Merging Money 101
Need to get your finances in order? Join the club. With our three-step guide, getting financially fit is easy.
Starting your new life together is the perfect opportunity to reassess all your finances, from credit cards to car insurance. Not only is it a time to get better rates, but also to consolidate. Considering the majority of Nesties say that money is the number one topic they fight about, it might be easy to avoid this conversation. But don't. The earlier you combine finances, the sooner you can increase your savings. It's true. Just use our three-step guide to start enhancing your new business, aka your marriage.
Step 1: Get Organized
It's time for 100% disclosure. Any debt either one of you came with can't be erased, but once you merge your paperwork, you can tackle it as the dynamic duo that you are -- and start working on a savings plan.
Schedule uninterrupted time for both of you to be in front of one computer and bring all the following documents to the table. In one Excel spreadsheet, make columns of your bill balances, interest rates, deductions, and earnings. What to have on hand:
Credit report for both of you (this will list debt you didn't even know you had)
Latest pay stubs
Benefit packages (bonuses, stock options)
Retirement statements [401(k), IRA]
Bank statements (checking and savings)
Credit card statements (Can't find them? Your credit report has a record.)
Investment information (CDs, stocks, etc.)
Loan statements (student, car, etc.)
Large payments like alimony or mortgages
Anything else that adds or deducts from your cash flow.
[Nest Note] You can get a free credit report once a year. Check out what month you can order yours at AnnualCreditReport.com.
Step #2: Create a Reasonable Budget
Now that you have all your money owed and earned in one easy-to-read document, it's time to build a budget. Sound hard? The only difficult part is sticking to it. But keep your eye on the prize: saving money as a team.
Start with your combined monthly take-home income and subtract these categories (use a month's worth of past receipts and bills to help you):
Your Nest: rent/mortgage/maintenance, phone, electricity, cable, cell phone, etc.
Transportation: car payments, gas, public transportation, taxis, parking, car insurance, etc.
Necessities: food and groceries, loan payments, medical bills, health insurance, new clothes, pet care, housekeeper, etc.
Investments: 401(k), CDs, Retirement IRA, etc.
The Fun Stuff: eating out, travel, music, grooming, gifts, gym membership, charity, miscellaneous splurges
Savings: "Pay" a savings account at least 10% of every paycheck. This can be used for two things:
- Emergency Money: Your monthly budget (minus savings) multiplied by three or six months. This is for a worst-case scenario like, you lose your job, are unable to work (think: car accident), or become homeless (think: Hurricane Katrina). With this money in the bank, you won’t have the added stress of going broke.
- Fun Money: Keep $500 (or more) on hand so those eventual "splurges" (like a vacation) won't put you into debt.
Trying to stay on target monthly is too hard. Treat your budget like a business and plan to balance it every quarter (three months). If you went over, you'll have to cut something next quarter. If you are under, congratulations -- but that doesn't mean you can now splurge. Put the extra money into savings and treat yourself to an additional cup of Starbucks. Remember, you'll need a surplus in your account around the holidays, birthdays, and anniversaries.
Step #3: Avoid Common Pitfalls
With the goal of saving for future aspirations: a bigger home, kids, exotic travel, it's going to take a few months to adjust. But starting new bad habits won't help matters. Don't make these newly budgeted mistakes:
Sneaking money: Buying on the sly will always get you in trouble.
The fix: if anything you need is over $200, let your other half weigh in on the decision. Saving money requires teamwork, and you both need to live by some rules.
Setting unrealistic goals: Putting 10% of your paycheck into a 401(k) might sound great in theory, but don't let these goals leave you strapped for cash. Be honest with yourself about what you can really save.
The fix: Put away 5% now, increase it to 8% next year, and try to close the gap over three years.
Being too cheap: Limiting dinners out to once a week is one thing, but don't allow your new budget to turn you into an obnoxious penny-pincher.
The fix: Treat yourselves once a month to something fun, like a hot new bar with $10 drinks or a new coffee machine. Otherwise, your budget will make you depressed.
Lying to yourself: Promising yourself you won't shop at all next month after you splurge at this huge sale at Saks may not be 100% realistic.
The fix: Make practical goals, but when you do need to cut back, don't even tempt yourself. No window-shopping or browsing with friends allowed!
Being set in your ways: Trying to change your spending habits will take some work. If you're a saver and he's a spender, you can agree to disagree on the small things, but you must agree on the bigger goals.
The fix: When deciding where to cut, come to the table with an open mind. Be willing to realize that your way isn't always right -- you might have to compromise your habits too.
Thinking you're on the same page: Talking about your money matters might go really well -- so well that you decide to stick with the current way you're handling cash. But ending the discussion early could work against you.
The fix: Make at least two changes or compromises apiece. Even if you're on the same money wavelength, you can still try new investment strategies -- or just switch roles. For three to six months, you can be the spender and he'll be the saver! This can give you even more insight into your assets.