Q: My boyfriend and I recently got married and started living together for weeks now. We both earn salaries from our full-time jobs to take care of our household expenses. We want to start saving money for our future but don’t know how to prioritize our finances? Can you advise? – Mary Anne, by email
Many young couples experience some tension over finances during the early years of their marriage because of differences in values and priorities. Your spouse may not share the same beliefs with you when it comes to spending and saving money. In order to have financial harmony, it is important that married couples discuss the dreams and goals that they want to achieve as family.
When couples understand the financial goals that they need to work on, budgeting family finances may become easier because each one will appreciate the need to save and invest for their future. Sometimes couples also need to adjust their individual lifestyles to suit new standards of living.
Planning your family finances takes a lot of personal sacrifices and discipline. This includes giving up some discretionary expenses in order to contribute savings to the family fund. As you create your financial plan for the future, here are the five most important financial decisions every young couple needs to consider:
1. How much emergency savings do we need?
While you may have budgeted all your household expenses, there will always be instances where you may need cash to pay for emergency needs. An old rule of thumb says that you must keep cash savings equivalent to at least three months’ worth of expenses but in reality, you may need a higher amount of stand-by fund depending on your financial situation.
It will help if you can identify the potential financial risks that can happen to you anytime. For example, the risk that you may encounter some accidents, or expenses for when you get hospitalized for some illness. You can cover these type of risks by getting insurance to limit your emergency cash exposure.
2. How do we handle debt?
If you already have credit card debts existing prior to getting married, you should both decide on how to resolve it. You have to find ways on how to repay it instead of avoiding it to prevent a crisis later on. It will be your responsibility as a couple to face every debt problem and get rid of it as soon as possible. When you are free of bad debts, your cash flow savings will be healthier.
Now, not every debt is bad. There are debts that are good when you use it for investment. For example, if you are considering investing in a condominium that you intend to rent out, instead of paying it full in cash, you can prefer to borrow from the bank. The rental payment that you will collect can be used to pay off your amortization. If there is excess from the rental payment collection over bank payments, that will be additional income.
Over time, once the property is fully paid from rentals, the ownership will be fully transferred to you and by that time, the market value of the property will also be higher, which you can use as your security for your children’s education later on if needed.
3. How can we afford to buy a house?
It is every couple’s dream to have their own house but before you decide to pay down payment to buy your own house, make sure that you can afford to pay the monthly amortization.
This is different from borrowing money to buy a house for rental income. In this case, you will be buying a house for your own consumption because you will be staying there. The payment for the bank amortization will come from your regular income as a couple.
If you think your cash flows are not yet solid to afford the monthly amortization, you can defer buying a house and wait for the right opportunity.
It is better to wait than risk losing your house later on. There are young couples who rush into buying a house only to lose it later to bank foreclosures due to inability to pay monthly payment amortizations. Although there are some who are able to squeeze their cash flows to cope with the bank payments, their standard of living suffers terribly.
4. How can we afford to have children?
Raising a child can cost a lot of money. Newly married couples must plan when they can afford to have a baby. The average time a newly married couple waits before having a baby is about three years. The three-year period may be enough for couples to adjust and prepare financially to support a child.
If you are doing your financial planning, it is important that you plan beforehand how many children you want to have in the future because each child is a financial budget. When you have a financial plan in place, it will be helpful if you can identify when and how you will finance every new child.
5. How should we plan for retirement?
It is good to start early in planning for retirement while still young because you have a longer time horizon. When you have about 30 or 40 years to prepare for your retirement, you can afford to invest just a little amount of savings every year and still achieve your goal by the time you retire.
When you are younger, you can also afford to take more risks in investing to have a chance of earning higher returns. For example, you can allocate a bigger portion of your portfolio into stocks than fixed income investment. Taking more risks does not guarantee you higher returns but because you are younger, you can always have the chance to recover your losses if you make mistakes.
Your goal in retirement planning is to accumulate enough savings fund that will take care of your annual living expenses when you have decided to stop working.
As you prepare your financial plan, it will be helpful if you can consult someone competent in this field, a Registered Financial Planner (RFP) who can give you independent advise. An RFP can help design your retirement plan and help you compute the amount you need to save on a monthly basis and investment vehicles where you can place your money.
Henry Ong, RFP, is president of Business Sense Financial Advisors. Email Henry for business advice firstname.lastname@example.org or follow him on Twitter @henryong888