A Newlywed's Guide to Important Financial Topics

Transcription

1 Ameriprise Financial Jeff Halbreich, CFP Financial Advisor & Franchise Owner Acero, Ste 218 Mission Viejo, CA CA Insurance 0D20500 A Newlywed's Guide to Important Financial Topics jeff.l.halbreich@ampf.com

2 Table of Contents Money Issues That Concern Married Couples... 3 What is it?... 3 Budgeting your money...3 Saving and investing your money...5 Establishing good credit...6 Getting Married Checklist... 8 Insurance Issues that Concern Married Couples...11 What is it? Health insurance...11 Life insurance Disability insurance...12 Other types of insurance...12 Working with a Financial Advisor...13 Services a financial advisor may provide...13 Some misconceptions about financial advisors How are financial advisors compensated? When is it time to consult a financial advisor?... 14

3 Money Issues That Concern Married Couples What is it? Marriage is an important step in anyone's life and brings many challenges with it. One of those challenges is the management of your finances as a couple. The money decisions that you make now as a couple can have a lasting impact on your financial future together. Careful planning of your finances can ensure that together, you achieve financial success. Budgeting your money In general When you were single, you managed your finances in a way that was comfortable for you and that you understood--no one had to approve or disapprove of your financial decisions. Now that you are married, however, both you and your spouse have to agree on a system for budgeting your money and paying your bills. Discuss financial situations You and your spouse must discuss your respective financial situations and expectations, and take stock of your individual assets (what you own) and liabilities (what you owe). Revealing your financial situation is an important step when budgeting as a couple. If either of you has a financial problem, it is best to identify it now and begin solving it together. This is the time to address questions such as what do each of you earn, and what additional sources of income do you have? What do you own? Will both of you work now that you are married? Who will hold title to property acquired before and after the wedding? In addition, be sure to disclose all of your financial commitments. If you pay child support, let your partner know the amounts. If you have to repay student loans, discuss that as well. The worksheets that follow will assist you in determining your current financial situation. Assets Bank Accounts (i.e., savings and money market accounts) $ Personal Investments (i.e., stocks, bonds, and mutual funds) $ Retirement Plans (i.e., IRAs) $ Real Estate $ Personal Property (i.e., cars, jewelry) $ Other $ TOTAL $ Liabilities Credit Card Debt $ Personal Loans $ Auto Loans $ Mortgage $ Student Loans $ Other $ TOTAL $ Page 3 of 15, see disclaimer on final page

4 Discuss financial goals Income Annual Salary $ Other Sources of Income $ TOTAL $ Expenses Housing (i.e., rent or mortgage, utilities, etc.) $ Food, clothing, transportation $ Discretionary (i.e., dining, vacations, gifts) $ TOTAL $ After you discuss your financial situations, you should discuss your financial goals. You can start by each making a list of your short- and long-term financial goals. Short-term goals are those that can take anywhere from three to five years (e.g., saving for a down payment on a home or a new car). Long-term goals are those that take more than five years to achieve (e.g., saving for a child's college education or retirement). When you have each determined your individual financial goals, you should review your goals together to achieve common objectives. You can then focus your energy on those common objectives and strive to attain those goals (short- and long-term) together. Decide on the type of bank account(s) you will keep Decide whether you and your spouse will have separate bank accounts or a joint account. Advantages to consolidating your checking funds into one account include easier record-keeping, reduced maintenance fees, less paperwork when you apply for a loan, and simplified money management. If you do choose to keep separate accounts, consider opening a joint checking account for household expenses. Caution: When sharing a checking account, be sure to keep track of how much money is in the account at all times since both of you will be writing checks that draw from the same account. Prepare an annual budget The first step in developing a financial future together as a couple is to prepare an annual budget. The budget will be a detailed listing of all your income and expenses over the period of a year. You may want to designate one spouse to be in charge of managing the budget, or you can take turns keeping records and paying bills. Tip: Make sure that you develop a record-keeping system that both you and your spouse understand. Also, keep your records in a joint filing system so that you can easily locate important documents. Begin with your sources of income--list salaries and wages, alimony and child support, interest, and any other form of income that you and your spouse may have. List your expenses. It may be helpful to review several months' worth of entries in each of your checkbooks to be sure that you include everything. Put all the expenses that are paid monthly into one category, and put all other expenses (every other month, quarterly, semiannually, annually) into another. Some common expenses are: Savings Rent or mortgage payments Student loan payments Groceries Pet care Major purchases Insurance Car repairs Clothing Tax payments Page 4 of 15, see disclaimer on final page

