CHAPTER
18

Life, Love, and Money

In This Chapter

• How your life affects your finances
• Being single and earning a paycheck
• Living together and your finances
• Marriage and money
• The financial implications of divorce
• Borrowing money from people you know

Life, in many ways, is not a game of chance. It moves along at its own pace. Days pass; seasons change; and all of a sudden, you’re another year older.

Your life is changing, too. You’re probably better established in your career than you were a year or so ago, and it might seem like a lifetime ago that you left college and started working. Hopefully, your personal finances are on track, and you’re enjoying having a little extra money—not only for things you want to buy, but for investing in your future as well.

Let’s have a look at how different stages of life can affect your personal finances and how you can make the most of each of those stages.

Footloose and Fancy-Free

Your single years can be some of the best of your life. You’re getting your career off the ground and starting to be recognized for your accomplishments. You’re meeting lots of new people and enjoying an active social life. You’re not broke like you were in college and the first couple years when you started working, so you can afford to do some things now you couldn’t do before. You’re also learning a little about investments, putting some money away in your 401(k) plan, and maybe even thinking about buying a place of your own.

If you’re still living with your parents, you’re by no means alone. Many millennials are staying at home longer, and among other reasons, they say it’s so they can repay college loans and save some money.

However, not all single people are financially responsible. Some not-so-young-anymore singles haven’t saved a dime, and they aren’t looking into the future past their next paycheck.

In earlier chapters, we talked about investments, taxes, and other topics that can affect your finances and your future. Hopefully, you’ve learned something and are doing what you need to both enjoy your single years and ensure your future. At the very least, you should by now be paying back college loans, working to reduce (and hopefully eliminate) credit card debt, saving money in an emergency fund, and putting some money into your employer’s 401(k) plan or another type of tax-deferred retirement plan.

We’d never suggest you miss out on the opportunity to enjoy your great single years because you’re saving every penny you make and never have any money to do anything with. Just don’t lose sight of the fact that you have a lot of life ahead of you, and all the fun you have when you’re footloose and fancy-free won’t finance your retirement.

Living Together

So you’ve met somebody you really, really like. Okay, you’re in love. You’re spending a lot of time together. Actually, you’re together almost all the time. You talk about a future together, but neither of you feels like you’re quite ready to start shopping for an engagement ring. And then one day you’re just hanging out when it happens: your significant other asks you to move in.

This scenario is becoming increasingly common, as more than 6.4 million unmarried couples are living together in the United States, according to U.S. Census figures. That’s a change from 35 years ago, when fewer than 1 million unmarried couples cohabitated.

Couples live together for a variety of reasons. Some do it because it’s convenient; it eliminates running back and forth between two apartments and shuffling belongings all over town. Some couples use living together as a sort of “trial run” for marriage; they reason it makes more sense to see whether it will work out before they get married than risk a divorce later.

Financial considerations also can factor into a couple’s decision to live together rather than get married. Many couples set a goal of saving a specific amount of money, paying off student loans, or getting enough for a down payment on a house before taking the plunge. Some want to establish their careers before getting married and live together while they do.

Whatever the reasons, plenty of couples choose to live together. Although cohabitation is common and widely accepted, it can still be a sticky arrangement. There are financial and legal ramifications as well as the less-tangible emotional aspects to consider.

You’re on your own to figure out the emotional particulars of living together, but we can tell you some things you should know about the legal and financial aspects.

Financial Pros of Living Together

Living together definitely comes with some financial advantages:

Reduced costs If you each had an apartment before you moved in together, you’ll cut your housing costs by about 50 percent by sharing your space. That makes more sense than paying rent on an apartment that was empty most of the time, anyway. You’ll also be sharing costs for utilities, so you’ll see some savings there. If you were living a considerable distance apart, you’ll save money on transportation, too.

Tax advantages You’ll also realize some tax advantages by living together instead of opting for marriage. Although you’re living together, you’ll continue filing your tax returns as singles. That can save you some money, especially if you and your significant other earn above-average salaries. Even with changes to tax laws that lessen tax-rate disparities, many married couples still pay more combined income tax than two singles filing separately.

Financial Cons of Living Together

Although living together does have some financial benefits, it’s not all a bed of roses. In some instances, you’d be better off financially if you were married. Consider the following:

Health benefits Some employers offer health and dental benefits to spouses of employees but not to unmarried partners.

