Monthly Archives: March 2015

Marriage and Money Talk

marriage and money

Marriage for love?

Some people marry for love, some marry for money, and others marry because “it’s the right thing to do.” No matter the underlying reason for marriage, finances should always be a topic of discussion before tying the knot.

Start with yourself

Before you start any discussions with your soon-to-be-spouse, you need to take a look at your own personal financial situation. Sit down and ask yourself the same financial questions you would likely discuss.

Am I financially stable? Savings? Checking? Investments?

Do I have an emergency fund in case of unforeseen expenses? This should be 3-6 months of expenses.

How much do I bring home every month?

What are my spending habits? Am I a frugal, extravagant, or average spender?

Do I have any outstanding debts? Car loans, student loans, loan sharks? How much does that take away every month?

How is your credit score? If you don’t know, maybe it’s time to find out. After all, it’s your combined credit scores that will affect your interest rates in the future.

What are my financial goals? Short-term, intermediate-term, and long-term?

What is my investment strategy and risk tolerance?

Questions such as these allow you to better understand your own financial situation and position and figure out what you bring to the table. After all, it’s a discussion about mutual finances and the combined finances and goals of the partners in life.

Marriage is all about compromises (happy wife = happy life).. or so I’ve been told. Start thinking about things you are willing to compromise with in terms of your finances (decreased spending on electronics, getting a minivan for those future children, etc) because those are the types of things that will come up sooner or later in your marriage.

It’s almost like you are going into a business negotiation. Go prepared!

Ask your future spouse-to-be

Now that you’ve taken a look at your own personal finances, the next or concurrent step (maybe you should ask him/her to do the same when you look at your own finances) is to ask your future partner to take a look at his/her own personal finances in preparation for a discussion about future money habits and financial goals.

This way, they can also prepare both mentally and strategically for a very important discussion that sets a foundation for your financial future. Nothing is worse than having something this important sprung on you when you’re not prepared for something like this. Plus, you want to be sure that this sets a strong foundation and not a passive-aggressive balsa wood frame.

Once you’ve both gotten everything in order, set a date to talk about this and be sure to come open-minded.

Have “The Talk”

This shouldn’t really be a bad or ominous discussion. It should be an open-minded discussion between two partners about where they want their financial future to be and where they think it should be headed.

It is a way for you to brainstorm ideas and come to a consensus and compromise as to the best and most effective and equal (between the two of you) way to attain your combined financial goals. After all, two heads are better than one.

In addition to the “individual” finances that you should discuss as a financial family unit, there are several other things that need to be addressed once those finances are merged.

Are you going to consolidate all your accounts into one or two joint savings/checking accounts? Or are you going to have one joint account for bills and joint expenses and still continue to have separate accounts for discretionary spending?

Having separate accounts isn’t necessarily a bad thing. I’m almost 99.99% positive that all couples have some type of individual account. I can’t very well say 100% since I don’t know anybody.

Having separate accounts allows for separation of responsibility. A joint account to pay off bills and other joint expenses allows for joint ownership in both the money going into the account as well as the expenses incurred to be deducted from the account. Both parties are responsible for the balance of that account.

Your individual account may be there for a personal financial goal or for some spending money on a night out with the boys or a girls night out. Any large (monetary value is determined on a personal basis) should probably be discussed between both parties. The exception is a gift to the other party.

This way, you don’t have to feel guilty about spending $50 on a night hanging out with your friends and have to always be held accountable with your partner.

What about your financial goals? Do they align with each other? If not, how can you make a compromise and still make it all work?

What about your investing risk tolerance? Do you have the same tolerance? Will some convincing need to be done in order to obtain the best risk/reward ratio for your investments?

What about the future? A new house? Kids? A dog? All of these things will incur some sort of increased spending and increase your debt burden. It is good to come to a mutual understanding regarding big life events such as these with your partner before the time actually comes and it turns out you have completely different wishes.

