Yes, Money can Mess up Marriages!

marriage and moneyThis morning as I was returning from my early morning gym routine, I listened to NPR’s Chris Arnold’s report on “How to Keep Money From Messing Up Your Marriage.”  He provided another story of a seemingly successful couple who were on the verge of divorce over money.  The husband was making more than his working wife and since they were splitting expenses down the middle, she always felt broke, frustrated and had developed overwhelming resentment. Quelle Surprise! It’s true- money can mess up marriages of all ages, income and assets.

Certainly, money isn’t the only source of marital conflict.  There can be disagreements about children, chores, communication and work.  But, money is certainly the most difficult to resolve. It’s often very difficult for couples to talk about money issues and resolve them.  Money can represent more than dollars and cents.  It can be used to express feelings and relationships.  It can be given to express love, power and respect. And, it can be withheld to humiliate, punish or control.

First, let’s look at five biggest blunders couples make with money based on a CNBC article a year ago:

  1. Believing that “love conquers all.” It takes hard work, communication and commitment to successfully manage money as a couple. Here’s a quiz you and your spouse can take and discuss:

http://www.cnbc.com/2015/02/10/how-money-stressed-is-your-marriage.html

Couples who enjoy a good relationship with money often have shared values, an appreciation of their partner’s perspective and an ability to find common ground.

  1. Practicing money silence. Often this silence is passed down from generation to generation, leading to miscommunication, misunderstandings and hurt feelings.  It is often the reason marriages end up in divorce and children become financially unprepared adults.
  2. Avoiding financial conflict. One recent survey showed that 80% of spouses admitted to hiding some financial purchases from partners-presumably to avoid a fight over the item. Not a good idea.  When you don’t openly discuss money you miss an opportunity to understand your partner’s viewpoint and resolve a problem in its early stages.
  3. Waiting to be financially rescued. Don’t blindly put your financial future in someone else’s hands.  If they die, become disabled or leave, you may have real problems.  Take adult responsibility for your money even if it is not your strong suit.
  4. Meeting with your financial advisor alone. While it may be more time efficient to delegate certain tasks, this is an important one to perform jointly.  It’s a great opportunity to talk about money together in the midst of your informed, caring, objective wealth manager, to understand and resolve financial differences and to make decisions about your future as a team.  In addition, if something happens to one of you, the other is not in the dark.

The commitment to work together for financial harmony should start early.  Couples considering marriage and newlyweds need to do the following:

  1. Give Yourself a Financial Checkup. Only about half of couples today know their partner’s credit score before marriage.  You need to know each other’s spending habits and preferences.  Understand your partner’s debt situation, if any, and work together on getting it paid down.
  2. Start to Develop Sound Savings Habits. Consider putting at least 10% of your combined income into savings each month before you are married.  Calculate what your share of the wedding costs will be and how you will fund and attain that goal together.
  3. Create a Budget. Put everything “on the table” including yours bills, obligations, income etc.  Group your expenses into needs, wants and wishes.  Make sure to budget for the wedding and honeymoon. And, agree on an amount of “fun money” each of you can spend each week or month without talking to the other first.
  4. Split up the Task of Finances. Once married, both should be part of the process.  One might pay the bills (pretty easy these days online), one might recap the finances monthly, one might be responsible for income taxes, one for insurance, etc.  You are accountable to each other.
  5. Decide how best to manage your money. Combine your funds into a joint account, use separate accounts, or keep separate accounts that link into a new joint account.
  6. Once married, update beneficiaries, withholdings and other paperwork. This applies to 401(k) s, life insurance, W-4s at work, etc.
  7. Have a Financial Date at least once a month. Talking about money should be a healthy, ongoing conversation.  Talk about your combined progress toward meeting your financial goals, future financial decisions and corrections, if needed, to your plan.

Unfortunately, love does not conquer all.  Our experience at DWM working with couples of all ages, incomes and assets over decades has shown us that hard work, commitment, regular communication, understanding of a partner’s perspective and an ability to find common ground is what is required to keep money from messing up your marriage.   Money can’t buy you happiness.  Yet, working and talking together about money goes a long way.