Life insurance If an employer offers life insurance and the employee dies, benefits automatically go to the spouse of the deceased. An unmarried partner must be named as a beneficiary to receive the benefits.

Property If you live together in a house or condo that’s in only one of your names, the significant other may have no claim on the property, despite having invested $30,000 in the new kitchen.

Social Security If a person dies while employed, the spouse might be eligible for some Social Security benefits upon reaching age 60. An unmarried partner isn’t eligible for these benefits.

Memberships Unmarried couples may not be eligible for money-saving “family” memberships in clubs and organizations.

We’re not trying to turn marriage into a business transaction, but as you can see, there are financial advantages and disadvantages to living together instead of getting married you should consider.

One thing to remember, though, is that marriage implies love and commitment that extend far past the savings account. If you’re putting off marriage because you might be taxed at a higher rate, you might have to ask yourself whether you’re looking for an excuse to stay single.

Getting Married

You’re tying the knot! Hearty congratulations and best wishes to you both! Before you blissfully embark on your honeymoon, though, you need to think about some financial matters.

Chances are, you’ve been thinking a lot about money as you ponder how much to spend and how to pay for your wedding. We leave that up to you, with only a warning to think long and hard before taking on a lot of debt to pay for your special day.

With some planning, you can put on a lovely wedding without a $30,000 price tag. Many websites, blogs, apps, and articles can help you plan a wedding that won’t break your budget. Here are few of our favorite articles:

• “Ten Ways I Trimmed $21,000 Off My Wedding Budget” (lifehacker.com/ten-ways-i-trimmed-21-000-off-my-wedding-budget-1183546801)
• “8 Websites to Help You Save Money on the Cost of a Wedding” (makeuseof.com/tag/8-websites-help-save-money-cost-wedding)
• “The 7 Best Wedding Planning Apps Brides and Grooms Should Download Now” (techtimes.com/articles/52507/20150515/best-wedding-planning-apps-brides-grooms-download-now.htm)

A large number of divorces are caused by financial problems. Sometimes these problems are a result of a gambling or another type of addiction. Often, though, financial problems occur because the couple doesn’t work together on their financial health.

If you’re planning to marry, it’s absolutely essential that you and your intended sit down and carefully and thoroughly discuss how you’ll handle your finances after the wedding. You should establish some goals to work toward together and be sure you know about each other’s debts, spending patterns, and investments. Talk about your college debt, credit card debt, or other liabilities. Get familiar with one another’s credit scores, and understand what each of you earns and saves. As a married couple, you’ll need to work together to handle your finances.

You also need to decide how you’ll set up your bank accounts as a married couple. It’s not necessary to have joint accounts, although most married couples have at least some of their money pooled. Some couples, especially when both people are earning, keep both separate accounts and joint accounts. Separate accounts give individuals freedom and independence, while joint accounts offer the convenience of allowing either spouse to sign a check or make online payments. This is a decision you and your partner need to discuss and figure out based on what works best for the two of you.

While contemplating marriage, be sure to consider your spouse-to-be’s financial personality. Learn your partner’s attitudes concerning savings and the best means for saving money for your future together. Do you have 401(k) plans? Any stocks? What about savings bonds you got as gifts when you were a kid? Talk about saving to buy a house. What about saving for kids?

Talk, too, about how you’ll operate within a budget, and together plan the budget you’ll use. You don’t want the stresses of adjusting to married life to be aggravated by a misunderstanding of how you’ll be handling your finances. Iron out as many financial considerations as possible before the wedding to avoid conflicts afterward.

You also should discuss how your marriage will affect your employer benefits. If one of you has a much better package than the other, set it up so you’re both covered by the better deal, if possible. Consider health benefits, retirement savings plans, and anything else that might affect your financial situation. Check to see whether either employer offers compensation to an employee who gives up benefits to be covered by the partner’s plan.

Pay attention to your insurance policies, too, ensuring you have what you need. And you’ll need to think about setting up wills, trusts, and powers of attorney, as applicable. (You learn more about those topics in Chapter 20.)

What About Prenups?

Prenuptial agreements—those handy little plans that spell out how assets will be divided in the event the marriage fails—used to be primarily for people with lots of money. But even if you don’t have tons of money, some matrimonial lawyers and financial advisers strongly recommend a prenup, especially if one person has a child or children from a previous marriage or relationship. A prenuptial agreement also might make sense if one partner owns a business or makes a lot more money than the other. Such an agreement could be important if one partner has major assets independently and doesn’t want to risk losing them.

