Getting married or moving in with your partner inevitably changes things — your finances included.
Learning to manage your money together does not have to be overwhelming. It’s something any couple can do, as long as you put in the work. “If the two of you don’t make your finances a priority, they won’t be one,” writes self-made millionaire and financial adviser David Bach in his book, “Smart Couples Finish Rich.”
Plus, two heads are generally better than one, and “the sooner you start working together, the more quickly you can dramatically improve your financial picture,” says Bach.
Get started on a path to a rich future for you and your partner by following these 10 steps:
1. Talk about money
“Smart couples talk about money all the time,” explains Bach. “When you work together on your finances, you can compound the results. When you don’t, the same can be said for the mistakes you will invariably make.”
You’ll want to start by understanding the financial background of your partner, finding out how your partner feels about money, and what they consider to be its purpose in their life. This will allow you to understand how they make financial decisions.
Next, you can discuss the more concrete details, such as who is responsible for paying which bills or whether you want a joint account.
“You shouldn’t assume that both you and your partner are somehow automatically on the same page when it comes to the question of how you are going to organize your finances and who is going to be responsible for what,” writes Bach. “If you haven’t already done so, the two of you need to sit down together and specifically work all this out. The alternative is chaos and potentially major strife.”
2. Write down specific goals
The first step to achieving anything is to figure out precisely what it is you’re after. What do you and your partner want? It could be a vacation home, more wealth, or being able to travel the world together.
“Make your goals specific, detailed, and with a finish line,” Bach writes. Next, write them down: “People who write down their financial goals get rich. It’s a fact. Study after study has shown that writing down your goals makes it much more likely that you’ll achieve them.”
Finally, get started right away — within 48 hours, Bach suggests. “By taking this sort of specific immediate action, my goal becomes even more real to me and thus even more exciting,” he explains. “It’s this excitement that will ultimately create the lasting energy the two of you will need in order to see your goal through to reality.”
3. Create a plan
“Failing to plan together is the same as planning to fail together,” writes Bach. Simply going through the motions won’t cut it — finishing rich requires a written financial plan to outline your budget and savings goals.
Step one is to understand where you’re starting from: “Could you tell me your net worth? Do you know what your assets and liabilities and expenses are? Could you easily list on a piece of paper what investments you own, how much equity you have in your home, and on what and to whom you owe money?” If you couldn’t come up with any answers, don’t worry. That’s normal, Bach assures.
Start by addressing those questions. Next, get organized by pulling together your financial records and setting up a new filing system. Once you’re organized, don’t stop there, Bach emphasizes: “In order to stay on track from your starting point to your destination, you have to monitor your progress.” This means revisiting your investments and general financial plan a couple times a year.
4. Check your spending habits
The simplest way to finish rich is to save more, which all begins with spending less. This is easier said than done. “There’s no getting around it. Money is easy to waste,” writes Bach. “It’s especially easy to waste on the small stuff … The challenge is that the small stuff adds up — and before you know it, you’ve cost yourself millions.”
To draw awareness to how easy it is to spend, and to help curb overspending, he suggests a weeklong challenge: Track your expenses for seven days, writing down every expenditure.Spend as you normally would and don’t drastically change your habits out of fear of what you may find, he encourages.
After seven days of diligent recording, analyze your list together. “Start by sharing what you are going to start cutting out, not what you suggest your partner cut out,” he advises.
“The reason this simple concept is so important is that if you can get yourself to believe you can find an additional $10 a day to put away in a retirement account, you can begin to take advantage of the concept called the ‘miracle of compound interest,'” Bach writes.
5. Set aside at least 10% of your income
“If you and your partner are not currently putting 10% of your pretax income into a pretax retirement account, you are heading for trouble,” Bach states.
Paying yourself first is no revolutionary or glamorous concept, but it’s critical to accumulating wealth over time.
If you’re not comfortable making a 10% contribution right away, it’s better to start small than not start at all. In fact, Bach started his own savings by setting aside a mere 1%. Over time, he gradually increased his percentage — from 3% to 10% to 15% — until he reached 20%. Once you’ve decided on a percentage to contribute, make it automatic, Bach stresses. This way, you’ll never even see the money and you’ll learn to live without it.
“You’d be amazed how effortlessly you can learn to live on a little less,” he assures. “You can’t spend what you don’t have in your pocket.”
6. Save for a rainy day
Things don’t always go as planned. People lose their jobs, businesses go up in flames, and breadwinners get sick. You’ll want to hope for the best, but prepare for the worst by building an emergency fund.
