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All Contents © 2018The Kiplinger Washington Editors
By the editors of Kiplinger's Personal Finance
| Updated February 2017
Singles have their own personal finance challenges to contend with.
But for couples, the consequences of bad money management -- debt multiplied, foreclosure, even divorce -- can be far more costly and significant. That's why it's important to jointly develop and frequently reassess a family financial plan throughout your relationship.
Here are eight common money pitfalls for couples, with advice on how to steer clear of trouble or overcome problems. Take a look.
Why it's a mistake: If your significant other’s name is the only one listed, "you leave yourself open to being thrown out on the street at a moment’s notice" if you break up, says Kevin Reardon, a certified financial planner and owner of the Pewaukee, Wis.-based financial planning firm Shakespeare Wealth Management.
How to avoid it: Both parties’ names should appear on the lease, suggests Reardon.
Couples should also consider drafting a cohabitation agreement that clearly states the living arrangements they’ve agreed to. It might include how much each person pays for rent and utilities, for example, or state whether one person is financially supporting the other; or confirm how much each person contributes to a joint bank account, says Celia Rechtshaffen Reed, a lawyer with Gillespie, Shields & Durrant. Putting it down on paper helps to protect both parties if there’s a breakup. You can seek out the help of a lawyer in writing a cohabitation agreement, but a basic agreement can cost up to $2,000, she says. If you draft your own, be sure to get it notarized.
Why it's a mistake: Couples who don’t have a money talk may ultimately be surprised by the costly impact that one partner's low credit score has on the interest rate for their mortgage and other loans. You'll also be more likely to fight about budgeting, saving and spending habits.
How to avoid it: Early and frequent communication with your sweetheart is critical to help avoid fights down the road, says Cathy Pareto, a financial adviser in Coral Gables, Fla. Several crucial issues should be up for discussion before marriage, including how much money each person earns, where it comes from, where it has been and will be saved and invested, and where it’s spent each month.
Keep in mind that this is just the beginning. Throughout the course of your relationship, you’ll want to discuss your finances regularly and update your plans and budgets as necessary.
Why it's a mistake: Designating one person as the family money manager can make one partner feel burdened by a thankless job, while the other feels out of the loop. And in the event of a divorce or the death of the spouse who handled the finances, the less-involved spouse is exposed to a variety of financial risks.
How to avoid it: Both individuals should be active participants in the managing of household finances. A simple solution for couples is to take turns each month managing the checking account and having a regular check-in meeting so that both spouses are aware of what’s happening on the financial front. Both partners should attend meetings with financial advisers.
Why it's a mistake: It's easy to fight about one spouse's personal expenses from a joint account.
How to avoid it: Set up a joint checking account and open a joint credit card for mutual expenses, but maintain separate personal checking accounts and credit cards for the occasional splurges. Establish boundaries regarding how much you each can hoard and/or spend on your own.
Why it's a mistake: You won’t get any grants, scholarships or federally guaranteed loans to support you in your old age, nor will you have the income or time to catch up once you retire. And by forgoing tax-favored retirement accounts, such as a 401(k), you not only miss out on any employer match but also lose the tax benefit and opportunity for long-term growth that these accounts offer. You could even harm your student’s chances for financial aid. The federal financial aid formula ignores assets in tax-sheltered retirement plans but assesses up to 5.6% of other parental assets.
How to avoid it: Throw everything you have at your retirement accounts. If you have a 401(k) at work, contribute at least enough to capture the entire employer match, and strive to max it out (in 2017, you can contribute up to $18,000) before contributing to college funds.
There are some exceptions. Save for college if you are lucky enough to fit one of the following scenarios, says Deborah Fox, of Fox College Funding: You know you will receive an inheritance or are the beneficiary of an irrevocable trust that will cover your retirement needs. You plan to retire at midlife with a pension and start a lucrative second career. You have a guaranteed pension that will be enough to support you in old age (and that neither state legislature nor employer is likely to take away). You are in a profession in which your income will jump significantly later in your career, allowing you to catch up on retirement saving. You have income-producing property or other assets that will provide enough money to support you after you leave the workforce
Why it's a mistake: Assuming you and your spouse think alike in at least a few ways, your collective nest egg could get overloaded in one asset class or sector -- limiting your gains or exposing you to outsize losses. For instance, two married, risk-averse investors who separately load up their 401(k)s with bonds may not generate the long-term growth needed to support their retirement dreams.
How to overcome it: Take a big-picture view of your investments, and establish an overall asset allocation that's appropriate for your ages and goals. Then, look at your investment options in each of your retirement plans. If, say, her 401(k) plan has a stable-value fund paying attractive interest rates, she can stash a portion of her retirement savings in it, while he adopts a more aggressive approach in his retirement plan to complement her conservative allocation.
Why it's a mistake: The loss of even one income source can jeopardize a couple's ability to pay monthly bills and meet savings goals.
How to avoid it: Buy a disability insurance policy, which will replace a portion of your income should an illness or accident prevent you from working, if you’re self-employed. Or get a supplemental plan if your employer coverage is skimpy. The policies pay monthly benefits if you can't work at all, and some pay partial benefits if you can work only part-time. "Disability insurance is not about you," says Connie Golleher, chief operating officer of the Holleman Companies, an insurance advisory firm in Chevy Chase, Md. "It's about your family not having to deal with the consequences" of a breadwinner's disability.
Why it's a mistake: You can start claiming at 62, but your benefit will be permanently reduced by a fraction of a percent for each month you claim before your full retirement age. Claim at 62, and your benefits will be cut 25% compared with what you would receive if you claim at 66.
How to avoid it: By coordinating the dates each spouse claims benefits to take maximum advantage of spousal and survivor benefits, a husband and wife can boost lifetime benefits by hundreds of thousands of dollars. For many married couples, delaying benefits until 70 for at least the higher earner is a savvy move. You qualify for an 8% delayed-retirement credit for each year past full retirement age that you wait to claim, until you turn 70. So instead of getting $2,000 a month at age 66, for example, you’ll get $2,640 at age 70.
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