Once upon a time, you found that special someone to spend the rest of your life with, and now the two of you are ready to ride off into the sunset, right?
Not so fast. You'll have a much better shot at a fairy-tale ending if you take a little time at the beginning to sit down and talk about money. It may not sound like the most romantic topic, and many couples even consider it taboo. But "Money is the biggest loaded piece of information you can talk about, bigger even than sex," says Peg Downey, a financial planner and partner at Money Plans in Silver Spring, Maryland.
But sorting out the dollars and cents is a sensible way to enter a lifelong commitment and to ensure that financial squabbles won't lead to a split. Couples should share their financial histories (along with any skeletons in the closet). What assets—and debts—are you bringing to your marriage? Are you a spender or a saver? How did your families handle and discuss money when you were growing up?
When one engaged couple recently went through this exercise, it was, in some ways, an awkward conversation. They learned, for example, that her credit score was about 100 points lower than his stellar score of nearly 800. On the other hand, he owed close to $10,000 in credit card debt and had a hefty student loan.
He was reluctant to have his past debts become her problem. But she felt they were a team, and with the issues laid out, they could deal with them together.
For example, they discovered that even after marriage, each will maintain a personal credit score. Her lower score won't directly affect his unless they decide to buy something jointly—a car or a house, for instance. Then the combined, lower score could mean they’ll have to pay a higher interest rate.
The solution: She must raise her credit score, and start by putting an end to late payments. Until her score is higher, the couple will hold off on applying for any big loans together.
Curtailing expenses will also help the couple save to pay off the husband-to-be’s debt. They’ll continue to chip away at it by always paying more than the minimum amount on the monthly statement.
As for the student loan, the couple sees it as an investment to be paid out of the higher future income that should come part-and-parcel with the additional education.
It may be a long while before the couple settles all of their financial issues. But full disclosure at the outset has helped them set a course for the future, and realize how they need to adjust the way they handle their money.
There is no universal right answer to the question of whether to merge your accounts or keep them separate. What's most important is to agree on what works for you.
Married for three years, Jude Escaņo, 30, and Therese Lizardo-Escaņo decided on joint accounts. They found that merging their money made it easier for them to keep track of their expenses. "It also helps us keep our marriage transparent," says Therese, 28. "Because we know how everything is being spent, we can ask questions if we have any."
On the other hand, Michelle and Bruce Baker have gone the individual route since their marriage 13 years ago. Michelle was working toward her doctorate in pharmacology at New York Medical College when Bruce, now 43, became a professor at the University of Kansas. With their long-distance marriage, the Bakers figured that maintaining separate accounts was the easier option. And because it worked for them all those years ago, "we never went back," says Michelle, 37.
Another option in the great joint-versus-individual debate is to have both. In January, Andrew Kim, 27, proposed to his girlfriend, Stephanie Layton, also 27. "I didn't know how to approach joining finances initially," says Kim, senior investigator with government contractor USIS in Falls Church, Virginia.
Layton, who is studying for her doctorate in classical archaeology at the University of Virginia, suggested they maintain individual accounts—and a degree of financial independence—and also open a joint account, to which they'll each contribute a percentage of their income. Kim supports that arrangement.
So does Olivia Mellan, author of Money Harmony: Resolving Money Conflicts in Your Life and Relationships (Walker & Co., $14.95). Mellan recommends that couples separately make a list of expenses to be shared, then merge their lists. To cover those expenses, they should use a shared account to which each person contributes an amount that is proportional to his or her assets and income.
Mellan thinks over-merging is a big danger. "I believe that all women and a lot of men psychologically need their own money," she says. "It allows them a sense of autonomy in the midst of intimacy."
Once you've decided to make a list of expenses, you might as well add income, assets and debts so you can eyeball your entire financial picture.
Soon after becoming engaged, the Escaņos sat down at the kitchen table and laid out their budget in a spreadsheet, along with "bank and credit card statements, pay stubs, insurance forms, everything," says Therese.
Breaking out physical documents is smart. On top of helping you get all the numbers right, the paperwork makes your finances seem more real. "It's not so easy to set up a spending plan when money is such an abstract concept," says Downey. She remembers when she was a child and her parents brought their paychecks home in an envelope. Now, in the age of direct deposit, she says, "money's not a real, concrete thing."
