Financial Priority One of the hardest things in a relationship is agreeing on how money should be spent. BY NORMAN BING
Steve Cooper, hitched
It's important to know where your money should be going.
My husband and I can’t seem to agree on the how to prioritize our finances. How can we come to an agreement?
Although you and your spouse disagree on some ways of managing your finances, one thing you are in agreement with is the need to discuss your approach to finances. You should examine your finances from a holistic viewpoint instead of just one piece of the pie. Begin with creating a financial strategy that prioritizes your finances based on your goals as a couple. Some elements, listed in order of importance are:
Creating an emergency fund. Regardless of your financial situation, it’s always a good idea to have enough cash saved to support you and your spouse through at least three months’ worth of expenses. You never know when an unexpected financial emergency may arise. This should be your first priority.
Saving for retirement. The next step in prioritizing finances should be saving for retirement—the earlier the better. Start by putting money away in tax-advantaged accounts such as Roth IRAs or company-sponsored 401(k)s. Maximize your 401(k) contributions if you can, as contributions are made pre-tax and will reduce your taxable income; some companies even match your contribution, so be sure to take full advantage. A traditional IRA is another great savings vehicle that can offer couples greater flexibility with contributions being tax-deferred.
Consider saving for your children’s future. The cost of college continues to increase and it’s never too early to save for this expense. If you have children or are considering them, college saving vehicles like a 529 plan can offer significant tax advantages, are flexible in that they allow anyone to contribute, have high contribution limits, and investments in this type of plan become more conservative as your child nears college age. Make sure to do your research, as some states offer additional state tax incentives. Remember, your children can take out loans for college, but you can’t take out a loan for your retirement, so be sure to plan for yourselves first.
Assessing and developing a plan to pay down your debt. Consumer debt, such as interest on car loans and credit cards, is non-deductible—it’s the worst kind of debt to have. Depending on your financial situation, it should be paid off first after you create the emergency fund and put away some for retirement. Specifically, pay down debts with the highest interest rates—not necessarily those with the highest balances. A financial advisor can help you integrate debt in your wealth management strategy as not all debt is deemed "bad debt." For example, if you have a credit card with a zero percent interest rate or your home mortgage is around four percent, instead of paying down that debt, contribute to a retirement savings program. The retirement vehicles previously discussed often provide a higher net gain than the interest rate on the mortgage or credit card. By not significantly paying down the “good debt” immediately, some of your money will be freed up for your other financial priorities.
Each couple’s financial situation is different and it isn’t always easy to prioritize your financial obligations, but consulting with a qualified financial advisor can help you tailor a plan to fit your needs. By developing a financial roadmap that outlines your goals, while considering both your assets and liabilities, you and your spouse can see the areas of your finances that may need more attention. This will ultimately help you and your spouse make smart decisions on reaching a financial agreement.
Norman Bing is a Wealth Management Advisor for Merrill Lynch in Doylestown, Pa., with more than 28 years of professional experience. He can be reached at (215) 340-3318 or via e-mail at Norman_Bing@ml.com
Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither Merrill Lynch nor its Financial Advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.
Before you invest in a 529 plan, request an official statement and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses and risks of investing in the 529 plan, which you should consider before investing.