Marriage and Money = Business

Marriage is essentially a business deal between two people who may or may not be romantically and/or emotionally involved. I say this because some people really do make marriage a business deal for tax purposes or whatever else.

The point is, before you jump into marriage head first, make sure you get your finances in order and have that financial talk to make sure that you are both on the same page.

You don’t want your finances to be in complete ruin when two people are messing around with the finances at the same time in completely different directions. It’s like having two heads that don’t talk to each other.

Fortunately for me, my wife and I are pretty much on the same page in terms of financial goals and spending habits. The only thing she doesn’t like is my higher-than-her risk of investing style of speculative high growth stocks. For that, I simply do that type of investing in my own personal Roth IRA.

 

Congratulations in your upcoming marriage and I hope this helped in setting a strong foundation for your joint financial future! ūüôā

Investing 101 – A beginner’s guide

beginner investing 101

You hear about the stock market hitting new highs and the economy going up and down and the job market is getting better, interest rates are rising, housing market this and that and you want some of the action.

But first things first..

Do you have an emergency fund set up already? If not, please take a look at setting an emergency fund up now and how important it is to have one for a rainy day.

Do you have high interest debt? Interest from credit card balances will far exceed any returns from the stock market in the long run, so pay them off before throwing your money into the stock market. Take a look at reducing and eliminating debt before investing anything.

Getting started with investing

If you are a first time investor, you probably don’t have thousands upon thousands of dollars sitting idly to throw into the stock market at this time. Investing in individual stocks is also a time-consuming endeavor, from researching stocks, fundamentals, news, etc., and it can often be overwhelming at times.

Fortunately, there is an easy way to get your feet wet in the world of investing with even just a small sum of money.

Fidelity allows you to open an IRA with recurring $200 per month automatic investments that waives the $2,500 minimum to open an account.

Charles Schwab has a $1,000 minimum opening balance that is waived with a $100 minimum monthly transfer via direct deposit or Schwab MoneyLink.

Both Fidelity and Schwab have many mutual funds and index funds that have no trading fees. Many do have a short-term holding period fee of 90 days. These funds are really meant to be bought and held for many years to accumulate compounding growth with reinvested dividends and capital gains.

If you do have at least $1,000 to invest, the Vanguard STAR Fund that has a minimum opening balance of $1,000 that tracks eleven actively managed Vanguard funds. The minimum for the majority of Vanguard funds do however start at $3,000, and if you do have the money to invest, Vanguard is a favorite of mine to use when investing in mutual funds.

I do have investment accounts with Vanguard, and their low fees and great track record is definitely a place for investors that want to put money in a mutual fund or index fund and let that money sit and grow for years to come.

Open an account

Take a look at different companies and the funds they offer and pick out some that you are interested in. View each fund prospectus, which contains details on a fund’s objectives, investment strategies, risks, performance, distributions, and fees and expenses. This will tell you whether or not a particular fund is in line with your objectives, your risk tolerance, and your investment strategy.

Be sure to review all necessary documentation before investing in any fund as there is no guarantee on returns.

Once you decide where you want to open up an account, the next step is to jump in headfirst and actually open one up. These days, you can open an account up online in a couple of minutes and the verification process generally takes a day or two.

Voila! Your new account is set up and ready to go.

Funding your account

Once you have your shiny new account set up, typically you will need to set up an account from which to transfer money from. This is generally done using electronic bank transfers in which you would need your bank account number and the routing number.

Put savings on auto-pilot

To put the story short, if you are brand new to investing and want to get your feet wet, investing in mutual funds are the best way to go. They tend to be low maintenance and you can easily diversify your portfolio with a couple of funds.

Setting up automatic contributions is a great  way to set investing and savings on auto-pilot and average out your cost basis. Also, make sure to reinvest any dividends and/or capital gains to allow for compounding to really make your money grow.

