Personal Financial Advice for Newlyweds
In a few days, my oldest child will get married. There are at least two consequences of this impending event: 1. I will take a break from writing a blog post next week. 2. This blog post.
There are certainly more consequences that are much more important to me personally, but for now these two will have to suffice.
In an earlier generation, couples often married earlier. These days, if my children are any indication, they are more likely to study for a career, get themselves financially established, and only then get married, perhaps waiting until their early 30s to “tie the knot.”
From a financial perspective, that means they may have already established their own bank, retirement, and investment accounts. They may have their own spending habits. All this means that they may have quite different attitudes toward financial management. Sometimes, it means they may come into a marriage with quite substantial incomes, net worth, and/or debts. If you are one of these young couples anticipating marriage, there are a few things that you should know or plan to do.
Even if a couple has been living together for a while, such that they perceive their relationship as a marriage under common law, that is not necessarily the case. The provinces define common-law partnerships according to their respective legislative decisions. As a consequence, the rights of common-law partners are not necessarily the same as the rights of a married couple.
I don’t want to talk about marriage by talking about divorce, but rules around divorce help to clarify the nature of the legal aspects of a marriage.
The provinces have established laws about the division of matrimonial property in the event of a divorce. What constitutes matrimonial property varies somewhat from province to province, but it is essentially the property that the couple has accumulated while they were married. This means that property brought into a marriage by either spouse is generally excluded. Inheritances and life insurance proceeds would be two examples of assets that would not generally be included as matrimonial property. Business assets may or may not be included as matrimonial property. Items that will be included in matrimonial property are things like workplace pensions and the family home.
A lot can be covered under this area, but I think the most basic way this becomes an issue to sort out is in deciding about bank accounts and the related issue of bill payments.
You have to decide how you are going to sort out bill payments and savings for joint activities. You also have to decide how to share the responsibilities. Assuming that one spouse makes more than the other, are the bills paid in proportion to their incomes? Or, since they get equal enjoyment out of having their home warm in the winter, do they pay the heating bill on a 50/50 basis?
Option 1. Keep Separate Accounts
The big issue here is to decide on whose account is responsible for the bill payments, or if both spouse’s accounts take care of the bills, how do you split them up?
Option 2. Joint Account
If both of you have your incomes going into one account, then it’s fairly straightforward. The bills come out of the same account that the money goes into.
Option 3. Hybrid Model: Joint Account for Joint Expenses; Separate Accounts for Separate Expenses
This both complicates and simplifies things. The complication is that there are multiple accounts. The simplification is that there is one account to cover joint expenses. It also retains a sense of autonomy or individuality for the two spouses.
As to the kinds of spending, there are essentials, like food, clothing, and shelter, but there is a lot of discretion on the first two. How much of food is going toward eating out or on take-out? I’m not really a big fan of budgeting, but I think it is helpful to create a simple spreadsheet to track your expenses. Include in those expenses more discretionary categories like leisure, entertainment, and vacations/travel. And don’t forget to include setting aside a part of your money for medium-term savings like for cars, where necessary, or the purchase of a home, as well as long-term savings for retirement.
Investment Planning and Retirement Planning
I’ve put these two categories together because for a young couple in their 20s or 30s, retirement planning is likely at least 25 years away. Retirement Planning is, therefore, more about saving for retirement.
Naming the Beneficiary of your RRSP and/or Pension Plan
If you have a pension plan from your employer, you may have been obligated to provide the name of a beneficiary if you were to die prematurely. I have seen young couples, already married, who still have their parents named as the beneficiaries of their pension plan. Likewise with their RRSPs. Pension legislation generally requires that a surviving spouse be the primary beneficiary, but it’s best to get this right in the documents.
Naming the Beneficiary of your TFSA
A Tax-Free Savings Account has a particular kind of beneficiary that is only available to a spouse, whether married or common-law: Successor Holder. By naming your spouse a successor holder, there are rights available that allow the TFSA to pass to the survivor tax-free and without any impact on the survivor’s TFSA status.
If you get to the point of opening a non-registered account because you’ve maxed out the contribution room in your RRSPs and TFSAs, a situation that is more likely if you do not have a home that you are paying a mortgage on, beware of the rules regarding joint accounts. Because interest, dividends, and capital gains are all taxable sources of income, the CRA requires you to be clear who is the owner of the asset that generated the income. If only one spouse has contributed to the account, then the taxes due fall to the contributing spouse alone, even if the account is joint. You may want to keep separate accounts or have two joint accounts with one spouse named first on one and the other spouse named first on the other. In the latter case, the first-named spouse does all the contributing and is responsible for all the taxes.
