My latest source of curiosity is how couples join their finances. I just finished a fantastic book by David Bach called Smart Couples Finish Rich. He lays out nine steps for couples to do to get ahold of their financial life.
Step 1 – Learn the facts and myths about couples and money.
The author lays out a few myths about money and corrects them.
Myth: “If we love each other, we won’t fight about money.”
Actually, couples fight about money quite a bit. You’ll fight about money if you don’t have enough of it. And you’ll fight about money if you don’t have the same priorities.
Myth: It takes a lot of money to make money.
Actually, it takes time to make money. Time in the market. And a little bit of money.
There are a few other myths he debunks, like thinking you don’t have enough money to invest and not talking about money. He encourages early investing and consistent investing. Smart.
Step 2 – Determine the true purpose of money in your life
This is the big why. What is important to you and does what you spend your money on mirror your values? List your top five values and discuss them with your partner.
My five values
- Security. I always want enough money to buy a comfortable place to sleep and enough food. The basics.
- Freedom. I want enough money to not have to work. Freeeeeedom.
- Family. I want to spend money on my family and spending time with them.
- Excitement. I want to spend money on things that make life interesting. Adventure.
- Health. I want enough money to be healthy and promote a healthy lifestyle.
These five values should guide your decisions about money and life.
Step 3 – Plan together…win together
Now the author wants you to gather all your documents and put them in file folders and get a real handle of what money comes in and what money goes out. What are your assets? What are your liabilities?
Make goals based on your values. Take some tiny action within 48 hours of setting that goal. I like that idea. Want to move to France? Hop on Airbnb for ten minutes to check out places. Just do something.
I took this step to create an income/expenses/passive income chart for boyfriend. Quite fun. Although I didn’t use file folders.
Step 4 – The couples’ latte factor
The author thinks that Americans don’t have an earning problem, they have a spending problem. I think that’s true for people not living in real poverty. He gives ways to cut back.
Step 5 – Build your retirement basket
Pay yourself first. Put aside money for retirement before you do anything. He goes through the different retirement account options. Very helpful.
You don’t need to time the market. You need time in the market.
Clever.
Step 6 – Build your security basket
The fact that the author wants you to invest in retirement before creating an emergency fund is novel and I like it. Retirement is free (and often employee-matched) money because you pay into your retirement fund before you see the money in your paycheck, so it makes sense to build the retirement basket first.
He recommends a money market account (Vanguard has one) for a savings account and goes through the different types of insurance. Very helpful. I don’t think I would get any of the insurance plans, but it’s interesting to read about them.
Step 7 – Build your dream basket
Now is the time to build your dream basket by thinking about what you want to do. I think this is the fun part. He recommends VTSMX, which is, apparently, the older version of VTSAX and which I don’t think you can buy anymore.
He also goes through different types of annuities. Again, helpful. I don’t think I would get one, but it’s interesting to read about them.
Step 8 – Learn to avoid the ten biggest financial mistakes couples make
The biggest financial mistakes couples make are having a 30-year mortgage, not taking credit card debt seriously, trying to time the market, buying stocks on margin, not starting a college-savings plan soon enough, not teaching your kids about money, neglecting to sign a prenuptial agreement, not having a greater purpose beyond the two of you, not figuring out who is responsible for what, and not getting professional financial advice.
The only part I disagree with the author on is the need for a professional financial advisor. His argument is that rich people hire financial advisors. He claims that the right advisor can be worth more than 3% annually. This is based on data from Vanguard.
How a financial advisor can save you over 3% annually
- Lowering expenses – cost effective implementation = 0.45% savings
- Rebalancing – your investments = 0.35% savings
- Behavior coaching – helping you to not hurt yourself = 1.50% savings
- Asset location – optimizing portfolio that minimizes taxes = 0.75% savings
- Spending strategy – the way you withdraw your money = 0.70% savings
Hmm. Definitely something to consider. I’ve always been anti-financial advisor, but the data is persuasive. I’m not going to go out and get one tomorrow, but it’s definitely made me more open-minded and listen with a keener ear when people talk about theirs. I don’t do anything for tax savings. What do you guys think?