5 Utilities Car payments Credit card payments Alimony/child support Household items Medical expenses Gifts Automobile gas Child day care Entertainment/dining out Personal care/grooming Estimate your expenses for each category. How much money do you spend on these items on a monthly basis and on an annual basis? Try to come up with a realistic amount for what you think you will spend in a year's time. Add another category to the irregular expenses list, and call it Contingencies. This can be a catchall category for expenses that you might not anticipate or budget for. The amount to budget for contingencies should be about 5 percent of your total budget. Add your sources of cash and uses of cash on an annual basis. Hopefully, you get a positive number, meaning that you are spending less than you are earning. If not, review your expense list to determine where you can cut your spending. Consider using computer spreadsheets or programs like Quicken for assistance. Create a cash flow system After you have developed a budget, you should create a system for managing your monthly inflow and outflow of cash. It is a good idea for both you and your spouse to become involved in this process--at least at first--so that both of you have a clear understanding of the costs of running the family and household. Cash flow systems like the one described below are simple and painless to operate. Once they are established, you will find that making financial decisions becomes much easier because you have done your homework. Separate your regular monthly expenses from irregular expenses (every other month, quarterly, semiannually, annually) by using a different bank account for each. Otherwise, you may be tempted to use money that has been earmarked for something else. You should limit the number of checking accounts that you have in order to avoid confusion. Each time you get paid, deposit some money into an account for irregular expenses. The amount of money you deposit should be equal to the total amount needed for the irregular expenses, divided by the number of paychecks you each receive annually. In so doing, you will have the money for the outlay when it arises. The rest of your pay should go into your checking account, to be used for regular monthly expenses and savings. One variation to this system of cash flow management is to establish one or two additional bank accounts for one or both of you for personal spending money. Allocate the budgeted amount for personal expenses (e.g., lunches, haircuts, gifts) to this account. This way, you are free to spend the money in this account in any way you like without having to worry about meeting regular monthly expenses. However, all of these bank accounts may have fees. Saving and investing your money In general At some point in your married life, you will almost certainly encounter some large expenditures, such as a new home, your own business, or a college education for your children. Chances are, you won't be able to meet these expenditures from your current income. You and your spouse must discipline yourselves to set aside a portion of your current income for saving and investing your money to ensure its steady growth or, at the very least, protect it against loss. Page 5 of 15, see disclaimer on final page