Insurance and Risk Management
If you are newly married and do not have any children between you, you may think life insurance is not necessary. Death in young adulthood is unlikely, but it could happen. The emotional trauma of this sort of loss may leave the surviving spouse so bereft that they cannot work for months. Having adequate life insurance in place allows the surviving spouse to take the time to grieve. Furthermore, buying term life insurance when you are young and presumably healthy is relatively inexpensive.
It should go without saying that life insurance should be purchased if you have children who depend on your income for financial support.
A final note. You may have life insurance through an employer’s group plan. Especially when children are in your life, this is almost certainly inadequate. If health issues disqualify you from buying private life insurance, then group insurance will have to do, but don’t consider it sufficient in itself.
If you buy a home and your mortgagee offers you mortgage insurance, don’t take them up on it unless you have no other sources of insurance. Instead, include the value of your mortgage in your general life insurance needs.
The likelihood of disability is much higher than death. Don’t neglect accounting for this risk. If your employer offers a group policy it may not be adequate, depending on the specifics. Of course, it is not portable if you change jobs. And, if you are a self-employed professional, you need to get this insurance. Long-term disability can be expensive, so insuring against this risk is arguably more important than life insurance.
Many of the tax-related benefits of being married apply only when you are over 65 or drawing a pension. Still, there are some things a newlywed couple should be aware of.
If you are both in the habit of donating to registered charities, you have the option, when married, to combine your donations to increase your tax credit. Any donations up to $200 attract a 15% federal tax credit. After $200, the credit rises to 29%. The provinces will add their own credits. By combining your donations, you only need to get above $200 for one person in the tax year to gain access to the higher credit. It is generally more beneficial for the higher income spouse to use this credit.
Medical Tax Credit
A couple, or if there are children, a household, can combine their medical expenses that are not otherwise covered by insurance. If the expenses exceed a certain calculated threshold, a credit can be claimed. The calculation favours the lower-income spouse applying for this credit.
If you are relatively young couple with few assets, you may think a will is not important. Your will needs may be very simple, but if there are any assets that cannot be dealt with outside of a will (e.g., RRSP, TFSA, and life insurance all provide for the naming of beneficiaries), then you should at least consider a simple online will like Epilogue Wills or Willful, to name two such offerings. If there are children involved, do not skip over this.
Powers of Attorney
As disability insurance is probably more important than life insurance while you are young, powers of attorney are probably more important than wills at the younger stage of life. Presumably, a newlywed couple would grant power of attorney to each other, but it would also be good to name alternates in case the other spouse is not able to take on the role. In Ontario, there are two kinds of powers of attorney, one for property and the other for personal care. Other provinces may use different terms for personal care matters.
The Plan Well Guide
The spread of COVID-19 seemed at first an issue for the elderly or people with compromising health conditions. However, the variants that have developed over time have caused young and otherwise healthy adults to also become sick with and die from COVID-19. I will certainly advocate for getting vaccinated, but my point in raising this subject is to observe that severe illness can strike even the person most unlikely to get sick. It is useful to consider what you would like your spouse to do on your behalf if you become so ill as to be unable to speak on your own. The Plan Well Guide can help you inform each other about how you would like to be treated medically if that power of attorney for personal care has to be invoked. It may be morbid, but marriage vows often speak of “in sickness and in health” so this sort of preparation comes with the territory.
How we talk about all of the above, indeed, whether we are capable of talking about any of the above, often depends on our beliefs about money. These beliefs are typically rooted in our childhood at the unconscious level. I encourage young couples to discover their respective Money Scripts® by going to this site, developed by Brad Klontz, a psychologist, financial planner and co-author of the book, Facilitating Financial Health.
There is more to attaining a healthy attitude toward money than doing this simple test, but if it gets you talking about money with each other, you have taken one step toward a healthier marriage.
A few other ideas:
Money inspires a great deal of conflict in a marriage, so it may be wise to set some guardrails on your financial behaviour to address those potential conflicts head on.
You may wish to set limits on how much can be spent on a discretionary basis by either spouse. Anything above that prescribed limit requires the other spouse’s agreement.
Young couples may come into a marriage with student loans, car loans, and may wish to add to their debt by buying a home and furnishing it. Even with a good income, they could soon be in hot water. Although it’s hard to imagine in these days of low interest rates, I remember friends who had to sell a house they had bought because they couldn’t afford the high interest rate they were paying on their mortgage. Eventually, they got back into the housing market, but it was a tough path for them to take.
This may sound a bit funny, but if one spouse is so captured by a scarcity mindset that they find it difficult to spend any money at all, an agreement that a couple might make is to spend a certain amount of money per month on a recreational activity.
If there is a bottom line to all this, a good goal for a couple, regardless of their income levels, is to develop a plan that helps them to feel in control of their finances.
This is the 116th blog post for Russ Writes.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.