FUNDAMENTALS OF FINANCE
A Guide for Helping Professionals
Adam J. McKee
Love and Money
This work is licensed under an Open Educational Resource-Quality Master Source (OER-QMS) License.
Getting married and having kids is a dream to some, and a sort of inevitability to others. It’s just what you do when you grow up. Marriages are legally binding relationships, as is having children. When you take on the responsibility of having kids and spouses, you need to plan for their financial future. This has to be worked into your overall long-term financial plan.
A wise relative may have told you never to talk about money, religion, or politics in polite company—it’s just rude! That advice may be good for a dinner party or a first date, but before you get into a long-term relationship with someone and commingle your finances, you’d better have talked about all three of these things in detail. One of the major learning objectives that I have for this book is for you to understand that personal finance is a dynamic process–it’s constantly changing, evolving, and going down unexpected paths. You can’t just make a budget during college and hope it stays useful through retirement. You should check it at least once a month, and do a detailed restructuring of it at least every year (or every time there is a major life change, such as getting married or having a baby).
Any marriage counselor (or divorce lawyer) can tell you that the ultimate source of marital disharmony is usually one of three things: Kids, sex, and/or money. Many couples avoid talking about money, bills, and debt because it causes bad feelings. The problem is that if these issues are not taken care of in a constructive way, they come out later as anger and resentment. Once things get emotional, you will not likely be able to resolve anything. These conversations are best had over a spreadsheet and a cup of coffee.
Fighting over money is a leading indicator of a future divorce.
Before you seriously entertain marriage (forgive me for not being romantic here!) you should make sure you agree or at least can reach a compromise on the following issues:
Who will work and how much they will make. Nothing affects family finances like that stream of regular paychecks. It should be decided early on who will work, and what they can be expected to make. This is the basis for projecting a budget, which is a critical step in distressing a new marriage once the honeymoon is over. You may not be precise with this, but saying “I plan to be a police officer in the city where we live now” as opposed to “I plan to write fantasy novels while you work” can go a long way toward forming realistic, shared expectations! In these days of high crime, moral decay, and astronomical childcare, many parents are choosing to stay home with their children. This is great if you can make it work, but you need to agree on this before finances get commingled and children are brought into the picture.
Where the family calls home. Some folks are willing to pack up and move across the country for a more rewarding job opportunity. Heck, a free move with a pay raise is an adventure that someone else is paying for! If you have ties to your local community, and cannot imagine leaving your ancestral home, you absolutely must make sure that your partner is going to be happy living with that arrangement. Every couple needs to have open and candid conversations about where they are going to “settle down” before they try to actually settle. As we’ll discuss from a different angle later, location is a huge issue when it comes to income. Staying in Small Town, USA has its quaint charms, but it may have a very large financial cost as well. This decision needs to be made together.
What the budget priorities are. He’s a fun loving outdoorsman, always looking for a new adventure. She’s a home decor aficionado and just loves watching HGTV on weekends. If she wants a $10,000 bath remodel and he wants a $10,000 fishing boat, somebody has to lose. It is much better to establish how much money will go into these various aspects of their life together before any papers get signed. What kind of vehicles will we drive? What kind of home will we live in? How much will go into our retirement accounts? How much will go into savings each month? Where are we most willing to save money in the budget? Where are we least willing to compromise in the budget? Getting down to the details of all these things will take a lot of time and conversation–but that in itself is a good thing to do before making a lifetime commitment to someone.
A few key issues are of monumental importance because of the vast amount of resources involved. How much you plan to spend on a home is key. The smart play is to buy the cheapest, smallest house that you can be comfortable in. I see couples on HGTV searching for a two story 4-bedroom 3-bath homes. That is ridiculous unless you are a real estate guru and know the property will appreciate, or you are planning on opening an orphanage. As your grumpy old professor, I’m suggesting you never pay a lot of square footage that you are not going to really use and that costs you even more money to heat and cool. But you are not building a future with me (well, I hope you retain this book as a reference), but you and your spouse must agree on your philosophy and timeline concerning homes and real estate.
Children may be “gifts from God” as my mother is fond of saying, but it’s your responsibility to raise them once delivered. The average middle-class couple in the United States will spend around half a million dollars raising a child from birth to age 17. That doesn’t even begin a college education. Good parents have to make huge sacrifices; Most of us are happy to do so because we love our children. Before a couple decides to bring children into the world, those sacrifices need to be discussed in great detail, including the financial ones. You can go on a cruise every summer, you can have a couple of kids, but most helping professionals cannot afford to do both (unless they are idiots and do it on credit cards).
Another set of items that are hard to describe I’ll just lump together into “crazy expensive hobbies.” If you or your spouse has a crazy expensive hobby, then both of you need to love that hobby or be willing to bleed money so that the other person can do what they love. I teach in a very rural area in the South, so hunting, horses, and recreational vehicles come to mind. Yours may be exotic wines, European river cruises, mountain climbing, or whatever. If I cannot be happy in life without an $87,000 RV and a huge garage to park it in, then that is something my fiance needs to know before we get married.