6 Save a percentage of your earnings When figuring out your budget, savings should be considered one of your monthly expenses. Think of savings as a fixed payment (like a car payment) that must be made every month. If you don't and you wait until the end of the month to save whatever you have not spent, you'll find that nothing ever seems to go into your savings account. A good rule of thumb is for you and your spouse to save 4 to 9 percent of your combined gross earnings while you are in your 20s and then double that savings percentage as you reach your 30s and 40s. In some cases, a dual-income couple may be able to live off one spouse's salary and save the other salary. Example(s): Mary and Richard, a married couple in their 20s, earn a combined annual gross income of $60,000. Together, Mary and Richard save 5 percent of their combined gross income each year, or $3,000. Example(s): As another example, Christine and Tom, a married couple in their 30s, earn a combined annual gross income of $80,000. Together, Christine and Tom save 10 percent of their combined gross income each year, or $8,000. Build an emergency cash reserve The savings that you accumulate can serve as an emergency cash reserve. Ideally, you should have in savings an amount that is comfortable for you to fall back on in case of an emergency, such as a job loss. A common formula used for calculating a safe emergency fund amount is to multiply your total monthly expenses by 6. When determining how much cash should be in your emergency fund, a major factor is your comfort level. If you and your spouse feel secure with your jobs and are confident that if you lost your current jobs you would be able to find a new one fairly quickly, an emergency fund of three times your monthly expenses should be sufficient. However, if either of you has an unpredictable income, you may want to have an emergency fund that is equal to 12 times your monthly expenses. Example(s): Christine and Tom, a married couple in their 30s, plan to build up an emergency cash reserve. Both Christine and Tom are attorneys and feel quite secure with their present jobs. Christine and Tom have monthly expenses of $3,000 and plan to build up an emergency cash reserve that is equal to 3 times their monthly expenses, or $9,000 ($3,000 x 3). Example(s): As another example, Mary and Richard, a married couple in their 20s, plan to build up an emergency cash reserve. Both Mary and Richard are employed as freelance writers and feel that their incomes are at times unpredictable. Mary and Richard have monthly expenses of $1,500 and plan to build up an emergency cash reserve that is equal to 12 times their monthly expenses, or $18,000 ($1,500 x 12). Investing your money When you have established an emergency cash reserve, you can begin to invest your money to target your financial goals. There are three fundamental types of investments: cash and cash alternatives, bonds, and equities. Cash and cash alternatives are relatively low-risk investments that can be readily converted into currency, such as money market accounts. Bonds, sometimes called debt instruments, are essentially IOUs; when you invest in a bond, you're lending money to the bond's issuer--usually a corporation or governmental body--which pays interest on that loan. Because bonds make regular payments of interest, they are also known as income investments. Equities, or stocks, give you a share of ownership in a company. You have the opportunity to share in the company's profits and potential growth, which is why they're often viewed as growth investments. However, equities involve greater risk than either cash or income investments. With equities, there is no guarantee you will receive any income or that your shares will ever increase in value, and you can lose your entire investment. In addition to these three basic types of investments--also known as asset classes--there are so-called alternative investments, such as real estate, commodities, and precious metals. No matter what your investment goal, your overall objective is to maximize returns without taking on more risk than you can bear. You'll need to choose investments that are consistent with your financial goals and time horizon. A financial professional can help you construct an investment portfolio that takes these factors into account. Establishing good credit Page 6 of 15, see disclaimer on final page

7 In general Establishing good credit is an important step in the path towards a solid financial future. A good credit history can enable you to make credit purchases for items that you might not otherwise be able to afford. Most creditors will require a good credit history before extending credit to you. If you do not have a credit history, it is important to establish one as soon as possible. If you have a poor credit history, you should take steps toward improving it right away. Individual or joint credit Married couples can either apply for credit individually or jointly. One of the benefits of applying for joint credit is that both you and your spouse's income, expenses, and financial stability are considered when a creditor evaluates your overall financial picture. However, applying for separate credit has its advantages. If you and your spouse ever run into financial problems (e.g., illness or job layoff), separate credit allows one spouse to risk damaging his or her credit history while preserving the other spouse's good credit. In addition, separate credit can also protect you and your spouse from each other. If you and your spouse cosign a loan or apply for a credit card, you are both responsible for 100 percent repayment of the debt. In other words, if your spouse does not pay his or her share, you can get stuck with paying the whole amount. On the other hand, if your spouse takes out a loan or applies for a credit card on his or her own, generally your spouse is solely responsible for the debt. Tip: While the general rule is that spouses are not responsible for each other's debts, there are exceptions. Many states will hold both spouses responsible for a debt incurred by one spouse if the debt constituted a family expense (e.g., child care or groceries). In addition, in some community property states, both spouses may be responsible for one spouse's debts, since both spouses have equal rights to each other's incomes. You may want to discuss your state's laws with an attorney if you live in a community property state. Page 7 of 15, see disclaimer on final page

