Thank you for joining us today. The goal of this program is to improve your knowledge and understanding of basic financial tools and goals—information that can help each of us in our daily lives. As CPAs, we are committed to the highest ethical standards and excellence. Our mission is to provide the public with trusted advice and counsel on which you can base your most important financial decisions. Today’s program offers common-sense guidelines to help couples make informed financial choices. Personal financial planning is a key ingredient to achieving your goals and plays an important role in achieving financial harmony in your marriage, whether you are considering marriage, are recently married, have children, or have reached the “empty nest” stage. And being realistic, we’ll also touch upon financial aspects of divorce.
Whether you are thinking about marriage or are currently married, do you know how your partner views financial matters? You may be surprised! If you haven’t done so already, you should sit down and ask each other the following questions. Would you sign a prenuptial agreement? If you have substantial assets before marriage (e.g., houses, investments, business ventures), a prenuptial agreement may be in order. A “prenup” can ensure that those assets are available to you in the event of a divorce. You especially should consider a prenup should you have minor children from a previous marriage or are taking care of an elderly parent. What do you know about personal finance? If the two of you are unknowledgeable about finances, read the money and business sections of your newspaper, subscribe to a personal finance magazine, check Bankrate.com and other financial websites, or take a personal finance course at a high school or community college. Also consider meeting with a financial planner. Will you discuss money regularly? Differences are inevitable. How you handle them is important to your marriage. Honest communication is the key to a lifetime of financial compatibility. Share your thoughts about saving and spending, investing and borrowing. Doing so can make acquiring wealth much easier.
Have you discussed your financial goals? Setting financial goals—both short- and long-term—helps you define the type of lifestyle you will lead. Break down your goals into manageable pieces. If you want to buy a house in five years, determine how much you need to save monthly to meet the down payment. Try to anticipate how changes in your life, such as the birth of a child, disability of a family member, or the need to care for an elderly parent, may affect your financial future. If you have been married a while and already have financial goals in place, take the time to update your goals and assess your progress. Commit your goals to paper and then plan and prioritize objectives for achieving them. How will you structure your finances? Will you pool all your resources into joint accounts, maintain separate accounts or devise some combination of the two? Consider appointing a money handler who will handle money management tasks like balancing the checkbook, paying the bills, and monitoring investments. Perhaps you might want to switch who is the chief money handler every now and then. Are you comfortable with each other’s money personalities? For example, are you spenders or savers? Do possessions like fancy cars or mink coats matter?
Do you know your partner’s risk tolerance? Investing styles are different. They range from conservative to risky. Take the time to arrive at a level of risk that is comfortable to you both. How will marriage affect your taxes? Check with a CPA or tax professional to ensure that you are prepared to meet your tax responsibilities. He or she can make you aware of any tax law changes. Effective tax planning is a year-round activity. Take advantage of every opportunity: shift income, use tax-deferred retirement plan, bunch deductions. How much debt does each of you have? Couples must enter marriage aware of the debt each partner carries and how it will be paid. You need to be aware of how much debt each of you has throughout the marriage. Once you know who owes what, develop a plan to reduce debt. Consider moving credit card balances onto a card with a lower interest rate. For several months, only make purchases that you can pay with cash. If you have substantial equity in your home, you could take out a second mortgage to reduce credit card debt.
Can you reduce expenses? Spending less than you earn is the key to being able to save and invest money. Continually look for ways to cut your expenses or increase your income. Try trimming a couple of items in your monthly budget. For example, resist the temptation of going out for dinner and a movie. Will you pay yourself first? The key to saving is discipline, and one of the best habits to get into is to pay yourself first. Automate your savings plan. Put the maximum amount possible into your employer-sponsored retirement plan. Most young newlyweds should consider investing a substantial proportion of their portfolios in stocks, which tend to offer higher yields than bonds or cash over the long term. Remember that it’s never too soon or too late to save for retirement. Have you created an emergency fund? You should have three to six months of living expenses that you can easily tap in the event of an emergency.
