The To Do’s Before the I Do’s

As December gets underway our minds are on the holidays, but there’s another season that is upon us: coupling. Christmas Day continues to be the most popular day for marriage proposals, and a large swath of engagements will take place starting the week before Christmas through New Year’s Day. Popping the question (and saying yes!) means you’ve found your perfect match, but too often couples swipe left when it comes to finding financial compatibility.

That doesn’t mean that the betrotheds need to make the same in terms of income or have had a similar upbringing relative to money. What’s most important is that the Mr. and Mrs. to be — or Mr. and Mr., or Mrs. and Mrs. — have open and honest conversations about their individual financial situations as early as possible.

However, that conversation isn’t always easy. It usually begins with the daunting “We need to talk about money” opener, followed by an often tense conversation. In fact, according to the American Psychological Association’s (APA) 2014 Stress in America Survey, almost a third of adults with partners reported that money is a major source of conflict in their relationship, whether you’re married or just cohabitating. Further, according to research by Experian, 33% of newly married couples said their spouse’s spending habits are different than what they expected.

But money doesn’t have to be the elephant in the room. In fact, getting more intimate with your finances is actually very healthy. So today we’ll talk about the most important things to address relative to you and your partner’s finances, which hopefully will eliminate a lot of stress and anxiety down the road.

The Ghosts of Spending Past

Similar to Dickens’ iconic character Ebenezer Scrooge, the way we view money is influenced by our experiences in childhood. There have been myriad studies focused on financial socialization and the role that families play. Researchers have found that both active parental coaching, as well as passive observations of parents saving and managing money influences your money habits in adulthood. For instance, if you grew up with a lot of material things and the belief that you need to show off that you’re successful, chances are you might be focused on status and live outside your means as an adult. Conversely, if you grew up believing that saving for the future was the most important and that every penny counts, you could be inclined to be more honest about money and make decisions that support financial security. However, that doesn’t mean you’re “stuck” with that particular imprint. You can reshape your beliefs about money based on the values you develop as an adult, and often those values can be influenced by your partner.

Wedding Bells Bills

Once he or she says “yes”, the wedding planning begins. The wedding ceremony is likely the first large expense a couple will have to face, and your upbringing can again play a role in how much you spend on the event. According to research by WeddingWire, last year the average cost of a wedding was $37,000 when you factor in the ring, ceremony and honeymoon (and you can tack on an extra $15k if you live in a major metropolitan area like New York or San Francisco). Thus, couples who are footing the bill themselves should discuss what they can honestly afford before they get carried away planning the perfect day (or hiring a costly wedding planner, an expense that runs about $2,000 on average). The dream is to have a white wedding, so you don’t want to start out in the red.

Head Over Heels…in Debt?

Wedding costs aside, another money issue from the past that often haunts couples is debt. According to a study by Experian, millennials’ average credit score is 625 and their average debt (excluding mortgages) is $26,485. For Gen X-ers, those figures are 650 and $26,670, respectively. In another study about newlyweds, 33% entered marriage unaware of the amount of their spouse’s student loan debt, while 40% didn’t know their spouse’s credit score. While having debt should by no means be a deal breaker, being forthcoming about your financial situation is really important. Like it or not, once you’re married your spouse’s liabilities can become your problem, so it’s important to work together to pay down debt and building up an emergency fund before you start investing for the future.

A common issue among married couples is secret spending. Research by Experian reveals men typically spend an average of $1,259 before mentioning it to their partner, while women spend an average of $383 prior to saying anything. Of those who admitted to maintaining a clandestine financial account, 61% were male and 39% were female. But practicing good financial hygiene as a couple doesn’t mean that either has to be a killjoy. Understanding your complete financial picture will help you determine where you have wiggle room so you can ease the tension and decide on a monthly amount of “fun money” that each person can freely spend. Keep in mind some of that surplus might have to go towards attending the weddings of your friends who came to yours, which on average costs almost $900 per person!

 What’s Mine is Yours 🙂

According to research by TD Bank almost 25% of couples keep all of their financial accounts separate. But that’s not a good solution. Even with separate finances, your spouse’s credit score will affect your ability to get joint credit, which can impact a number of important life decisions. Further, 401(k)s, which almost all married couples manage separately, are considered marital assets. A healthy relationship depends on working jointly toward your financial goals. An important place for couples to start is understanding what investment risk they are willing to take as a unit. We previously wrote about this, and offer advice based on your time horizon.

Your Path Ahead

Conversations about money between couples often hover around the idea of values. And while that’s an important place to start, it’s in the specific situations that your values are put to the test. So talking about the different scenarios (like going to work for an early-stage startup, buying your first house, having kids), as well as your background relative to money helps get a better understanding of your financial compatibility.

It’s also critically important to see real numbers and data when it comes to planning for your most important financial goals. Many couples will seek out a financial planner to help get a handle on their finances, but that can be a costly and time-consuming option. At Wealthfront we believe that process should actually be enjoyable, so we built Path, which we think is the future of financial planning. Path offers couples a way to “play to learn” with an interactive and fully automated experience that helps you understand what’s possible together. By linking your individual accounts you can start to understand how those scenarios will play out rather than making guesses. Further, it’s something that you can monitor often (and together) without additional costs and paperwork. In fact, when we launched Path earlier this year we actually received feedback that it made money conversations easier because it was kind of fun. While we don’t take all the credit for our clients’ marital bliss, we do think we’re onto something.

Your wedding day is symbolically the beginning of the future with your partner, so you should have an open conversation around what kind of debt is coming into the marriage, as well as how much the wedding of your dreams is going to add to the deficit. It might not sound as exciting as picking out the perfect photographer or band, but certainly will bring peace of mind.

Disclosure

Nothing in this communication should be construed as an offer, recommendation, or solicitation to buy or sell any security. Wealthfront’s financial advisory and planning services, provided to investors who become clients pursuant to a written agreement, are designed to aid our clients in preparing for their financial futures and allow them to personalize their assumptions for their portfolios. Additionally, Wealthfront and its affiliates do not provide tax advice and investors are encouraged to consult with their personal tax advisors.

All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance. Wealthfront and its affiliates rely on information from various sources believed to be reliable, including clients and third parties, but cannot guarantee the accuracy and completeness of that information.


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