8 Getting Married Checklist General information Yes No N/A 1. Has relevant personal information been gathered? Names, ages, health statuses Dependents Children from previous marriages 2. Has financial situation been assessed? Income Expenses Assets Liabilities Notes: Money management Yes No N/A 1. Have assets been itemized separately/together? 2. Have debts been itemized separately/together? 3. Has an apportionment of responsibility for expenses been determined? 4. Have separate/joint savings plans been discussed? 5. Will separate/joint checking/savings accounts be used? 6. Has a record-keeping system been devised? 7. Are there any credit history concerns? Notes: Housing Yes No N/A 1. Homeowner? 2. If not, is a home purchase planned? 3. Have home ownership options (e.g., joint, sole) been considered? Page 8 of 15, see disclaimer on final page

9 Notes: Insurance planning Yes No N/A 1. Is health insurance needed? 2. Will separate health insurance plans be maintained? 3. Will health coverage be combined? 4. Does life insurance need to be purchased/upgraded? 5. Does automobile insurance need to be purchased/upgraded? 6. Does homeowners/renters insurance need to be purchased/upgraded? 7. Does disability income insurance need to be purchased/upgraded? 8. Does personal liability insurance need to be purchased/upgraded? 9. Will beneficiary designations be changed? Notes: Investment planning Yes No N/A 1. Have investment profiles been determined separately/together? 2. Have investment goals separately/together been considered/prioritized? 3. Has size/frequency of investments been determined? 4. Are separate/joint investments contemplated? 5. Are there current investments? Stocks Bonds Mutual funds Annuities Real estate Art/collectibles Page 9 of 15, see disclaimer on final page

10 Notes: Retirement planning Yes No N/A 1. Is a retirement plan available? IRA Employer-sponsored retirement plan Beneficiary designation 2. Will one or both plans be funded? Notes: Estate planning Yes No N/A 1. Is there a will? 2. Will changes be made to the will? 3. Is there a trust? 4. Has setting up trusts been considered? 5. Have durable power of attorneys been considered? 6. Have health-care directives been established? 7. Are spousal property transfers anticipated? 8. Is there a concern about equalizing estates? Notes: Page 10 of 15, see disclaimer on final page

11 Insurance Issues that Concern Married Couples What is it? If you are married or planning to marry, you should determine how marriage impacts your insurance needs. The lack of proper insurance protection can lead a married couple into financial ruin. If you already have disability or life insurance policies, determine whether your existing coverage is adequate and update your list of beneficiaries. If you do not have either a disability or life insurance policy, consider whether or not your marital status changes your need for insurance. You should also review any existing policies held by you and your spouse (or spouse-to-be) and consider pooling them with one company or having multiple policies with one company in order to receive discounts and lower policy rates. Tip: If your employer does not offer a particular type of insurance or if the amount of insurance offered is not adequate, consider purchasing an individual or private policy. Health insurance Because of the high cost of medical treatment, a poorly timed sickness or accident could be financially devastating to your family. To avoid a financial disaster during a medical crisis, you and your family should have health insurance. Life insurance In general While you might not have felt the need for life insurance protection when you were single, it becomes important when you marry. Once married, you may find yourself with a spouse and/or children who are financially dependent on you. If you do not have life insurance, you will want to have a policy in place in order to make sure that your family's financial needs will be taken care of when you die. If you already have a life insurance policy, you should reevaluate the adequacy of your existing coverage. How much life insurance do you need? You should have enough life insurance to enable your family to continue the lifestyle they were accustomed to before your death. If you have children, you may want to make sure that your children's college education bills will be paid. At the very least, you will want to ensure that your family will be able to pay for burial expenses and pay off any of your debts. You can purchase the amount of protection that you need from either a term or cash-value policy. While both policies provide your beneficiaries with benefits at your death, they contain important differences. Term insurance provides you with pure death-benefit protection. In other words, if you die while the policy is in effect, the insurance company pays your beneficiary, and the policy does not build any cash value. Since term insurance is low cost, based on age, it is an attractive form of life insurance when you are younger and have minimal cash flow. Although low-cost term insurance may have provided you with sufficient life insurance protection in the past, it does not provide you with the same type of benefits that come with the more costly cash value insurance. Cash value insurance provides you with protection besides serving as a savings vehicle. Although it is more expensive than term insurance, cash value insurance can be a useful financial tool for a married couple since it builds up cash value over time. The cash value can then help you fund long-term goals, such as buying a house, funding a child's college education, or providing you with savings for retirement. Tip: When you reevaluate the adequacy of your existing coverage, you should keep in mind whether or not you and your spouse intend to start a family in the near future. Tip: In addition to making sure you have adequate life insurance protection, you should examine the beneficiary designations on your current policies, and make sure that they are up to date. Page 11 of 15, see disclaimer on final page