The average cost of hiring an attorney to draw up a traditional prenuptial agreement ranges from $1,500 to $3,000, depending on the complexity and the amount of assets to be considered. Prenuptial agreements also are available online from sources like LegalZoom (legalzoom.com), an online legal document provider. For $995, you can get a basic prenuptial agreement you fill out and then send in for a LegalZoom document reviewer to look over. You’ll have to pay more if your wedding is less than 2 weeks away.

Whether or not to have a prenuptial agreement is something you and your fiancé have to decide together. If you can’t agree on the need for one, or if you feel your partner is pressuring you to have one and you don’t want it, it might be a good idea to get some financial or relationship counseling before the wedding. It might just be a matter of not fully understanding the other’s concerns or wishes.

Filing Jointly or Separately?

The American tax system is far from simple, and it’s long been a thorny issue for some couples as they marry. The taxes a couple has to pay after marriage might be higher or lower than the combined amount they would have paid if they had remained single. If the amount is more, it’s referred to as the marriage penalty. If it’s less, it’s called a marriage bonus.

Typically, a marriage penalty happens when two people who make about the same amount of money marry. This is true for both low- and high-income couples because combining salaries and doubling your taxable income can push a couple into a higher tax bracket. It used to be that the deduction a married couple took didn’t even come close to adding up to the total of the deductions of two people filing separately, but tax revisions have gone a long way toward closing the gap.

A marriage bonus typically occurs when a couple with very unequal salaries files jointly. The amount earned by the person with the lower income generally isn’t enough to put the couple into a higher tax bracket. Because income tax brackets for married individuals are much wider than those for single filers, the couple might actually fall into a lower bracket and pay less in taxes.

To see which way is more advantageous to you, run your returns both ways—jointly and separately—through a tax program such as TurboTax before filing.

And Baby Makes Three

Life happens, and kids very often are a part of life. They can be the best thing to ever happen to you, but they are expensive—very expensive. If you have a child or two, are thinking of having a child, or are expecting a baby soon, you need to consider some child-related financial implications.

No one can tell you exactly how having a baby will affect your life. Suffice it to say, however, it will never be the same. Your sleeping schedule will change. Your relationship with your spouse will change. Your expectations, hopes, and dreams will change. And if you’re lucky, you’ll experience a profound, life-changing love for your baby.

Your financial situation also will change, starting with the income you may lose due to time off during pregnancy and after the baby is born. If your employer doesn’t offer paid maternity or paternity leave, check at work to see if you’re covered by short-term disability insurance, which might cover you for time off due to pregnancy and childbirth. If short-term disability won’t kick in, you could take time off under the Family and Medical Leave Act, but your employer doesn’t have to pay you when you’re gone.

The next financial hurdles to clear are the medical bills for the pregnancy and birth. Check the provisions of your health insurance policy to find out exactly what pregnancy and childbirth expenses are covered and what you might have to pay for yourself. Don’t forget to consider any deductibles or co-pays you might be responsible for. If you have to pick up some or even all of the cost, many hospitals and birthing centers will work with you on setting up a payment plan.

Not only are babies expensive to birth, they’re also expensive after they arrive in the world. A crib, a stroller, a high chair, a baby swing, car seats, mobiles, sheets, diapers, lotions, … the list goes on and on, and there’s more baby gear being invented by the minute. You definitely need furniture and equipment that’s safe and durable, but you don’t need the Ralph Lauren baby sheet and comforter ensemble available for $125 at Nordstrom. Your baby will sleep just as soundly on the $14.99 version from Target. Also, don’t overlook your local consignment shop, yard sales, or online sites like craigslist for baby equipment. You can find a lot of barely used gear around for much less than new costs if you look.

As you might know, childcare is expensive. If you’re planning to go back to work after your baby is born, you’ll need to carefully consider your options for finding someone to watch Junior. Unless you’re lucky enough to have Grandma watch the baby, you can plan on spending some serious dollars for good childcare.

But there is some good news: childcare expenses, with limitations, can be deducted when you file your income tax. To take the deduction, you only need to report the provider’s Social Security or taxpayer identification number and address to the IRS.