Another important point of conflict among couples is the ubiquitous automobile. For some of us, a car is a way to get from Point A to Point B without breaking down or getting wet. For others, cars are our life’s passion–an expression of who we are. Again, my frugal advice is to get a mechanically sound, dependable car for under $10,000 and drive it until the wheels fall off. In my analysis, I’d rather spend my money on something that builds value rather than depreciates. If you must have status symbols in your life, spend extra on a home rather than cars. Houses generally increase in value over time, and cars start bleeding money the minute you drive them off the lot. If you must have a high-end car, then your spouse needs to know about it. They may not be willing to sacrifice so you can have a status symbol in the driveway–or they may steal the keys while you’re in the shower. The important thing is to be in agreement on where vehicles fall on the priority list.
Who makes the most money. It is an inescapable fact: Somebody has to make the most money in any relationship. Often, the person that makes the most money feels like that they should get the most “say” in how the money gets spent. This is selfish and will cause immense problems in your relationship. If you don’t get anything else out of this section, remember these two points:
- Budgeting has to be democratic.
- Everyone has to stick to the budget.
When most people fight over money, it is usually because one or both parties believe that the other is selfishly wasting money. The real truth is that both parties have been blissfully wasting money and not living according to an agreed upon budget. Shame on you both. Agree to resolve the issues as a couple, not cast blame. If the budget cannot be agreed upon because of fundamentally different values, then you are sunk. That is why I recommend a premarital budget so strongly!
Who is in charge of the bank account. Back in my parent’s day, it was expected that married couples would have a joint bank account. Usually with the overtly sexist “Mr. and Mrs. John Doe” at the top. As you might suspect, I believe that bank accounts should be completely democratic as well. They should also, however, be confusion-free. That is why I recommend having THREE checking accounts. Each partner should have a discretionary account that their personal “allowance” goes in, and then there should be a joint account for paying bills. Both parties should have all paychecks deposited into the joint account. At specified times, each party should have a predetermined amount deposited into their personal account. These personal accounts are to cover gas, lunches, hobbies, and so forth. Having a checkbook and two ATM cards on the same account can be disastrous and you’ll never manage to keep up with where the money is going. I do suggest using the same bank and having electronic access to all three accounts where money can be moved back and forth. You will also need at least one savings account with the same bank and same electronic access. When it comes to actually paying the bills, there needs to be a regular system.
I personally use a budget that is divided into two halves of each month and fill in the amount paid in a spreadsheet as I pay each bill (my wife is more than happy for me to keep up with the math for the partnership). I started doing this because I get paid twice a month, and I’ve equally divided those check according to upcoming due dates. When due dates fall all over the place, it is sometimes difficult to pay all of the bills for an entire month all at once. Any system that gets your bills paid on time will work, but you need a consistent way of doing things such that nothing can be forgotten. As we’ll discuss later, paying bills on time can protect your credit score and save you thousands of dollars over time.
What happens if things don’t work out. When you are in love, some guy telling you to plan for disaster is not at all what you want to hear. Still, about half of the marriages in the United States today end in divorce. Who knows how many relationships end badly? I strongly suggest (as unromantic as it is) that every couple have a prenuptial agreement prior to entering into a legally binding joint venture. Who gets the house? Does the person leaving buy the other person out? How will the joint property be divided? How will joint bills be handled? Getting a divorce can be traumatic; a courtroom battle over furniture is not something you need to be added to your pain.
What the other person is bringing to the table. If your true love has six cats and you are allergic, that is something that needs to be discussed before you move in together. In a similar vein, you need to know what kind of debts and liabilities your significant other is bringing into the relationship. If both parties have preexisting debt, then combining that debt can be a huge burden on family finance. Nothing is quite as devastating as finding out that your true love is mere days from having to file bankruptcy to keep the home that you share.
If you don’t have some kind of plan, you can easily get dragged down with them. When you come into a relationship, you are an individual and you have your own individual financial history. Each party should make an effort to clean up their credit scores and debts before getting into a new relationship, and each should strive to keep it healthy during the relationship. It has oft been said that “true love can find a way”—that is true, but, when it comes to personal finance, true love will need the assistance of a spreadsheet.
Relatives and Friends
Most people are decent human beings and want to help other people when they see them in need. When we see friends and extended family members in troubled financial times, we often desire to help. If we have the money, we often extend our love and support in the form of a loan. Resist this temptation at all costs. Nothing hurts and ends friendships like one friend owing the other money. Most people that take out personal loans for friends need the loan precisely because they are poor money managers living beyond their means. Your friend may have the best of intentions, but given a poor track record with money, they will likely be unable t5o pay you back when the time comes. If you want to help your friend fill in the financial gaps, then give them a gift. Gifts strengthen social bonds, and there is no bitterness to come because gifts need not be repaid.
The same advice applies to cosigning a loan for a friend or relative. The bank wants a cosigner because, in their considerable experience, your friend is likely to not be able to pay the money back when the time comes. Cosigning a loan can ruin your credit along with the friend’s. Every time a payment is late, your credit score takes a hit. You will not be informed of this until you check your credit scores and notice that it keeps falling, or until your friend is in default on the loan and the bank comes to you (often with a court summons) looking for the entire value of the loan. Never take on responsibility for a loan that you cannot afford to pay back.
References and Further Reading
To get an idea of how expensive children are, check out the following interactive tool on the CNN Money website: http://money.cnn.com/interactive/pf/cost-of-children/