12 Disability insurance In general While life insurance ensures that your family is financially provided for at your death, disability insurance provides your family with income if you are unable to work as a result of a serious illness or injury. Disability insurance is a necessity if you have a family that depends on you for financial support. Although disability coverage can be expensive, depending on your age and the type of work that you do, it allows you to insure your most valuable asset: the ability to earn an income. Tip: You should consider disability insurance even if your household has two wage earners since most dual-income families have expenses that rely on both incomes. How much disability insurance do you need? Generally, you should have enough disability coverage to ensure that you could continue to maintain your current lifestyle if you became sick or injured and could not work for a lengthy period of time. While most insurance companies won't insure you for your entire salary amount, you should look for a policy that provides benefits that replace at least 60 percent of your income. Benefits are received free of income tax for a policy that is paid for by the insured with after tax dollars. Other types of insurance Automobile insurance Chances are that both you and your spouse own separate cars. If you each also have separate auto insurance carriers, you may want to pool your auto insurance with one company. Many insurance companies will give you a discount if you insure more than one car with them. Homeowners/renters insurance Whether you and your spouse own or rent a home, you need insurance to protect yourself against either the loss of your property or claims against you if someone injures him/herself on your property. If you already own a home, you may need to add your spouse's name to the policy. Consider having the same insurance company provide coverage for your home or apartment and your car. Many insurers will give you a discount if you carry more than one type of policy with their company. Page 12 of 15, see disclaimer on final page

13 Working with a Financial Advisor The world of 50 years ago was a lot different than it is today. An individual often worked at the same job all his or her adult life, lived in the same house, and stayed married to the same spouse. In those days, too, one spouse could support a family, paying for college ordinarily didn't require taking out a second mortgage, and people could look forward to retiring on Social Security and possibly a company pension. Today, your hopes and dreams are no different. Like most people, you probably want to buy a home, put your children through college, and retire with a comfortable income. But the world has become a more complex place, especially when it comes to your finances. You may already be working with financial professionals--an accountant or estate planner, for example--each of whom advises you in a specific area. But if you would like a comprehensive financial plan to help you secure your future, you may benefit from the expertise of a financial advisor. Services a financial advisor may provide Even if you feel competent enough to develop a plan of your own, a financial advisor can act as a sounding board for your ideas and help you focus on your goals, using his or her broad knowledge of areas such as estate planning and investments. Specifically, a financial advisor may help you: Set financial goals Determine the state of your current financial affairs by reviewing your income, assets, and liabilities, evaluating your insurance coverage and your investment portfolio, assessing your tax obligations, and examining your estate plan Develop a plan to help meet your financial goals which addresses your current financial weaknesses and builds on your financial strengths Make recommendations about specific products and services (many advisors are qualified to sell a range of financial products) Monitor your plan and periodically evaluate its progress Adjust your plan to help meet your changing financial goals and to accommodate changing investment markets or tax laws Some misconceptions about financial advisors Maybe you have reservations about consulting a financial advisor because you're uncertain about what to expect. Here are some common misconceptions about financial advisors, and the truth behind them: Most people don't need financial advisors--while it's true that you may have the knowledge and ability to manage your own finances, the financial world grows more intricate every day. A qualified financial advisor has the expertise to help you navigate a steady path towards your financial goals. All financial advisors are the same--financial advisors are not covered by uniform state or federal regulations, so there can be a considerable disparity in their qualifications and business practices. Some may specialize in one area such as investment planning, while others may sell a specific range of products, such as insurance. A qualified financial advisor generally looks at your finances as an interrelated whole, and can help you with many of your financial needs. Financial advisors serve only the wealthy--some advisors do only take on clients with a minimum amount of assets to invest. Many, however, only require that their clients have at least some discretionary income. Financial advisors are only interested in comprehensive plans--financial advisors generally prefer to offer advice within the context of a client's current situation and overall financial goals. But financial advisors frequently help clients with specific matters such as rolling over a retirement account or developing a realistic budget. Page 13 of 15, see disclaimer on final page

