of your building. He won’t cover your belongings if you get robbed or if the rental burns down. You can add your wedding rings on this policy too.

Health:  Despite whether you have a job with full benefits or not, you need to look into health insurance. Health care bills are one of the top reasons people in this country go bankrupt.  Please get health insurance, it’s worth it.

Long Term Disability: Short term (less than 13 weeks) is not the problem, that’s what an emergency fund is for…it’s the long term disability that hurts most.  God forbid something happens to either one of you, and it takes you out of the working field for an extended period of time, you don’t want to depend on the state or your family for everything…be smart get some long term disability insurance.

3)      EMERGENCY FUND

Seems obvious…the general rule is 3-6 months expenses.  You should have this BEFORE you buy a house and before you go on your next vacation.

4)      GET ORGANIZED…THERES THAT “B” WORD AGAIN!

Funny thing that happens when you get married…Income goes up, Expenses go down.  Gone are the single days of pinching every penny, and making sure you can make your car payment and rent.  Now you should have TWICE as much money, RIGHT? 

WRONG!  There is a difference between PERCEIVED wealth and ACTUAL wealth.  When you get “married money”, for some reason you will feel like you got a little raise, a little bump.  Even if one of you is not working, you know that if push comes to shove you have an able bodied adult who is willing to pick up the slack.  Two is always better than one.  BUT that doesn’t mean you don’t need a budget! EVERYONE needs a budget, even Warren Buffet needs a budget, if he didn’t have one, he wouldn’t be Warren Buffet.  This is what RICH people do.  They live within their means, they save, and they buy things with cash.  It’s so plain and simple, yet for some reason so hard for ordinary people to do.  What couples tend to do is “grow” their lifestyle first, and then budget second.  If you create your budget FIRST, you will be in touch with your NEW households’ spending habits, and this will help avoid “growing” your lifestyle into your newfound income.  Remember PERCEIVED vs. ACTUAL…this is where that comes in.  You don’t want to buy a new car (with payments) and a few months down the road realize that it was a curse instead of a blessing because you can’t afford to enjoy your new life together.   Married people need to go on dates too!

So, BEFORE you get excited and run off to the mall and buy everything you see and sign up for a new car loan or God forbid a TIMESHARE.    You need to come together with your spouse, (remember the come clean ceremony from Part 1) and put all your obligations, including your new insurance premiums, new rent payment, etc. together, and see what you really have left over at the end of the month.  You want to live in that place for at least 3 months, and really get a feel for how your money flows.  For instance, I work for a company that pays me salary every two weeks, while my husband is a teacher and most of the time they get paid once a month and only for 10 months. So given the different variables, we had to plan for the summer (non paying months) and plan our bills around the timing in our pay (cash flow) as well.  It is a new process and it takes a lot of practice. MsMoneyGuru has WAY more on this subject and a step by step process to build a budget…more to come.

Are you in Debt?  Hopefully your come clean ceremony (see Part 1 of this series) opened your eyes to what you have before you.  Paying off your debt should be JOB #1.  Are you overwhelmed and not sure how to do it? MsMoneyGuru has the answer…more to come.

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