If you read this title and immediately started singing the opening song from the amazing sitcom running during the 80’s and 90’s, Married with Children, you’re welcome! Hopefully, it doesn’t get stuck in your head for too long. All kidding aside, this classic American sitcom is one of those shows that you either loved or hated. Me personally, I vividly remember watching, more like cracking up, with my family each week as the “misogynistic” miserable Al Bundy, his “lazy” just as miserable wife Peggy, and their “dysfunctional-slacker” children constantly verbally sparred with one another over their lack of money and success. It is the quintessential comedic spin on the exact opposite of achieving the American Dream. What does a show like this have to do with premarital Financial Planning? A whole heck of a lot if you want to learn “what not to do” as a couple.
Getting married is a huge part of achieving the American Dream. It is an exciting time in life that is filled with lots of love, joy, and planning. As it relates to your finances, setting yourself up for long-term success is a key factor in overall planning and is an aspect of your life that should be paid close attention to as you enter this next chapter. The planning may be different depending on your age and whether this is your first marriage or not. Below are a few premarital financial planning tips to help you and yours avoid a life of despair and anguish, like Al and Peggy Bundy.
And if you happen to be Peggy in this relationship, fear not, working with our team means you are working with a wealth management firm with a deep bench of women financial advisors that are acutely aware and familiar with financial planning for women. We help women build and maintain a financial plan along with helping women avoid common financial planning mistakes so that they can maximize their potential for success.
Premarital Financial Planning Tips
Both of you need to know what assets each of you has before you walk down the aisle. Create a worksheet of all assets including bank accounts, investment accounts, real estate, vehicles, and any other asset that you might have. Depending on the schedule of assets, you may find that one of you is bringing more to the table than the other. While there is nothing wrong with that, it is an important part of premarital financial planning to have the conversation and then create a schedule of those assets and their values.
It is important to note that any asset that was obtained prior to marriage is considered separate property before and during the marriage if it is not commingled. If you wish to keep those assets separate this is a very important piece of premarital financial planning. Depending on what state you live in, if your assets produce any income during the marriage, that would be considered community (joint) property and therefore, each year, the income should be deposited into a joint account or used for the benefit of the marriage. An example of this is if you own a business or have an inheritance that was established prior to marriage, any income from the business or inheritance during the marriage, is considered community (joint) property. The only way to avoid this is by putting a prenuptial agreement in place, which we will discuss in a bit.
On the flip side of knowing all assets, it is also important to know all debts each of you has. How much debt and what kind of debt a person has can tell you a whole lot about a person’s spending habits and aptitude of growing with you financially. This can potentially become a huge problem in a marriage if this isn’t addressed in premarital financial planning.
Just know that debt is not all created equal. With consumer debt being the worst kind of debt, pay close attention to what each of you is bringing to the marriage. Do each of you use credit cards responsibly by paying off the balance every month? Or do one or both of you max out your credit limits and only pay the minimum payment each month? Depending on the answer, it will help you put a premarital financial plan in place for tackling the debt as a couple. Other types of debt, like student loans and mortgage debt, are more reasonable types of debt. Decide who will be responsible for paying these off during your marriage, especially if your income is drastically different from one another.
When it comes to debt, in general, it is crucial to develop good habits early on for the sake of your marriage. Stay away from consumer debt, pay your bills in full every month and on time, and keep other types of debt to a minimum.
Having the ability to obtain credit will be an important part of premarital financial planning and purchasing assets like a home or car. The better your credit score, the better the terms for financing. It is also a good indication of how debt is used responsibly or not. A partner with a good credit score usually indicates they pay their bills on time and don’t overextend their credit use. The good news is you can check your credit score for free online without dinging the score itself. You are entitled to a free annual credit report from each of the three credit reporting agencies (Equifax, Experian, and TransUnion).
Discuss any negative financial events from your past:
It is never fun to talk about the bad times. However, it is important to be open and honest about what you have been through financially, regardless of what caused it. It creates trust, which is crucial for a healthy relationship. If you or your partner went through a rough time financially, talk about what exactly happened, why it happened, and what you have done to prevent it from happening ever again.
This is also a good time to talk about your financial upbringing. How we were raised around money has a big role in how we use and think about money as adults. It also provides for better understanding of why a person may be a certain way. Having this knowledge in your back pocket is really the baseline of premarital financial planning and better understanding your partner when financial conflicts come up.