 

 

Budgeting: Putting the Pieces Together

budgeting2

Budgets are like a puzzle. You have a finite amount of money, regardless of how much you earn. You need to figure out where each piece of it is, and should be, allocated. It’s an honest look at your spending and saving rates. Many people have a negative attitude towards budgeting, thinking that it’s restrictive, time consuming, or unnecessary, but a budget is really something positive. It’s a tool to help you get where you want to be one day.

DWM works with clients to create custom financial plans. Why is that so important? The CFP website says it perfectly: “Creating a financial plan helps you see the big picture and set long and short-term life goals, a crucial step in mapping out your financial future. When you have a financial plan, it’s easier to make financial decisions and stay on track to meet your goals.” These plans help you define and quantify your goals. They’ll help you identify how much you will need to save to make these goals.

To create a realistic plan, one needs realistic numbers. One of the most important figures in all of this is the amount of money you spend, since the more you spend the less you have to save. Remember, you have a finite amount of money. Some people like to know exactly what they are spending, and we have clients that have created Excel budget spreadsheets that detail their spending down to the penny. On the other hand, some people don’t think about their spending (or live in denial about it) and have no clue. But burying your head in the sand doesn’t change reality. The money is still being spent whether you’re aware of how much you’re really spending on discretionary items vs saving for goals like retirement, or not. It’s better to face things now when you still have a chance to change your spending habits, and save to meet the goals that are important to you.

For DWM to provide you with a meaningful plan, we need solid numbers on your spending. So if you’re not currently tracking where your money goes, here is some advice to get you started:

  1. Take a look at your current spending. This is the part where many people stop before they get started because many budget worksheets contain 50+ categories. Trying to classify and tally everything into that many categories is daunting and time consuming. Instead, download a full year’s worth of transactions from your bank accounts’ and credit cards’ websites to an Excel spreadsheet, and sort by category or description to get an idea of where your money is really going. Label each category as Fixed, Goals, or Flexible according to the guidelines below in step two, and figure out what percentage of your take-home income each of the three composes. For some people there will be surprising or depressing revelations, but don’t be dismayed. You can take control of your spending habits. Now you’re ready for step two.
  1. Set goals and adjust your current spending accordingly. A good, easy to follow guideline is to divide your total take-home income 50/20/30:

–  Fixed expenses such as home, student, and car loans, utilities, insurance, memberships, and other expenses you are committed to and don’t vary much should make up 50% of your budget at the most.

–  Financial goals such as retirement, saving for college or a down payment on a vacation home, building an emergency fund, and paying off credit card debt should total at least 20%. (Note that you may be saving more towards retirement goals than reflected in this number because it only includes take-home income, and 401k contributions are deducted before your paycheck is deposited. For more on the ideal saving rate, see Brett’s recent blog.) For our clients, this is where a financial plan from DWM really helps you to know how much to allocate each month to meet your goals. Of course, we also review and offer our advice on fixed expenses and flexible spending as part of our comprehensive financial planning process.

–  Flexible spending makes up the other 30% (or less). This includes things that usually vary month to month like food (both grocery shopping and dining out), hobbies, medical costs, entertainment, shopping, gifts, etc. This portion may be spent on whatever you want or need, as long as you stay within budget.

This guideline is proportional (it uses a percentage of your income for each of the three categories), so it is scalable for all income levels.

We strongly suggest setting up automatic payments/contributions for the fixed expenses and financial goal categories. You will save time, avoid missed or late payments and contributions, and it can help keep your flexible spending portion in line. If 50/20/30 is a big change from your current spending and you are having a hard time cutting your fixed or flexible spending, start with adjusted percentages and continue to make small changes until your budget is in line with your goals. Monitor your actual-vs-budgeted spending monthly to see if your actual percentages are in line with your budget. Once you are consistently finding your percentages are where they should be, you can move on to step three.

  1. Re-evaluate as circumstances change. For example, if you receive a raise or bonus, your mortgage increases, decreases, or is paid off, you buy a new car or pay off an existing loan, when you are no longer saving or paying for college, etc. Otherwise, if you are making all your fixed expenses and financial goal payments/contributions without running up debt from flexible spending expenses, you know you’re doing fine and don’t have to track expenses each month.

