Saturday, October 5, 2013

Financial Thoughts for Young Couples

I had the pleasure of attending my cousin’s wedding yesterday afternoon and after the ceremony I started thinking about some of the financial considerations young couples face. Given that the majority of problems in a marriage ultimately stem from disagreements over money, I thought in today’s post it would be a good idea to touch on this subject. Please note, however, if as a newlywed you and your husband have just purchased a $10M apartment in New York, and you make comments like “I’m not fundamentally interested in making money,” please just close this internet browser now. Doing so will save you the confusion of many of the terms below like “work,” “mortgage,” and “embracing risk.” If you do not fall into the above category, good for you! The challenges facing a young couple are tremendously rewarding and if approached in the right manner will, I guarantee you, be some of your fondest memories in years to come.

Almost all the successful couples I’ve had the pleasure of working with over the years generally have many similarities; they have discussed their financial goals together, they have written these goals down, and they have acted on these goals. The REALLY successful couples have embraced risk. We’ll get back to the last point later, but I wanted to start with discussing, writing, and acting.

As a financial farmer, we know the value of discussing our plans aloud to provide our thoughts and also to hear what others might have to say. In a marriage, this is vital on the financial front because each spouse may have a different role in the relationship, different experience with money growing up, and drastically different goals than the other spouse. This is why going over expectations of income, housing, entertainment, lifestyle, etc. are so important. Talk all of it over and see what you’re each expecting.

Any couple, young or old, should be aware of the financial landscape, which segues nicely into writing down a summary of where you stand currently and also where you would like be down the road. Writing a goal down is very valuable, it sets in motion a whole chain of events. This financial snapshot should accurately capture as thoroughly as possible the complete situation; assets, liabilities, income, goals, etc. This experience usually isn’t done overnight, and it usually shouldn’t be done just once; financial planning in a relationship is an on-going element in your marriage.

The next, and critical step, is to act on your plan. If you want to buy a house immediately or in the next couple years, do your your research; understand the home buying process, understand financing, interest rates, and down payments. If you plan to rent an apartment and invest the difference, what type of monthly budget are you planning to use? When you’re a young married couple the runway is long and even minor advantages you implement early can have a meaningful impact on your net worth over time. The same, of course, can be said of mistakes. If you’re lacking in financial planning, talk with several financially successful older couples you respect and pick out what they did to succeed, and also if they’re willing to share, ask them about their financial failures.

As briefly mentioned above, this process of discussing, writing, and acting is not a stand-alone event; both of you need to be involved in laying the foundation of your future wealth.

One final note I’ll make today, and it is this; embrace risk. I’ve only seen lasting wealth created in a handful of ways, below are three of the most common that I’ve seen repeated often enough to make copious notes on the subject:

1. Steadily rising income that is squirreled away into a portfolio of investments that have the possibility of compounding exponentially, and rarely, if ever, touching them. Squirreling-away implies living below your means for a sustained period of time.

2. Being crafty, prudent, adventurous, careless, or whatever else in picking the RIGHT piece(s) of real estate at the RIGHT price (the money is made on the purchase, even if the sale is made decades away), at the RIGHT time. Buy the RIGHT real estate. When done correctly, real estate is the IDEAL (Income, Depreciation, Expense, Appreciation, and Leverage) investment vehicle.

3. Determined that a profession and real estate are both ridiculous, the entrepreneur chooses to spend every waking moment creating a (fill in the blank) company that does (fill in the blank) better than any other company. The success of that company then sustains everything else in life.

Now there’s a flip side to this coin, presented almost perfectly in a recent article I read titled “Failure to Launch” (hyperlinked) which bemoans the situation of the “New Lost Generation,” more often referred to as the Millennials.

Some generalized findings from the report: there are no good jobs, there are no good industries, there is a paradigm shift, and basically Millennials will probably earn less than their parents and work longer. And die younger. And listen to worse music. And not laugh as much.

So what? Life is a struggle. For each of these findings I can list ten advantages the Millennials have over previous generations. Here are a couple; it has rarely ever been easier to start your own business, interest rates are at historic lows, there are abundant entry-level jobs you can work to learn a trade, skill, or profession. Millennial computer skills far, far exceed the average of any other generation. Productivity in a creative environment is almost unrivaled. The list goes on and on.

So what am I trying to say? The field is fertile with opportunity, especially for young couples that have discussed their financial situation, written down their goals, and are taking effective actions to accomplish them. If you’re reading, you also probably have a pretty good understanding of one additional almost unquantifiable element, embracing risk. Go forth and do likewise!