Do you combine finances or not?
Many couples decide to join their finances by opening joint checking, savings, and investment accounts. This is completely a personal preference, but there are ways to be successful at it no matter what the choice.
If you decide to merge finances, it is assumed that all income goes into that account and all expenses come out, regardless of pay levels for each person. This is definitely the simplest way to approach it, but not everyone wants to have someone overseeing all of their spending. An easy way to resolve that and still have joined finances is to create “Fun Money” accounts for each of you. Set up a separate account for each partner and deposit the same amount of money into it each month. That is your spending money in which you have full discretion to purchase whatever you want whenever you want. The only rule is that your spouse cannot have any say in what you buy and once you run out for the month, that is it. No more spending. Not only will you each be happy with this setup, but it also helps with developing or maintaining disciplined spending habits.
If during your premarital financial planning you determine that you would like to maintain separate accounts entirely, it is very important to agree on how you pay your bills as you build your life together. If your income is about equal, then the split between bills should be equal. However, if there is a big dispersion in pay, it is important to create a split that is fair to both partners. For example, if your fiancé earns double what you earn, then the split should be relative to that vs right down the middle. Many couples start out this way and find that it gets complicated as assets grow and life evolves. However, if it works for you, just make sure to find a way to make it fair given each other’s income.
Define your role within your marriage:
Each of you should have skin in the game regarding your finances. It is very important for each spouse to be engaged in your finances and financial decision making. It is too big of a risk to bury your head in the sand just because one of you doesn’t like managing your money and bills. I wrote an article about this topic, which is applicable to either spouse, not just women.
Decide who is going to manage the day-to-day finances. This includes bill paying, monitoring spending and saving, and handling your taxes. Once determined, stay on top of it.
Even if one spouse is handling the bulk of it or all of it, it is important to have check-ins. Each week or month, schedule time with one another and discuss your finances. This is a wonderful exercise as it helps you stay on top of your goals and helps you maintain discipline.
Create financial goals together:
This is the fun part of the conversation. It is a time to be realistic about today but then daydream about tomorrow. Determine your small and major financial goals in the short term and long term during your premarital financial planning. For example, if you have a goal to create an emergency fund, outline how much and how long it will take for you to get there. What major purchases should you make in the short and long term? Do you need a new car or want to purchase a new house? How do you want to approach family planning if that is part of your goals? Do you both want to work after having kids, or does one of you want to stay home? Better identifying answers to these questions helps you as a couple determine the path to achieve all these goals. Goals are constantly changing. It is important to be able to pivot together as a couple through the years. The most important thing is to be on the same page, even during the pivots.
Do you need a prenuptial agreement in place?
For those who come to the marriage with assets, it might make sense to get a prenuptial agreement in place prior to the marriage. This protects what you bring to the marriage in the event of divorce. As an example, I mentioned earlier that in certain states, all income produced during a marriage is considered community (joint) property, even if it came from a separate asset. A prenuptial agreement can legally outline that this is not applicable if desired. It is also a great way to protect assets that come from a previous marriage when children are involved.
Just think about the very quick divorce Tom Brady and Gisele Bundchen went through. I guarantee you it was because they had a solid prenuptial agreement in place. Otherwise, they would have spent countless months or years arguing over who gets what.
Discuss your estate planning:
If you have children or assets from a prior marriage, it is vital to discuss your intentions for those assets in the event of your death during your premarital financial planning. Once you marry, updating your estate documents is imperative to make sure your assets go to who you want them to go to. Otherwise, the state in which you reside and die in will dictate who gets what in the event you die without a Will or listing beneficiaries on certain accounts. Here is an excellent blog post on better understanding the risk associated with dying without a Will.
Just like a financial plan, estate planning is something that might evolve over time as well. It is ok to make changes and updates along the way. Just get something started as soon as you get married to protect the ones you love. If you find things change over time, you can always modify your estate plan.
Clearly, Al and Peggy didn’t go through this exercise for one reason or another and it came back to bite them. Their lack of premarital financial planning likely hid some deep-rooted financial habits coming from both sides. The moral of the story is to avoid being like Al and Peggy, sit down with your future spouse and discuss these things. It may be uncomfortable, but it is very necessary for your success as a couple.