When Joan* and David* first met, Joan loved the fact that David was free and easy with his money. "He is incredibly generous and never worries about what something costs," says Joan. It wasn't until after they married that Joan realized just how differently they thought about money. David had run up thousands of dollars on his credit cards and showed no signs of slowing down. "I am frugal by nature," says Joan. "I always try and save before I make a purchase, and if I have to buy on credit, I make sure to pay my credit cards off in full at the end of the month. David is much more willing to take on debt."
For many couples, opposing attitudes about money such as these can cause arguments. "Money can ruin a relationship," says Janet Freedman, a certified financial planner and president of Finance Matters in Toronto. "It's so critical to be up front, lay out every single dime you owe and work out together how you are going to manage your finances right from the start."
Here are 10 things experts say that Joan and David -- and every couple -- need to do to handle their money well.
1. Add up the ins and outs
Sit down once a year and map out your cash flow. List what comes in per paycheque (after all deductions), then list all your expenses, dividing them into fixed expenses (such as groceries and mortgage) or discretionary ones (such as gym memberships and movies). Allocate a dollar figure to each expense, stick to it and don't spend more.
"I don't like to say 'budget,'" says Freedman. "It's like 'diet,' another dirty word. But if you know exactly how much is coming in and how much is going out and where, you won't fall into the trap of living beyond your means." She recommends that couples commit 10 per cent to savings right off the top (RRSPs, pension plans, RESPs, if you have children, and debt reduction). "If you try to find the money at the end of the month, it just won't be there. This is not a discretionary thing. It's something everybody should aim for."
2. Save and invest
You should both know how much money you have, where it's at, why it's there and how much you're spending on your investments. "If you're joined at the chequebook, you have an obligation and responsibility to know what's going on," says JoAnne Anderson, president of MoneyPower Inc. in Mississauga, Ont. "Often I see one spouse who has no clue as to why they have certain investments," she says. "Each person needs to know what his risk profile looks like and understand what their differences are as a couple … No one should invest outside her risk tolerance."
3. Manage your debt
List what's owed on each debt and when payments are due. "It's your job as a couple to keep on top of it," says Paul Lermitte, a certified financial planner with Integrated Planning Group/Assante Financial in Vancouver. "If one of you is in charge of paying the bills, the other should at least review what's being done or try sharing the job. It's one way of diffusing arguments about money." He also advises automatic payments: that way everything is paid and paid on time.
And you need to determine just how much debt you can carry. Once you've mapped out what's coming in and going out, it's easy to see what's left. For a mortgage, Lermitte recommends a 20-year amortization as opposed to the more traditional 25. "The first five years are mostly interest," he says. By choosing a shorter amortization you will shave thousands of dollars off your interest costs.
"The real problem area for most couples is credit-card debt," he says. It's easy to understand -- rates vary from 9.9 to 28.8 per cent. If you owe $2,300 at 18.4 per cent, for example, and make only the minimum payments, you'll end up paying more than twice that by the time you make the last payment -- and it will take 18 years. "The day you find you can't pay your cards off on a monthly basis, cut them up," he says.
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4. Know your net worth
No mystery here -- your net worth is simply what you own less what you owe. Anderson recommends sitting down once a year and listing all your assets: bank accounts, the house and cottage and their contents, vehicles, any investments, RRSPs, pensions or rental properties and so on. Then do the same for liabilities: mortgages, car loans, credit-card debt and anything else.
The difference between the two is your net worth. "From year to year you want that net worth or bottom line to grow," she says. "This gives you a snapshot of where you are and a starting point to figure out what needs to be done. The only way to improve on it is to add to your assets or reduce your liabilities."
5. Check your credit rating
"With the increased incidence of identity theft, this is an area we should all take more active interest in," says Lermitte. The standard system ranks credit worthiness on a scale from one (pays within 30 days) to nine (bad debt placed for collection). If there are errors (it's not unusual) on your credit report, you could be denied a loan or miss out on a job or a great apartment. A common mistake is confusing a John Jr. with a John Sr. If one of you is a deadbeat when it comes to debt repayment, the other could pay the price. To correct a mistake, contact one of the major credit bureaus and fill out the appropriate form.
In Canada, there are three credit bureaus: Equifax Canada, Trans Union Canada and Northern Credit Bureaus. Equifax and Trans Union are the largest; most national and international creditors are registered with both. Whatever shows up on one credit report will likely show up on the other, saving you the hassle of contacting all three (Equifax is the most accessible). You can check your credit rating by mail once a year at no cost.
Freedman also advises everyone to establish a separate credit rating. "Some people are in a relationship from early on and end up with joint credit cards. If the marriage breaks down or one spouse dies, the other has no credit rating," she says. "Trying to establish credit later in life can be difficult. Do it before you need to."
6. Purchase appropriate insurance
It's important for couples to have both life and disability insurance. "For most people term life insurance makes the most sense," says Freedman, coauthor with Marie Howes of Hit by an Iceberg: Coping with Disability in Mid-Career (Trafford, 2003). "Consider how much the other spouse would need to maintain your current lifestyle and whether that will need to continue long term." Disability insurance is equally important for couples: "If you don't have any group coverage through work, look into getting some individually. It's much cheaper to do this when you are younger."
Consider that your needs change throughout your lives, talk to a knowledgeable insurance agent, do your homework and shop around. "The only way to get the best value is to know what's out there," says Freedman. Make sure both of you know what your policies cover.
7. Organize your important paperwork
Keep all your legal documents -- signed wills, powers of attorney, marriage licence, birth certificates, insurance policies, passports, social insurance cards (don't carry these around, they are the key to your identity), property deeds and so on -- together in one easily accessible spot. "A safety-deposit box isn't always the best idea," says Freedman, who keeps her important papers in a lockbox. "Unless it's registered in both your names, you could have a hard time getting access."
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8. Learn about your tax liability
When you understand what tax bracket you each fall into, you will know which spouse should deduct child-care and medical expenses, who should claim charitable donations and how much of a tax break you'll each gain with an RRSP contribution.
If one partner is in a higher bracket, he or she should think about paying into a spousal RRSP to ensure that you build equal assets (you'll pay less tax in retirement). "Bottom line, you don't want to pay more tax than you have to," says Anderson of MoneyPower.
9. List important names and numbers
Most people have a list of emergency phone numbers at the ready. Add the names and numbers of the accountants, financial planners, insurance brokers or lawyers involved in your finances, and your credit-card numbers and expiry dates. "Tape it to the inside of a cupboard so everybody in the house has access," recommends Lermitte, a certified financial planner. When you go on vacation, leave the list with someone you trust.
10. Look forward to retirement
"This is a journey you and your partner are going to take together," says Anderson. "Once you have that vision, you can map out the strategies that are going to help you get there." The key is to start early. "If you start saving at age 20 and you don't have a company pension plan, usually you only have to save between $1,000 and $2,000 a year each to get to a comfortable retirement at 65," says Anderson. "If you wait till you're 45, you've each got to save between $11,500 to $12,800 annually."
One extra tip: talk it over
Most couples don't discuss money unless they are arguing. "It has both power and security attached to it," says Anderson. "You need to do some exploring about each other's ‘money personality' early on and keep talking about it." Anderson urges couples to have a monthly finance meeting. Joan agrees and believes that couples should start talking even before they pool their resources. "Couples should be required to take some sort of finance class," she says. "It would be a real eye-opener."
*Names have been changed.
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