Once you set up automatic investments, you can check back and re-balance as needed quarterly or twice a year¬†and odds are, you won’t even feel the money being taken out of your account.

What’s next?

You can certainly continue to contribute, but as you age and become more knowledgeable about the world of investing, your objectives may change, and you may want to invest in individual stocks, bonds, currencies, options, etc. There’s a whole world out there to invest in. Get out there and start learning and take control of your own investments and build your own personal wealth.

You can take a look at my investment strategy for 2015 and maybe it’ll help you out too. I am certainly open to comments and questions as always.

Paying down debt

Emergency account funded, now what?

Now that you have your emergency account opened and funded to cover at least three months of expenses, it’s time to start the journey in becoming debt free!

It is certainly worthwhile to continue to contribute to your emergency fund until you reach six month’s expenses, but now we can start to focus on reducing and eliminating debt.

Types of debt

Bad debt

This includes things such as credit card balances (this includes your store credit cards) and auto loans.

Carrying a credit card balance and not paying off the entire amount each month generally results in high interest accumulation that typically compounds each month it remains only partially paid off. This can often snowball into a sizeable sum in a short period of time depending on spending habits. It is recommended that you pay off all credit card balances in full each and every month to avoid interest accumulation. The average credit card interest rate stands at 15.07% with a maximum allowable at 29.99%. Not even the stock market can guarantee returns like that every single year!

Auto loans are also considered bad debt because the value of the car immediately drops when you sign those papers, even before you actually drive the car off the dealership lot. The instant and continued depreciation of a vehicle coupled with a fixed loan amount and a repayment option makes an auto loan a bad debt to carry. You can always buy a solid, used car that will run for years for cheap.

Good debt

Good debt is something that gives back and generates value. This includes mortgages and student loans.

Buying a home and taking on a mortgage does not immediately cause the home to depreciate in value. In addition, it creates value in giving you a place to live with the potential of increasing in value. Mortgage interest paid can also be taken as a deduction if you itemize your taxes when it comes time to file. Good debt.

I’ll be completely honest and say even though student loans are considered good debt, I believe there has to be enough return on investment to consider it a good debt. Taking on 100k in student loans to graduate in a major that results in a career ceiling of 40k salary per year does not seem like taking on “good debt” to me. Student loans have to be reasonable for the associated career upon completion, otherwise it does not create enough value to incur that debt in the first place. Just like mortgage loan interest, student loan interest paid can also be taken as a deduction during tax season.

Start with the highest interest rates

interest rates can snowball debts out of control

Interest rates can snowball debts out of control

Always pay off at least the minimum amount each month towards each debt that you have, otherwise they will charge you with hefty fees that will only increase your debt burden (no point giving them any more money than you have to).

First, calculate the minimum monthly payment for each outstanding debt you have and add them up. This is your total monthly debt repayment. Add this amount to your regular monthly expenses and subtract that from your monthly income. Take whatever amount is remaining or left over and put that towards paying off the debt with the highest interest rate.

If you want, you can even put aside a little bit of what you have remaining towards getting that emergency fund up to 6 months expenses, and then put the rest into paying off that high interest debt.

Once the highest interest debt is completely paid off, take the monthly payment you were making for the first debt and apply it to your second highest interest loan until that one is paid off and continue on. This way, your payment toward reducing debt is the same each month, but you will be reducing your debt load so much faster by snowballing your debt reduction payments down the line from highest interest rate down.

Surprisingly, by paying down debt, you will more than like take your net worth from a negative to a positive amount, and you can certainly give yourself a pat on the back once all your bad debts are completely paid off. If you are interested in learning about net worth, you can take a look at my discussion about whether or not you should be tracking your net worth.

Time to start building wealth

Once your debts are paid off, try not to accumulate any more bad debt. By paying off these debts, it frees up money that can be used to build financial wealth and create stability in your life.

If you are curious, you can check out my investment strategy for 2015 and let me know what you think.