I’ve been a forensic accountant for about 14 years.  I can’t count the number of times I’ve thought that it should be mandatory to take financial literacy lessons and exhibit some minimum level of competence before marriage. In other words couples should do some financial planning before marriage. A forensic accountant's involvement typically occurs  in a matrimonial situation after financial errors or chicanery occur.

Often it is too late for one or both parties to salvage their financial security by the time we enter the picture to figure out what went wrong and how.  My own financial fortunes depend to some degree on the misfortunes of others.  However, I would be ecstatic if every couple embarking upon marriage or a similar long-term committed relationship would take some time to discuss their financial habits and expectations with each other.  They should disclose and document their income, assets, and liabilities to each other. Couples should plan ahead to address what will happen in the event the unthinkable happens. Without planning their joyous beginning can come to an unhappy ending.

 

It has become apparent to me that financial planning before marriage is similar to purchasing insurance. Most people don’t want to spend time and money to plan for a bad thing that may not ever happen. It is so much easier to put it off and pretend the bad thing won’t happen. Often a couple planning their marriage typically is so full of hope and excitement about their life together. They may feel it is unlucky or a sign of mistrust to consider how to deal with possible problems with their relationship in future years. However, just like hurricanes, earthquakes, car accidents, and illnesses, relationship breakdowns happen. When they do, those who spent the time and money to protect themselves may be much happier than those who avoided an uncomfortable topic.

 

This will be the first in a series of three articles.  All written about financial planning before marriage, during marriage, and after the end of a marriage. In this first article, I address what individuals who are about to commence upon a hopefully long term relationship, marriage, should consider and discuss prior to tying the knot. This will not only prepare, in the long term, for a possible break in the relationship.  Financial planning before marriage may help surface and resolve some of the issues that could cause disagreements in the first place.

 

Financial literacy and advance planning is necessary for most couples, not just those with significant income and/or assets. In its most elementary form, financial planning before marriage comes down to communication and making sure each party has at least a little basic education.  Everyone should know how to prepare a budget, and track income and expenses.  You can decide if you prefer a checkbook, spreadsheet, or other type of software. While the following points address some of the more important financial issues to address with your future spouse, this is by no means an exhaustive list of topics. Use this as a jumping off point to chart the financial course of your relationship.

Spend or save?

Long before the wedding, the parties need to talk to each other about their own spending habits. When one party is very frugal and the other is a spendthrift, conflict will most assuredly develop.  Conflict can occur in times of financial uncertainty, and even when a couple’s financial situation is quite secure.  Being on the same page is crucial to handling a budget and purchases of any size during your marriage.

It is best to agree upon a mutually acceptable spending pattern, and whether the couple will share the decision when making purchases above a certain dollar amount. For example, is it okay if one spouse buys an expensive piece of jewelry or automobile without consulting the other? You should also decide whether you want to guide your expenditures by implementing a budget. As part of your budget, you should discuss the use of cash versus credit and how you will accomplish your retirement (401(K), IRAs, etc.) or other savings goals as well as how to finance significant purchases.

Premarital property.

Prior to marriage, a couple should create a list and communicate about their individual income, assets, and liabilities. Among other issues, say there is a piece of furniture that one party has inherited from a family member with particular historical and sentimental value to that individual’s family. It might be important that this item remains in the family for posterity. As such, identifying such items and agreeing upon their disposition in case of divorce or death will go a long way toward avoiding strife in the future.

Another important issue may be participation in or ownership of a family business. Depending upon the terms of shareholder agreements, ownership by individuals outside the family may be prohibited, or dilution of family ownership through marriage or divorce unwanted. It is important to address these issues prior to the wedding day.

Joint accounts or separate?

The couple should decide whether they will have joint accounts, maintain separate accounts, or have a mixture of both. There are pros and cons to each situation. For example, if you decide to put your accounts into joint names, both parties will have access to the accounts.  You will both be able to see where the money comes from and goes to. However, it also makes it possible for one party to drain the joint account(s) and leave the other party penniless. Maintaining separate accounts may aid in keeping assets and income separate.  It may also support your intention to keep these items separate if it comes to a divorce.  Separate accounts could also prevent transparency when it comes to a couple’s financial situation, and lead to suspicion and discontent.

Who pays the bills?

Decide who will be responsible for paying the bills. Frequently, one spouse handles the bills, in other instances responsibility is split between spouses.  One might pay the day to day living expenses.  While the other pays set expenses such as the mortgage or automobile payments. It is advantageous to have both spouses involved in the financial decisions, rather than one having complete control over everything.

It is also wise to document in a secure manner all accounts, both assets and liabilities, and relevant access data.  This may help avoid a situation if the spouse who has control over the finances becomes incapacitated or dies.  With proper preparation the other spouse is not put in a situation whereby they have no idea how to properly handle the finances. Planning ahead and deciding that both individuals will have some involvement and knowledge about the couples’ finances could prevent unintended difficulties in the future.

Credit reports.

In the interest of full disclosure, as well as developing good financial habits, each party should obtain a copy of their credit report and share it with their significant other so each knows what they are getting into. In fact, put it on your calendar to get a copy of your credit report every four months. Got towww.annualcreditreport.com, where you can request one free copy of your credit report each year from each of the three major credit reporting agencies, TransUnion, Equifax, and Experian.  You can then better monitor your credit record and help protect yourself from identity theft. Make sure to discuss any debts each individual has and how to address those during the marriage.  You want to decide if the other individual is going to help pay those debts off.   Debt can greatly affect your financial status as an individual and a couple.

Prior marriages.

If either party is a divorcee or has children from a prior relationship, there may or may not be financial repercussions to discuss. If either individual receives alimony payments from an ex-spouse, those payments will generally end upon remarriage of the recipient. However, child support payments, whether the individual is the obligor or the recipient, generally continue upon remarriage of either party. There are only a few exceptions, as child support is typically the obligation of the child’s biological parents, not stepparents.

Get a prenup.

To ensure that all of the topics mentioned are disclosed and legally documented, have an attorney draft a prenuptial agreement. Be sure to deal with this well in advance of the wedding day.  Signing the agreement close upon that date might be challenged as being coercive. Both parties should have separate competent legal representation and fully understand the terms of the agreement. A prenup doesn't guarantee an eventual split will be trouble free, but it may lead to a less contentious divorce.

While it is entirely human and understandable to avoid things like finances when preparing for a wedding, it is a big mistake. Take time to understand each other’s financial personalities and plan for how to deal with major financial issues before marriage.  It may actually save your relationship.  Create a roadmap to resolve and avoid disagreements and outline the disposition of contentious issues before illness or divorce can sneak up and make things much more difficult. Financial planning before marriage is important before you say "I do".