Financial Planning for Newlyweds
One of the best ways that a young married couple can solidify their marriage is by developing a financial plan. The process allows couples to determine how they will manage their financial household and how they will make financial decisions. As newlyweds begin a new stage in the life cycle, primary attention should be given to budget planning, establishing an emergency reserve, debt management with the proper use of credit, insurance planning, and savings planning.
A budget includes both fixed expenses and variable expenses. Fixed expenses include nondiscretionary items such as food, clothing, rent or mortgage, car expenses, and insurance premiums. Variable expenses include discretionary costs that you have more control of, such as eating out, travel, and gifts. To cover unexpected expenses, consider setting aside an emergency reserve that covers 3-6 months of your essential living expenses. If both spouses are employed, a three month reserve may be adequate. An emergency reserve should include cash and cash equivalents, such as money market funds and Certificates of Deposits that mature in twelve months or less. Establishing your emergency reserve should be a top priority for your financial plan.
As you begin to accumulate assets, managing your credit prudently will lessen unnecessary stress to your marriage life. Experts recommend that your housing expenses should not exceed 28% of your gross annual income. In addition, total debt should remain below 36%. Debt falls under three categories: very good, reasonable, and bad debt. For example, a 15 year mortgage is optimal, while a thirty year mortgage is reasonable. If you are purchasing a new home, consider buying a house that you can pay off in fifteen years. Likewise, when buying a car, a loan amount that you can pay off in three years is recommended. Finally, limit your use of credit cards to eliminate the accrual of bad debt. Interest rates on credit cards can be as high as 28%.
Developing an insurance plan to cover major risks is an essential part of a financial plan. Life insurance protects your family in cases of premature death and allows your loved ones to maintain their standard of living. Disability insurance protects your income should you become incapacitated to work. Health insurance covers preventive and major medical expenses. For these renting, renters insurance covers your personal furnishings and is very reasonable in cost. If you are gainfully employed, consider reviewing your employee benefits to make sure that you are taking advantage of all of your options.
Your budget should also include any savings plans that you contribute to, such as a retirement plan and a college savings plan. A reasonable benchmark is to begin saving 10-13% of your annual gross income. Developing the discipline of saving will give you peace of mind and bolster your financial security.
In closing, each family’s financial situation is different and requires careful planning. Consider consulting a Certified Financial Planner® professional to assist you in mapping out your financial plan.