How Do We Manage Our Money?
This is part 2 of a series on money. It’s usually one of the first things we discuss in premarital counseling. A few months ago I wrote this post on talking about money in the relationship. Now is the time to take it to the next step and make some decisions on how to manage your money.
But first, let’s take a step back and talk about the big picture.
What is Money Management?
Simply put, money management is making a plan for your money so you can make the most of it. This plan typically involves 4 things.
Budgeting
Saving money
Avoiding or reducing debt and
Investing in your future
Money management goes beyond spending less than you bring in.
Chartered Life Underwriter and Financial Consultant, Marshall Gilman of The Gilman Financial Group told me, “The biggest mistake I see is people living at or above their means and leaving savings to the future. It should be the opposite. If they could live below and "bank" or invest the difference they would be more financially sound when they decide to start a family. When things do get expensive. Savings should be first not last. You don't save what's left in your checking account. You save first! Then what's left over is available for spending. I try to get them on a systematic savings plan. Every month or week is best as if you plan annually there is always a reason not to put it away.”
However, a true sign of financial know-how is saving enough to live comfortably in the long term as well as the short term. But how do you do that?
If learning how to manage your money sounds intimidating or stressful, take it one step at a time. Below are money management tips and resources to help you gain control and, more importantly, peace of mind.
How to Manage Your Money?
Financial advisor, Lukas DeWitt of Proxy Financial told me it is not as simple to answer that question as one might think. He said, “A lot of financial principles revolve around 2 main questions, what is your time horizon and what is your risk tolerance? For a newly wed couple, I would recommend creating a budget and sticking to it. Once established, have monthly or quarterly financial “check ins” to make sure both parties are on the same page.”
But of course, you first need to decide if you want to merge your finances or keep them separate. Are you okay saying that this is OUR money? Or does it feel better to continue to use MINE and YOURS?
Accountant and Accredited Financial Counselor, Jasmine Johnson shared that “many finance people argue that all married couples should combine their money. But, I kinda disagree. It's all up to that couple. Although it is proven that couples who combine money together grow faster together, there are many reasons where the opposite is best.”
Start with a Budget
If you’re not sure how to budget, start by choosing a system that you’ll stick with. A lot of financial professionals mention the 50/30/20 budget plan, which allocates 50% of your income for needs, 30% for wants and 20% for savings and debt repayment. If you want to read more about it, check out this article. This 50/30/20 budget calculator divides your income into these categories.
If the 50/30/20 rules don’t work for you, there are plenty of other budget programs to choose from - from spreadsheets to apps. If you are looking for an app, check out these options.
Use Designated Accounts for Spending and Saving
One way to make money management easier is to keep money designated for bills and budgeted expenses separate from your emergency fund and other savings accounts. This will reduce the temptation to dip into the account to pay for nonemergencies. But if you are saving, please consider what you are saving for. Is it a large expense? For retirement? Or for a rainy day?
Investment Advisor, Chaim Schramm has experience with couples going through divorce. So he spoke with me about the kinds of financial decisions that fuel the kind of resentment.
Schramm said, “The number one piece of financial advice I have for couples is to identify your goals and verbalize the savings that are going to finance them.
If one partner thinks of the Joint Brokerage account they have as a retirement asset, the other partner needs to know that so they’re not doing something that has low odds of surviving until retirement in that account. If a High Yield Savings account is the tax savings fund, everybody needs to know it’s not up for grabs.
It can be healthy to have slush funds that pay for extravagances, but everybody needs to know what is “safe” and what is “play” money.”
Johnson expands on that sentiment. She suggested that couples, “create a system of how money will be received and spent. Whether it is together, splitting bills or taking on a portion of the bills.”
De Witt added, “It’s important to establish different “buckets” for saving money. For example, it’s recommended to have an emergency savings bucket 3-6 months of living expenses. The next bucket is for long term savings including retirement accounts. And finally, brokerage investment accounts. Each “bucket” has a different goal and should be invested differently depending on the goal and when you need access to that money.”
Pay Off Any and All Debt
A strategic approach to debt repayment will help you reach your goal of being debt-free faster. You may want to tackle your most expensive debt — the accounts with the highest interest rates — first. And then do your best to make minimum payments on the rest. Just as you consider looking at your money as “ours” or not, I suggest you do the same thing for the debt. Do you consider your debt MINE or OURS? Can you reduce or release your debt quicker if both of you work repay together?
This is a very personal decision as honor and responsibility come into the picture. Your partner may not want to assist or you may not want them to. However, if you are open to it, consider using windfalls, such as a tax refund or bonus at work, to make a dent in balances.
Invest in Your Financial Future
Set money aside now. A financial professional can suggest what’s best for you. Whether it be an IRA or a 401(k) or a brokerage account - fund an account and let compound interest work its magic. The ultimate goal is long-term financial freedom and stability. To start the process and look at some real numbers, you may want to check out this retirement calculator.
Gilman also said, “I recommend that people first make sure their insurance is correct. Without the proper coverages their assets are at risk. Consider that there is double the exposure as they are 2 now not one. Look into life insurance as they will probably spend based on 2 incomes instead of one.”
Do you have a financial plan? Did any of these tips resonate with you? Do you have any that can be added to this list? The comment section is always open.
I’m here if you want to talk money on a high level. However, I highly recommend these pros if you want to talk numbers!
Marshall H. Gilman CLU, ChFC
President
The Gilman Financial Group
631.533.5043
mgilman@gilmanfg.com
Lukas DeWitt
914.364.3570
New York | Miami | San Francisco
www.proxywealth.com
Jasmine Johnson, Accountant/Accredited Financial Counselor®
www.square1accounting.com
"Chaim" Victor Schramm, CFS®, CAS®, AIF®, CDFS®
Investment Advisor
www.chaim-investment-advisors.com
541.729.0382