“You and your partner should have a heart-to-heart talk about your spending, your ability to maintain your income stream if one or both of you was to lose your job, and what I call your ‘sleep at night’ factor,” writes Bach. “This ‘sleep at night’ number is different for everyone — including partners. Almost invariably, one of you will require more of a financial security blanket than the other to be able to sleep well at night.”
Bach suggests having a minimum of three months’ worth of expenses. “You need to decidetogether what makes sense for the two of you as a couple,” he says. “If you’re in doubt about how much cash to keep in your security basket, err on the side of caution and save more, not less.” Up to a point, that is — anything more than 24 months’ worth of expenses saved is overkill, he notes.
7. Dare to dream
Dreaming is not just for kids. Bach challenges you and your partner to think big: “What do the two of you want to do that is totally fun, totally crazy, totally outrageous? Do you want to travel around the world? Go wine-tasting in Tuscany? Swim with the dolphins in Hawaii? Build your dream home with that dream kitchen?”
Every adult deserves to dream, but there’s also a financial advantage to dreaming big, Bach explains: “Many people don’t bother to change their spending habits or start saving simply because their future doesn’t seem compelling enough to motivate them. But nothing creates leverage and motivation like a dream.”
What’s more, “people stop dreaming because they don’t have the money it takes to transform their dreams into reality,” Bach writes. “Just as you secured your future by deciding to pay yourself first a fixed percentage of your income for your retirement basket, now you’re going to fund your dreams by committing to pay yourself an additional fixed percentage of your income that will go into your dream basket.”
The trick to building your dream basket is to contribute money on a regular basis. To ensure you won’t skimp on savings, make it automatic. The amount you choose to save is completely up to you and your partner, but Bach suggests setting aside 3% of your after-tax income.
8. Pay your mortgage off early
“Thirty-year mortgages are probably the most popular form of home financing around. They are also, in my opinion, the single biggest financial mistake people make in this country,” Bach writes.
The longer you take to pay off your mortgage, the more interest you’ll have to pay, and interest can add up to over $100,000 over the lifetime of the loan. To get a better idea of how much interest you’ll end up paying, use an online mortgage calculator.
Bach doesn’t suggest ditching your 30-year mortgage if you already have one. “The fact is, 30-year mortgages give you a ton of flexibility,” he explains. “By all means take out a 30-year mortgage, but under no circumstances should you take the full 30 years to repay it … A much smarter decision is to pay off your 30-year mortgage early.”
He recommends reviewing your last mortgage payment and adding 10% to that number. “That’s how much you’re going to send the bank next month, and every month thereafter … If you keep this up, you’ll wind up paying off your 30-year mortgage in about 22 years … In short, this is a simple idea that can easily save you tens — if not hundreds — of thousands of dollars in interest over the lifetime of your mortgage.”
Call up your bank or mortgage company to let them know you want to pay them earlier than the schedule calls for, and make sure there are no penalties for paying it off sooner.
9. Tackle any lingering debt
“Credit card debt can destroy a marriage,” says Bach. “I don’t care how much two people may love each other, if one of them is constantly spending the couple into debt, I can promise you that eventually the relationship will fall apart. If both parties are running up debts, it will simply end that much sooner.”
If it’s your partner who has accumulated mounds of debt, encourage him or her to work on erasing those balances as soon as possible. While you’re not technically responsible for debt they acquired prior to your marriage, it becomes a collective hindrance as your finances merge.
Also, don’t wait to talk about credit scores until you’re about to make a major purchase. You don’t want there to be any unpleasant surprises when you and your partner go to a mortgage company to get pre-approved, for example, and you’re rejected because one of you has terrible credit.
10. Save for kids
Kids are pricey. The USDA says the average cost to raise one is about $245,000, and that doesn’t include college expenses. To get an idea of what you might need to cover, read about thecosts new parents didn’t see coming.
The best way to prepare for these expenses is to start setting aside money as early as possible. As soon as your kid is born, consider opening a 529 savings plan — a state-sponsored, tax-advantaged investment account — to cover the costs of college. These plans allow a parent to contribute up to $14,000 per year ($28,000 for a couple) for each of their children’s college educations. It also allows anyone — a grandparent, godparent, or particularly generous neighbor — to contribute to the fund.
However, before you start tackling college, make sure you’re setting aside enough for retirement, Bach emphasizes: “You shouldn’t even consider putting aside money for your kids’ college costs unless you are already putting at least 10% of your income into a pretax retirement account. Your security basket comes first. College funding comes second … The greatest gift you can give your children is to ensure that you won’t be a financial burden to them.”