After you know the above information, it is time to establish a realistic budget. A viable budget helps you save regularly, use income wisely, and avoid misunderstandings about how money is spent. With a computer and personal finance software, you can make the task easier and enhance your ability to analyze the results. Personal finance software can chart the success of your budget by category. Personal finance software also can serve as a planning tool to help you meet your goal, such as a cruise. Start by listing all sources of monthly income, including wages and salary, bonuses and commissions, interest, dividends and rental income. Next, identify your major expense categories: mortgage or rent, insurance premiums, child care, and utilities, food, clothing, medical and dental bills, gifts and car repairs. If you can’t account for a large chunk of your income, carry around a small notebook and record every dime you spend over the next few months. Look for expenses that you can cut so you'll have more money for investing, vacations, your children's college fund and other purposes. It is important that you monitor your budget regularly. If you find that your spending is outpacing your income, rework the numbers.
Adequate insurance coverage is vital to protecting your family and your assets. You should update your insurance annually. Review your life, disability, medical and property insurance needs. Make a checklist of your policies and the amount of coverage you have. Determine whether changes in your financial and family life warrant adjusting coverage. Couples with children from a previous marriage and couples with only one working spouse should seriously consider purchasing life insurance for both spouses. Young married couples who both work and have no children may not need life insurance now. However, most CPAs agree that there are advantages to purchasing life insurance early in life. Buying coverage while you're young and healthy gives you the opportunity to “lock in” favorable rates. For most people, term insurance is the best way to get adequate coverage at an affordable cost. Expect to pay more for permanent life insurance, such as whole life, which offers an investment component in addition to the death benefit. Regardless of which insurance you purchase, you should make sure that the beneficiaries listed reflect your current circumstances. For example, if you’ve remarried, is the primary beneficiary on your policy your current spouse?
As important as life insurance is, statistically, young people are more likely to be disabled than to die prematurely. That’s why disability insurance is so important. Disability insurance provides you with a monthly income in the event an accident, illness or injury leaves you unable to work. Most people who work in California are covered by the State Disability Insurance program or SDI. If you are covered, your employer automatically deducts your SDI payment from each paycheck. SDI provides short-term benefits to eligible workers who suffer a loss of wages when they are unable to work because of a non-work related illness or injury or a medically disabling condition from pregnancy or childbirth. Only four other states have state disability insurance programs. If you move elsewhere, you should consider purchasing a disability insurance policy. Even Californians should consider purchasing a long-term policy as the state’s policy only provides benefits for the first year following a disability. You may be able to purchase long-term disability insurance from your employer. If not, you can buy it on your own. Compare policies and select the one that meets your needs at a premium you can afford. If finances are tight, you can reduce the cost by extending the waiting period before coverage kicks in.
Increased health care costs make it more critical than ever for couples to consolidate health insurance so they are not paying for duplicate coverage. If you and your spouse both have health insurance through your employers, compare your coverage and costs to determine which plan best fits your circumstances and finances. You’ll also want to review your auto coverage. If you each have a car registered in your own name, combining them in one policy may qualify you for a multi-car discount from the insurer. Since the policy rates for married drivers are usually lower than for single policyholders, be sure to notify your agent of your marriage. If you own your home, you should have homeowner’s insurance. It protects your home and your personal property from fire, theft and similar perils. It also provides liability coverage as well. Most lenders require homeowner’s insurance to secure a mortgage. If you rent, renter’s insurance will cover the value of your possessions. And like homeowner’s insurance, renter’s insurance provides liability coverage.
If you haven’t done so already, you should draft a will, and if you already have one, you need to revise it periodically to reflect changes in your life. A will ensures that your assets are distributed according to your wishes to family members or other beneficiaries. With no will in place, state law determines what happens to your property. A will, however, does not override beneficiaries you have designated on your life insurance policies, retirement plans and payable-on-death (POD) accounts. These beneficiaries will receive those assets directly. A will lets you place certain conditions on your assets, such as holding assets in trust for your children until they reach a certain age. A will also allows parents to name a guardian who will care for their minor children should something happen to both parents. Without this provision, the court will appoint a guardian for the children. The estate-tax exemption allows you to leave bequests worth up to $1.5 million free of any federal estate tax to beneficiaries other than your spouse or charities. If you’re married, you and your spouse are each entitled to separate $1.5 million exemptions. The exempt amount will increase to $2 million in 2006 and $3.5 million in 2009. Currently, the estate tax is scheduled to be repealed in 2010, but to return in 2011 unless the law is changed in the interim. Transfers between spouses are nontaxable.