Divorce and Financial Issues

Marriage is not a perfect or foolproof institution, and sometimes it ends in divorce. If your marriage is failing, or has failed, it’s urgently important that you protect your assets and make the best of a bad situation. It might seem insensitive to focus on finances when you’re splitting up, particularly if you have a child or children who need your care and attention. But ignoring your financial situation during this time could negatively affect you—and your kids—for years to come.

Often, when divorce occurs, one or both parties is emotionally devastated. Obviously, that’s not a good place to be and can make just getting through the day incredibly difficult. The emotional aspects of divorce can be extremely frustrating and consuming, but it’s important to pay attention to the entire divorce scenario, which includes your finances.

If you don’t have a lot of assets, dividing up what you do have might not be so difficult. If you have a prenuptial agreement, as discussed earlier in this chapter, the division of property should be pretty straightforward. If you don’t have a prenup and you have considerable assets, or suspect the division of whatever property you have won’t be agreeable or easy, you probably need to hire an attorney.

When it comes to dividing property, you’ll need to be realistic about what you’ll be able to afford. If you and your spouse were both contributing to mortgage payments, you might not be able to afford them on your own, meaning you might not be able to keep your house. The same may apply to vehicles, vacation property, and other assets.

While you’re dividing property, you’ll also need to consider how to divide debt. Be sure you get the full story on any debt your spouse has incurred. Many divorces are the result of financial problems, which sometimes occur without the knowledge of one of the partners. Laws regarding the obligation of one spouse to the other in the event of debt vary, but it’s always better to confront the reality of your financial situation and decide how to best deal with it.

If you are required to pay alimony, maintenance, or child support to your ex, or you are to be the recipient of any of those payments, be sure you understand the tax implications. Alimony payments are considered taxable income, but the payer can usually deduct them from his or her income. Child support, however, is neither taxable nor deductible. Marital support becomes alimony in the year of the divorce, so be aware of the tax consequences.

Retirement savings may be affected by divorce as well. In the event that one spouse worked and had a retirement plan and the other spouse had no income or had been in an employment situation that did not include a plan, the property settlement can divide the retirement savings into two parts—one for the employee and one for the spouse. Tax penalties that would apply for an early withdraw from a retirement fund under different circumstances do not apply when an account is divided due to divorce. A court order known as a qualified domestic relation order (QDRO) is needed to make a nontaxable division.

Finally, you’ll need to take action regarding credit cards, bank accounts, financial accounts, insurance policies, wills, and any other pending legal agreements. Depending on the circumstances of your divorce, you might have to take steps to prevent your former spouse from gaining access to your bank accounts or credit cards. Be sure all the necessary paperwork is completed to ensure your accounts and policies remain safe.

Clearly, divorce is a difficult and complicated action, which we can only begin to cover here. If you’re facing divorce, you should learn everything you can on your own. But unless there’s a compelling reason not to, also consult with a qualified attorney who can lead you through the proceedings.

Borrowing Money from Family or Friends

Married or not, at some point of your life, you might find yourself in a position where it makes sense to borrow money from a family member or friend. And although these types of loans have been lifesavers for many, they also can be dangerous.

If you plan to borrow money from a family member or friend to use as a down payment on a house, get your catering business off the ground, pay off the last of your student loans, help with expenses if you take extended unpaid leave after having a baby, or for any other purpose, proceed carefully.

When you borrow money from a bank or other lender, you have a legal obligation to pay back the money, based on specific terms.

Borrowing from a friend or family member should be no different. You and the lender should have everything in writing, with an agreement that outlines the terms of the loan. Include the interest rate, if there is one; the penalty for late payments; what will happen if the loan recipient defaults; in what installments payments will be made; and so forth. Consider having the agreement notarized, which will make it more legally enforceable in the event of default. When you have an agreement in place, stay in touch with the person who loaned you the money. If your loan payment is going to be late, be sure you let the lender know, and explain the reason.

Family members and friends often are happy to loan money to a deserving relative or friend, but relationships have been irrevocably damaged when the recipient of the loan defaulted.

The Least You Need to Know

• Living single and bringing in a paycheck is a tempting time to spend, spend, spend, but it’s also a great time to save.
• Living together without being married can affect your finances. Consider these effects before making a commitment.
• Getting married might involve changes to your taxes, insurance, and bank accounts.
• A baby is an expensive proposition, but there are ways to keep expenses under control.
• If you find yourself facing divorce, work carefully to protect yourself financially.
• When borrowing money from a family member or friend, be sure everything is in writing and everyone agrees on the terms of the loan.