As newlyweds, it's natural to want to spend money doing the things you love together and buying furnishings to build your nest. Just make sure you plan how to save money together before you spend money together.
Particularly if this is the first time you're merging bank accounts and assets with someone, you should look at this transition as an opportunity to set up thoughtful savings and spending guidelines. Money troubles can mar even the best marriage, but with some planning, you can make your finances a source of shared purpose rather than friction. A good savings base will reduce stress later when you confront challenges, and you'll grow closer as you partner to reach your goals.
Setting Financial Goals
So, how do you get started on saving? First, sit down together and create a financial vision. Where do you see yourselves in a year, in 5 years, in 10 years, and beyond? What do you want to accomplish, and how much money will it take to do those things? Set savings goals on paper.
Think of savings falling into three categories: emergency savings, short- to mid-term savings, and long-term savings, such as retirement savings.
Savings for a Rainy Day: Building an Emergency Fund
Maintaining an emergency savings fund is essential because unexpected expenses are inevitable. The only questions are when and where they'll happen. You'll be much better equipped to handle any emergency--medical issues, car breakdown, sudden job loss--if you have a strong money safety net. Experts recommend saving three to six months of income. In bad economic times, some encourage setting aside nine months or more of income.
Short- to Mid-Term Goals: Saving for a Home
After you build up an emergency fund, you'll want to save for major joint purchases. One purchase on the minds of many newlyweds is a home. If you've both been renting until now, you'll know that renting has the benefit of flexibility. However, with home ownership, you can deduct the mortgage interest from your taxes and build equity in a property with each monthly mortgage payment. If your home increases in value, you can sell and make a profit, which you can put toward a larger home if you're thinking of having children.
You'll need at least 3.5% of the home's sales price for a down payment--that's the amount required for a mortgage loan guaranteed by the Federal Housing Administration (FHA) and popular with first-time buyers. Of course, if you want to build equity quickly and get favorable interest rates, it's better to have an even larger down payment. The larger the down payment, the lower your mortgage balance and the smaller your monthly mortgage payments. If you can afford a 20% down payment, you won't have to pay the monthly premium for an FHA guarantee or for private mortgage insurance.
Retirement might seem like a long way off, but you'll be much better off if you start saving now. If you're young newlyweds, you've got time on your side--and time (with compounding) is what helps build savings.
Consider this example from the US Department of Labor: if you put $1,000 into an IRA at the beginning of every year from age 20 through age 30 and earned 7% annually, you'd have $168,514 in the account at age 65. This is without putting in a penny past age 30. But say you waited until age 30 to begin putting away $1,000 every year and continued doing so for the next 35 years, still earning 7% annually. Despite putting away a lot more money, you'd have only $147,913 by age 65.
Make sure you're both enrolled in your employers' retirement benefit plans if they offer them, and shoot to maximize any employer match. If your employer doesn't offer a 401(k) or other contribution plan, open up a traditional or Roth IRA account. Talk to a financial advisor about investing retirement funds in stocks, bonds, and mutual funds.
Now that you have a good idea of your big-picture goals, set a savings target, or a percentage of your income you'll save no matter what. To see how much you can save comfortably, look at your income and your essential expenses and see how much is left over. Together, set up a line-item budget, detailing all your expenses and income, including how much you'll set aside for savings.
If neither of you is the type to embrace sophisticated software and accounting systems, decide on certain principles or rules governing your finances. An easy-to-remember rule of thumb like the Balanced Money Formula can help some couples get on the same page. This formula, proposed in the book All Your Worth: The Ultimate Lifetime Money Plan, calls for setting aside roughly 50% for "needs," 30% for "wants," and at least 20% for savings. Allocate those savings between the categories of retirement, emergencies, and medium- and short-term goals.
If the savings you come up with don't come close to matching your financial goals, you have two choices: boost your income or cut expenses. It's usually quicker to do the latter. Look hard at your spending to see where you can cut. Can you do without the premium cable plan and make do with the basic package, for instance?
Boost Savings By Tracking Spending
Recording all your expenses in detail for even two weeks may be eye-opening: you might be surprised to learn how much you (or your spouse) throw away on small purchases. You don't have to eliminate every treat, but you can save a surprising amount just by cutting back. Going without two $6 fast-food meals and two $4 lattes a week would yield more than $1,000 of savings in a year.
Even if you've always been good at keeping track of where your money goes, adding another person to the mix means greater coordination is required. The two of you may now have to develop a more formal system for tracking your spending.
Investing Your Savings
Discuss whether you want joint ownership on all, some, or even none of your accounts--there's no one right answer, except that both of you must be comfortable with the bank account setup. Put your emergency and short-term savings in liquid investments, accounts that can be converted to cash easily. Your best bets are savings accounts, money market accounts, and certificates of deposit:
- Traditional savings accounts usually have the lowest interest rates of the three, but they provide easy access to your cash.
- Money market accounts often require hefty minimum deposit amounts and have a limit on the number of transactions, but they offer higher interest rates than traditional savings accounts.
- Certificates of deposit (CDs) offer higher interest rates, on average, than savings and money market accounts, but they carry penalties if you withdraw the cash before the maturity dates. CDs are offered for terms of varying lengths--so you can deposit money in a 3-month CD or even a 5-year CD. Generally, the longer the term, the higher the CD rate. You can employ "laddering" strategies--staggering CDs of varying maturity dates--to take advantage of higher CD rates while maintaining some flexibility.
Best Savings Rates
Even within account types, interest rates can vary widely. If you're considering new accounts anyway, you may as well look around for high-interest savings accounts and money market accounts, or the best CD rates. Check rates at local financial institutions and online at sites like Money-Rates.com and RateAPY.com for the best bank deals.
Make Savings Automatic
You may find it helpful to set up savings accounts or money market accounts dedicated to specific goals. In fact, some banks let you earmark funds within a savings account so you can keep track of them more easily. Set up an automatic transfer every month from your checking account to your savings account. Automatic deductions remove temptations and make saving painless.
Which exact mechanisms you set up or rules you define for handling finances don't matter nearly as much as the act of creating these plans together and agreeing on the overarching savings goals. Put aside some time now to work out the details of these goals--and your budget--and revisit them periodically. With any luck, a sound savings plan will see you both through many happy years of work and retirement.