Planning ‘Two’gether - Financial Planning For Newlyweds

2006-12-04

Getting married changes your life. From being sole arbiter of all you do, the change to doing things together, especially in the way you decide and the when you do things, can be quite significant. The same holds true for your financial planning; it’s no longer just your goal, but your goals together. Even when you’ve been quite successful in managing your money, be prepared for changes ahead. It needs as much effort as a successful business merger, or more.

When Mike and Rose got married last year, both had been managing extremely well. Mike works with a large IT firm in California, Rose with a top bracket consulting firm. Both had been earning and socking it away for over 8 years; IRA’s, mutual funds, stock brokerage accounts, real estate and more. Between them, they had more than 20 different savings, checking, brokerage and retirement accounts – plus their homes. With over $300,000 in savings and retirement, plus the appreciation on their homes, their combined net worth was over half a million dollars; not bad going for a couple with an average age of 32!

Yet, when they started talking about their plans together, both realized that changes were needed. “We’d like to start a family, and move to a larger home; plus, both of us would like to spend more time with the children, which could have some impact on careers and earning.” Planning for educating the children, possible work-at-home or part-time careers, early retirement – suddenly, this seems a lot different!

Where are they now?

The couple live in a condo apartment that Mike bought a few years ago, for $220,000; Rose’s house in the suburbs, which she bought for $175,000, has been rented out. The rental brings in about $5,000 more than the payments. Both properties have doubled in value, with the rise in the real estate market.

Between them, they make a combined $125,000 per year, and save over 30% of their incomes. Together, their retirement accounts have appreciated to over $200,000; an additional $100,000 plus in cash and bonds, plus small amounts in stocks. Both their employers provide health care and other benefits; plus, with liberal flexi-time and telecommuting options, they could sustain both careers even after children come along, for quite some time.

Seeking Financial Advice

Getting professional advice was a no-brainer for both; after all, they first met at our financial planners’ office four years ago. After coming up to date with both their financial affairs; working through their joint priorities, she came up with a series of recommendations.

1. Simplify their accounts : With 20 different accounts that both of them had accumulated, managing transactions becomes a painful chore. Susan recommended that they bring it down to a handful; sharing a checking account that also serves for bill payment, and similarly reducing the brokerage accounts.

2. A more adventurous investment portfolio : With both of them young, earning well, and saving diligently, they really don’t need income stocks or bonds right now. Investing in growth oriented equity funds or even in selected foreign equity funds, they could boost their rate of return significantly. With both of them not being active trading stocks, funds could also provide the diversification and management that they don’t have the time for now. Suggested funds include the T. Rowe Price Blue Chip Growth Fund, or the Vanguard Total International Stock – both on the Money Magazine list of recommended funds.

Another possibility is investment in commodity funds; these could diversify the risk, and supplement the returns. Susan suggests that an aggressive growth strategy could bring them more mileage, than trying to plan individual education or other needs separately.

3. Cash reserves : Health and other insurance plans from their respective employers help cover contingencies; and with both of them doing well in their respective careers, they don’t really need a huge cash reserve. Susan recommends keeping about 4 months salaries in a high yield savings account like ING or EmigrantDirect, with the rest being reinvested.

4. Real estate : Between their combined home equity, they can comfortably afford a bigger house; however, with fears of a housing market bubble, they’re reluctant to get in over their heads. Susan recommends selling one of their properties, and using the proceeds for a down payment on a larger home; they could easily put down 20% or more, and still have the other property on hand. The only caution; they need to be comfortable with the monthly payments without dipping into reserves or using an interest-only ARM.

Another option could be investing in real estate, to build up a property portfolio. While California seems too expensive for their tastes, several out-of-state locations are possible

Summary

The overall investment plan rests on 3 simple steps

1) Simplify their holdings, making it manageable
2) Continue to diligently save and reinvest, to sustain current activities.
3) Invest for aggressive growth, to build their net worth.

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