So, look at how your income is being spent and be honest with yourself. With DWM on your team, you can develop a budget and make sound financial decisions that help you meet your short and long-term goals. Please contact us to update your plan or learn more about budgeting, saving, or our comprehensive financial planning process. Your future self will thank you.

Financial Literacy for Young People: Math and Family Communication are Key

Child-Financial-LiteracyWe work with families. In some cases, three and even four generations. We love that aspect of our work and we’re often asked about ways to improve financial literacy for young people. Our experience and recent research show that a good understanding of math and regular, excellent family financial communication go a long way.

43 states currently require personal-finance classes to be taught in high school. These classes are intended to produce good long-term financial behavior. Typically, the kids are taught financial facts and strategies long before they even need it. Furthermore, recent studies, including those by Harvard professor Shawn Cole have shown that that these finance classes are not working and there “is virtually no effect of (high school) financial education on (future) behavior.”

However, studies have shown that math has an impact on students’ financial outcomes. Students required to take more math classes ultimately practiced better fiscal responsibility than other students as young adults. This included a greater percentage of investment income as part of their total income and lower rates of home foreclosure and credit-card delinquency. Charlie Wells of the WSJ recently put it this way: “Focus on teaching math-not money.”

Without strong math skills, people tend to use more emotion in their investing, spending and saving patterns. Further, people with less math experience don’t easily understand the concepts and benefits of basic long-term strategies such as exponential growth and compounding. Studies show that people that are comfortable with numbers and making numeric comparisons make better financial decisions.

The other big key is that financial education should begin at home. Unfortunately, that is easier said than done. In fact, a research professor at North Carolina State University has found “parents talk more about sex with their children than they do about money.” Parents need to have a process to include the children in family financial discussions.

Here’s how one family did it. Scott Parker of Encinitas, CA, stopped by his local bank and withdrew his entire monthly salary in cash. In singles. It took 24 hours for the tellers to put his $10,000 request in stacks and bags. At dinner that night, he dumped the money on the kitchen table.

It certainly got the kids’ attention. Parker’s 15 yr. old son initially thought Dad had robbed a bank. After a pause, Mr. Parker and his wife then went through the expenses, taking money off the table for each one. Taxes, house payment, food, car payments, soccer, scouting, tithe for church, hamburger night and everything else. By the end, there wasn’t much left on the table.

This type of exercise is a great example of communicating with your family. Initiate them early, even at 4 or 5, and keep communicating as they grow. Shielding children from the realities of everyday financial life makes little sense, particularly given the financial responsibilities their generation will face.

Communication helps solve a major problem for children. Money is a source of mystery to them. They sense its power and ask many questions: “Why isn’t our house as big as my cousin’s?” Why can’t I get Lego Mindstorms- it’s only $349 and educational?” Adults often do a poor job of answering. They may deflect the question as impolite. Or they may respond defensively. The right way is to use the question as a “teachable moment”- an opportunity to increase the financial education of the child. Of course, this isn’t always easy, especially after a full day or work, school and outside activities.

Over time, the children should understand both the family budget and the choices made in determining it. “What are our needs, wants and wishes?” “What priorities did we determine?” “Why did we make those choices?”

It’s good to have them involved in the decision-making process on certain items. For example, spending money on a high-end family dinner out or putting the money towards the “Disneyland fund.” They see much of the spending. However, credit cards make it difficult for them to quantify items. That’s why Mr. Parker’s bag of money was so instructive.

Wealthy families have special challenges. You may worry that the children will flaunt their good fortune or think they never have to work. Full disclosure may not be the best solution. Rather, involve the children is smaller financial learning experiences requiring math comparisons and making good choices.

Financial literacy is a process. Over time and with regular communication, children will better understand the family budget, key questions, priorities, and choices. And, they will understand the math involved in evaluating choices rationally rather than emotionally. This is particularly valuable when they become teenagers, as they start to make choices about college and student debt and as they move into the working world. A good financial education will help them throughout their lives and hopefully will be passed along to their children someday as well. Our core purpose at DWM is to protect and enhance the net worth and legacy of our client families. Financial literacy for the entire family is a key to meeting that goal. Please let us know if we can help in any way.