In theory, you share everything in marriage, but in practice, more and more couples are talking less and less about their finances — a dangerous trend — as money is a leading causes of marital conflict and divorce. To help start the dialogue, "Good Morning America" financial contributor Mellody Hobson shares the top five financial issues that married couples need to be able to answer about each other.
Mellody's Tips on Managing Finances With Your Spouse
How can you be sure exactly what your income is in order to talk with your spouse?
You would think that "How much money does your spouse make?" would be an easy question to answer — but think again. Half of the couples in a 2003 survey came up with disparate answers to questions about income and net worth. Why is it important to know this information? Because in order to figure out how much you can spend and more importantly, save, you need to know how much money is coming in. At the end of each year, most employers provide employees with updated salary information for the coming year, as well as any upcoming bonuses to be paid out. Then, just a month or so later — at the beginning of each year — you should receive a W-2 from your employer detailing your total compensation from the previous year for tax purposes. Use this information as a prompt to sit down together and discuss your collective income and how you plan to budget for the coming year.
What do you need to know about your spouse's debt?
Most couples think they know everything important about their partner — shoe size, favorite food, childhood pet, etc. But, do you know how much money your beloved owes? If you don't, you better find out quick because like it or not, it could impact you. In most cases, you are not responsible for the debt your spouse comes into the marriage with, unless of course, you add your name onto the various accounts. However, any debt wracked up during the course of your marriage on joint accounts is the responsibility of BOTH of you to repay. And, if you live in a community property state — it is always your joint responsibility, regardless of whether you have joint accounts. So even if you have not combined your finances, you need to be fully aware of all existing debt between the two of you because it will effect other joint financial goals, such as buying a house or a car, and even when you can retire. In addition to knowing the amount, you need to agree about how and when you are going to pay it off.
How much do you need to know about shopping habits?
While you do not need to share information about each and every dollar spent, there needs to be some overarching agreement about how your money will be spent and allocated to reach your joint financial goals. And, you are in dangerous territory if you are regularly hiding your spending habits from your spouse or believe that your partner is hiding something from you. Unfortunately, spending in secret is not an uncommon practice, a recent study by GMAC found that one-third of surveyed spouses admitted to hiding at least one purchase from their partner. That said, spending habits need to be layered in with understanding the full picture of your spouse's income and debt at the end of each month, you both need to understand how much is coming in, what is going out and what is being saved.
What do you need to know about your spouse concerning retirement?
First and foremost, couples need to sit down and ask each other: :When do you want to retire? How much income do you think we need each year, and what will be the source of this income?" Then, you need to make a plan on how to get there together, and revisit this plan each year. I strongly advocate that EACH spouse contribute the most that they can to their own employer-sponsored retirement plan — putting away at least enough to quality for an employer match. If one spouse is not working, then it is critically important that the working spouse contribute to a Spousal IRA on behalf of their partner. In 2008, you can contribute $5,000 for the non-working spouse and $5,000 for the working spouse for a total of $10,000. These days, 401k plans and IRAs are often only two pieces of the retirement puzzle though, so you also need to talk about other investments and income such as a pension or Social Security — that will help you reach your goals. As with debt, the key is for each person to have an understanding of the total amount saved or invested, and your plans to increase that value.
What do you need to know to plan for the unexpected like death or divorce?
The importance of understanding the issues we just covered, your spouse's income, debt and investments, becomes paramount when the unexpected happens. The sad reality is that between 40 percent and 45 percent of marriages end in divorce, and the average age of widowhood is 55 years old. So, what can you do? First, talk about your life insurance needs together; what would you need to supplement your own income if your spouse died; and make sure your life insurance policies address these needs. Also, each year, make sure that your beneficiary information on your various accounts, e.g. investment, 401k, etc. is up-to-date, reflecting the spouse as beneficiary (if they do not, you need to know about it). Last, but not least, if you and your spouse have separate wills, be sure to understand how the financial impact of your spouse's will. Are you the primary beneficiary? Or will most of their assets be distributed elsewhere? The death of a spouse leaves the surviving partner not only in emotional distress, but often in financial crisis as well, so make sure you are knowledgeable about your financial health before the unexpected takes you by surprise.
Should each spouse also have a secret stash of cash to protect them from the unexpected?
Generally speaking, financial secrecy is not a good idea. Rather, partnership coupled with healthy independence should be the goal. My advice to each partner is to be sure to build and maintain a separate credit history from your spouse—you can easily do so with your own credit card. That said, you also want to make sure both of your names appear on your significant joint investments and accounts, so that one partner cannot act without the knowledge of the other.
If you have been married for a while and have not talked about these issues in the past, it is NOT too late to start. Remember, knowledge is power and it is important to start a conversation now. While you may face some resistance from your spouse, you need to start chipping away at these issues together to keep your finances and relationship on sound footing. And, keep in mind, while the practice of "dividing and conquering" may work with household chores, it is not a good idea when it comes to your finances. Both partners need to understand the full picture to ensure you stay on track to meet your financial goals.