Couples who follow bad financial advice can experience ramifications that vary from a slight hiccup to a complete derailment of their finances.
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For example, decades ago, due to poor financial advice, some married couples consolidated their student loans together with the idea that one interest rate and one payment would make life simpler. However, couples who didn’t buckle down and pay off their consolidated debt as soon as they could are now finding themselves saddled with a crippling amount of combined student loan debt, often fueled by deferments, forbearances and capitalized interest. Even worse, these spousal loans cannot be separated and are not eligible for loan forgiveness programs under current laws.
To help you and your significant other avoid this and other financial catastrophes, take note of these six examples of the worst financial advice for couples.
Have Separate Bank Accounts
“Couples who each have their own bank account are more likely to experience financial difficulties,” said Michael Ryan, former financial planner and owner of MichaelRyanMoney.com. “It is important for couples to communicate openly about their finances and to make joint financial decisions.”
A recent group of studies published in the Journal of Personality and Social Psychology found that couples who combine their money experience a higher rate of relationship satisfaction and are less likely to break up — especially among couples who have a low household income or who report feelings of financial distress.
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Pay Off All Debts Before Saving or Investing
“Unfortunately, when couples see this scenario as a dollars-and-sense issue and not a commitment, they fail to grasp the importance of the other two activities,” said Todd Christensen, AFCPE-accredited financial counselor with Debt Reduction Services. “They believe that saving and investing are not as important as paying off debt.”
He continued, “Consequently, if they ever do pay off all their debt, they may proceed to spending that payment on consumer goods rather than on saving and investing. After all, their so-called advisor told them to deprioritize saving and investing, so the couple often ends up justifying consumer purchases after paying off their previous debt by justifying them again. In reality, paying off debt, saving, and investing are all equally important. Couples should never completely sacrifice one for the sake of another.”
Only Use Credit Cards for Emergencies
“Credit cards should not be used for emergencies,” said Ryan. “Credit cards should be used responsibly and only for purchases that can be paid off in full each month.”
To deal with financial emergencies, couples should build an emergency fund. Most experts recommend having an emergency fund that’s equal to three to six months’ worth of living expenses. To meet that goal, make a pact with your partner to save $1,000 as quickly as you can, which will cover many emergency expenses that could arise, and then continue steadily adding to it.
Save Tons of Money in Your Child’s 529 Plan
“This can be bad advice if the 529 is held in the child’s name, such as in a custodial account,” said Brad Biren, a tax and elder law attorney and owner of IQMOP Consulting. “The reason is because all assets in the name of the child, other than untouched retirement accounts, are FAFSA included. That means they must be disclosed on the Free Application for Federal Student Aid form. The more assets a child has, the less financial aid they are likely to receive.”
“There are two better options for investing in a young person’s future. First, rather than opening a 529 in the child’s name, open one that you own separate from them. That will help to keep it FAFSA excluded. Second, open a child Roth IRA instead. The income must be considered earned, and the child’s tax rate will likely be low; therefore, deferring taxes at their young age will be mostly unnecessary. Keep in mind that gifts cannot go into an IRA, as they are not considered earned income.”
Buy a Home ASAP
“Buying a home is a major financial decision,” said Ryan. “Couples should carefully consider whether they are ready to take on the financial responsibility of owning a home.”
Before buying a home, take a look at these important steps you should take as a couple.
Only Contribute to Your 401(k) up to the Employer Match
“Under IRS Code 401(k), an employer can match your contribution, up to 6% of your salary to your account,” said Biren. “This allows the employer to write-off the expense from their earnings, assuming it is an ERISA-approved plan, and it provides you with an extra 6% of tax-deferred retirement savings.”
He continued, “For most Americans, they can deposit up to about $22,500 into their 401(k) plans. Both the employee’s contribution and the employer’s contributions are tax-deferred earnings. This means that you will not pay tax on them now at your current tax rate, but rather in the future at once you start to take out required minimum deductions or RMDs. So, if you make $100,000 and contribute only $6,000 to the limit of the employer match, for a total of $12,000 in tax-deferred retirement savings, you are leaving almost double that amount to be taxed now. Why? Because the $6,000 you contribute is reduced from your taxable income. If you were to max out your contribution, you would eliminate almost 15% of your taxable income for the year.”
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