To minimize future estate costs, you can make annual tax-free gifts of $11,000 each to any number of individuals. Couples can give combined gifts of $22,000 per recipient. In addition, the future appreciation on the gifted assets will be transferred out of your estate. You should select a qualified executor to handle your estate. An executor is responsible for paying your debts and distributing your assets in accordance with your will. A professional executor, such as a CPA or other trusted advisers, will be more experienced than a friend or relative at administering estates and adds the benefit of impartiality in distributing your assets. It’s a good idea to prepare a list that shows where all important documents and assets are stored. This should include birth, marriage and death certificates, especially of children, spouses and other potential heirs. You also will want to include important financial records, such as stock certificates, insurance policies and retirement account statements. Be sure to provide your executor with the names of your attorney, CPA, stockbroker and other advisers.
You should also have a “living will,” sometimes called an advance healthcare directive. A living will expresses to your family and to your healthcare providers what medical procedures (life-prolonging, pain-relief, etc) you do and do not want. You also can appoint a “healthcare proxy” to make decisions on your behalf that are not covered by your living will. If you are incapacitated or otherwise unable to take care of your financial affairs, a durable power of attorney will give a trusted individual the ability to pay your bills and manage your affairs during your incapacity. Your will has no effect during your lifetime, and a living will only addresses your medical affairs. Durable powers of attorney fill in the end-of-life planning gap and avoid expensive court proceedings to have a guardian or conservator appointed to handle your affairs.
It’s been a pleasure to talk with you today. I know we covered a lot of information that may be difficult to remember. Thankfully, you have all this information in the 360 Degrees of Financial Literacy packets that you received when you walked in. At this time I will be happy to answer any questions you may have.
Issues to discuss before Marraige
Marriage: How to Achieve Your Financial Goals
Are You Financially Compatible? <ul><li>Signed a pre-nuptial? </li></ul><ul><li>Know about personal finance? </li></ul><ul><li>Discuss money regularly? </li></ul>
Are You Financially Compatible? <ul><li>Discussed financial goals? </li></ul><ul><li>Who will handle money management? </li></ul><ul><li>Know partner’s money personality? </li></ul>
Are You Financially Compatible? <ul><li>Checked risk tolerance? </li></ul><ul><li>Know how marriage affects taxes? </li></ul><ul><li>Determined joint debt? </li></ul>
Are You Financially Compatible? <ul><li>Can you trim expenses? </li></ul><ul><li>Will you pay yourself first? </li></ul><ul><li>Established an emergency fund? </li></ul>
Creating a Budget <ul><li>Use personal finance software </li></ul><ul><li>List sources of income </li></ul><ul><li>Identify major expenses </li></ul><ul><ul><li>Record every expenditure </li></ul></ul><ul><ul><li>Cut back where necessary </li></ul></ul><ul><li>Monitor regularly </li></ul>
Protect Yourself with Insurance <ul><li>Life insurance </li></ul><ul><li>- Term or Whole Life?? </li></ul>
Protect Yourself with Insurance <ul><li>Disability insurance </li></ul><ul><ul><li>Deducted by state? </li></ul></ul><ul><ul><li>Offered by employer? </li></ul></ul><ul><ul><li>Purchase on own? </li></ul></ul>
Protect Yourself with Insurance <ul><li>Health insurance </li></ul><ul><li>Auto insurance </li></ul><ul><li>Homeowner’s or Renter’s insurance </li></ul>
Distributing Your Estate <ul><li>Write a will </li></ul><ul><ul><li>Determine who will get what assets </li></ul></ul><ul><ul><li>Name guardian </li></ul></ul><ul><li>Check estate-tax exemption </li></ul>
Distributing Your Estate <ul><li>Make annual gifts </li></ul><ul><li>Select an executor </li></ul><ul><li>Provide guide to important documents </li></ul>
Distributing Your Estate <ul><li>Draft a living will </li></ul><ul><ul><li>State acceptable medical procedures </li></ul></ul><ul><ul><li>Appoint healthcare proxy </li></ul></ul><ul><li>Draw up power of attorney </li></ul>
Rapacki + Co. P.A Contact us for more help on this topic. We have resources in this area if we can’t handle it ourselves. Call 888-RAPACKI