Step 9 – Plan a money date
Finally, you should plan a regular money date to check in. Love doesn’t conquer all, but open communication might. Make sure you guys are on the same page when it comes to money. Open a dialogue. Start a discussion. Talk about money regularly. Boyfriend and I scheduled a time to meet every month to update his spreadsheet I made for him. Wheee!
I liked this book a lot and highly recommend it for couples looking to overhaul their finances together.
I think you’d have to go back to work to worry about taxes. 😉
There’s the IRA conversion ladder that someone mentioned to me recently in the comments somewhere.
Yeah, tax optimization is important for early retirees too. Def check out the Roth conversion ladder! It’s a powerful knob to turn to limit your lifetime tax burden.
Do you have an article on that I can read?
Yes, in the interest of shameless self-promotion, I do 😉
Note: Roth conversions are taxable, so be mindful for your healthcare subsidies.
https://clippingchains.com/2021/04/12/roth-conversion-ladder/
Hello! It has been a pleasure over the years to read about your travels and discoveries and now your new adventure. Thank you for being so open and thoughtful. I am now ten years off retirement, and started investing late – but I am also now more committed to living a sustainable financial life that does not contribute to the climate emergency and might even promote greener policies – divestment and so on. I wondered if you are considering this as well?
I think living a frugal life in general is good for the climate emergency. It’s definitely something I think about whenever I purchase anything. What were the conditions of the person making this? What happens to it when it’s no longer useful? Etc.
How does your financial life promote greener policies?
Pay yourself first, I learned that from an advisory firm at 23 and it has made a massive difference, because Time in the Market and dollar cost averaging . Regularly put aside 10% minimum. Now, the advisory firm put me in an IRA in mutual funds that were front- loaded to the tune of 5.25%, which is too steep. I’ve since learned that a cheapie index fund is ‘more better’ , of course, but if I had not been shown the math and charts on starting sooner than later , and investing in companies , I would be a lot poorer for it.
Cheapie index fund is most definitely more better.
Ramit Sethi has a podcast about money, relationships, and psychology that may be of interest. He interviews couples on each episode.
Oooh, interesting. Thanks for the recommendation.
I don’t use a financial advisor either but I can see the wisdom in hiring one that charges a flat fee, if only to get another perspective on your portfolio. As far as minimizing taxes, it’s probably more important when you’re in the accumulation phase and in a higher tax bracket than you are now. Overall I really enjoyed reading this book summary. The title sounds intriguing but I don’t think most of the content would be especially new or valuable to me. I do like your 5 values though!
Yeah, not sure how much I actually learned new, but refreshers are always good.
Also, I’m curious for the reasoning behind a 30 year mortgage being considered a financial mistake?
I’m also curious about the 30 year mortgage
You’re paying interest over thirty years. That’s a lot of interest.
This article sums it up pretty well. You pay a TON more interest when you get a 30-year mortgage. He recommends a 15-year mortgage. Or, if you have to get a 30-year, pay a few extra payments a year to cut down drastically on the interest.
Regarding Step 8 and the value of a financial advisor, here is a well-known financial author’s take on Vanguard’s list:
https://andrewtobias.com/are-financial-advisors-worth-300-basis-points/
As for the other mistakes in #8, none less than Warren Buffett suggests that a 30-year mortgage is “the best instrument in the world”, pretty much the polar opposite of a financial mistake. With 30-year rates now over 6% it is much less compelling, but I refinanced a few years ago, paying 3 points, into a 30-year, 2.75% rate. I’m super happy with my longer term, even though I will be paying more total interest than if I had chosen a 15-year.
-Bob
Appreciate the perspective!
Hiya! Glad to see you back here regularly again!
So, with the recent downturn, are you a little bit worried about your portfolio and whether you’ll have enough for the rest of your retirement? (I know I am.)
Somewhat regularly! No, I’m not concerned about my portfolio. I still have more than when I retired. Should I be worried? My chart still says I’m fine.