14 Financial planners aren't worth the expense--like other professionals, financial advisors receive compensation for their services, and it's important for you to understand how they're paid. But a good financial advisor may help you save and earn more than you'll pay in fees. How are financial advisors compensated? When it comes to compensation, advisors fall into four categories: Salary based--you pay the company for which the advisor works, and the company pays its advisors a salary Fee based--you pay a fee based on an hourly rate (for specific advice or a financial plan), or based on a percentage of your assets and/or income Commission based--the advisor receives a commission from a third party for any products you may purchase Commission and fee based--the advisor receives both commissions and fees You'll need to decide which type of compensation structure works best for you, based on your own personal circumstances. When is it time to consult a financial advisor? In many cases, a specific life event or a perceived need may prompt you to seek professional financial planning guidance. Such events or needs might include: Getting married or divorced Having a baby or adopting a child Paying for your child's college education Buying or selling a family business Changing jobs or careers Planning for your retirement Developing an estate plan Coping with the death of your spouse Receiving an inheritance or a financial windfall In these situations, a financial professional can help you make objective, rather than emotional, decisions. However, you don't have to wait until an event occurs before you consult a financial advisor. A financial advisor can help you develop an overall strategy for approaching your financial goals that not only anticipates what you'll need to do to reach them, but that remains flexible enough to accommodate your evolving financial needs. Page 14 of 15, see disclaimer on final page

15 Ameriprise Financial Jeff Halbreich, CFP Financial Advisor & Franchise Owner Acero, Ste 218 Mission Viejo, CA CA Insurance 0D The information contained in this material is being provided for general education purposes and with the understanding that it is not intended to be used or interpreted as specific legal, tax or investment advice. It does not address or account for your individual investor circumstances. Investment decisions should always be made based on your specific financial needs and objectives, goals, time horizon and risk tolerance. The information contained in this communication, including attachments, may be provided to support the marketing of a particular product or service. You cannot rely on this to avoid tax penalties that may be imposed under the Internal Revenue Code. Consult your tax advisor or attorney regarding tax issues specific to your circumstances. Neither Ameriprise Financial Services, Inc. nor any of its employees or representatives are authorized to give legal or tax advice. You are encouraged to seek the guidance of your own personal legal or tax counsel. Ameriprise Financial Services, Inc. Member FINRA and SIPC. The information in this document is provided by a third party and has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial Services, Inc. While the publisher has been diligent in attempting to provide accurate information, the accuracy of the information cannot be guaranteed. Laws and regulations change frequently, and are subject to differing legal interpretations. Accordingly, neither the publisher nor any of its licensees or their distributees shall be liable for any loss or damage caused, or alleged to have been caused, by the use or reliance upon this service. Page 15 of 15 Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013