Newlyweds Lillian and Nathan Hall circumvent that issue by dealing in hard cash. Like the Escaņos, the Halls put their budget in spreadsheet form. Then they break out weekly expenses, and "every Sunday, we take out $250 for the week," says Lillian, a 27-year-old special-education teacher. "With cash, you're just more aware of how much you're spending." (They use any leftover money for emergencies and occasional fun rewards.)
Going over the nitty-gritty will get you talking about your spending priorities. If past bills reveal that one of you drops a substantial amount on eating out while the other prefers to stay in and save for extravagant travels, then you'll need to compromise. Maybe you can patronize less-expensive restaurants and use your savings to build a vacation fund. Or splurge on fine dining once in a while and settle for less-expensive destinations.
One spending issue that cropped up for the Escaņos was gift-giving. Jude has seven siblings, each with two or three children. That adds up to a lot of presents each year. "It was difficult for us to establish a limit for gifts," says Therese. But they discussed what would be fair and agreed to stick to it.
Maintaining detailed household records is also necessary for couples with individual accounts. The Bakers keep a budget so they can outline and divvy up their annual expenses. "We decide a year at a time who's going to pay which bill," says Michelle.
Buying a home is often a couple's first big savings goal. When figuring how much you need to accumulate before closing the deal, factor in the costs of owning, not just buying.
Jennifer Lynn and William Andrew Thompson lived together for a year and a half before their marriage last year, so they got to know each other's spending habits and monthly expenses. But after tying the knot, paying the mortgage became a top priority.
Six months after buying their house, the escrow payments were raised to reflect the correct tax amount. Having been warned at the closing about an impending hike in their monthly payments, the couple was prepared to deal with the increase. "You get used to seeing the paychecks go directly to the Countrywide Fairy," says Jennifer.
To keep up with monthly payments, as well as to make renovations to their home in Randolph, New Jersey (which had not been updated since it was built in 1941), the couple decided that each of them would take on a second job. Jennifer, 27, is both a first-grade teacher and a ballet instructor. William, 29, is a YMCA program director with a landscaping business on the side. "We felt that maintaining a balance of spending moderately was important enough to sacrifice some of our time to working more," says Jennifer.
When couples come to see Downey, "they're thinking about getting a place together," she says. Downey, on the other hand, is most concerned about their insurance coverage and whether they need legal documents they didn't have previously.
When it comes to health insurance, for example, each of you should reevaluate your policy. It may make sense for one of you to add the other to your plan. If you retain separate coverage, know what you'll have to do in case an emergency requires you to act on the other's behalf. As for life insurance, you probably don't need it if each of you is still working and neither is dependent on the other's income.
If you have an existing insurance policy, or if each of you has a retirement plan or IRA—and we certainly hope you do—remember to update your beneficiaries. You'll probably want the money to go to your new spouse, rather than to your parents or siblings.
If you're a military couple, be sure to take advantage of the benefits to which you're entitled. Jude Escaņo is an Army doctor. "The benefits he receives help us live more comfortably," says Therese, who is a medical student at George Washington University. Among other things, the Escaņos are eligible for a tax-free basic housing allowance. And while Jude was deployed in Iraq, his income was tax-free.
It's also important to update your tax-filing status. Even if your wedding date is December 31, Uncle Sam considers you married for the entire year. Check in with the human resources department at your workplace and adjust the withholding allowances on your Form W-4. And if you change your name, let everyone know, including the Social Security Administration.
Depending on the circumstances, you may also be candidates for a prenuptial agreement. For instance, a prenup can make sure you're compensated for helping to pay for the professional education of your spouse. Or it can protect assets that you bring to the marriage. Also, on the legal front, each of you should have a power of attorney that allows you to act on your spouse's behalf should he or she become incapacitated.
With your budget and paperwork in order, it's likely that one of you will take charge of the bookkeeping. But both of you should stay in the loop and have access to information such as account numbers and passwords.
Keep in mind that as time passes, your finances will need to adapt to your circumstances. Ask each other where you expect to be and how much you expect to be making in one, three, five and ten years. Do either of you plan to go back to school? If so, will you need to take out student loans? Would you like to have children? If so, when? It may surprise you to learn that you have different goals and expectations, so it's best to find that out early.
After breaking the ice with your first big money talk, agree to reconvene regularly to keep each other up-to-date. You might even consider meeting with a financial planner. It may not sound like the stuff of fairy tales, but constant and open communication about finances can help you live happily ever after.