One lesson I have learned since college graduation is that life constantly evolves. It was rare for me to end up where I imagined I would be, either professionally or personally, five years later. Some transitions from one life phase to the next can be planned, but many others can sneak up on you. Unexpected changes are the most emotionally taxing, and when they are complicated by a change in financial situation, they can feel overwhelming. The key to navigating these changes successfully is to identify and plan for potential financial hurdles as you move from one phase of life to the next.
From Formals to Life on Your Own
Transitioning from student life to the real world is likely the first big financial test you will face. This change can be stark, especially if you bore a share of your college financial burden. I had a work-study job in the Economics department for four years as well as a babysitting gig for about 20 hours a week, so I had a decent income as a student. I also racked up over $40,000 in student loan debt along the way. I was determined to rid myself of this debt burden so I did not allocate any of my income to investing while I paid off my student loans, which in hindsight was a mistake. I was debt free by the time my peers began buying apartments and houses, but I was starting at ground zero in savings. You may need to forego some happy hours to be able to pay down debt and save simultaneously, but the extra years of growth in your savings and investment accounts will pay off richly in the long run.
Even if you manage to graduate without student loan debt, learning to budget and avoid credit card debt can be challenging for those making their own financial decisions for the first time. Maintaining strict financial boundaries isn’t much fun, but it’s incredibly important at this stage. Some financial planners advocate small changes like making coffee at home instead of a $5 daily latte. I disagree. I believe that it is much easier to make larger, infrequent money-saving decisions than many small ones over and over. Choosing an apartment that is $150 per month cheaper than what you can afford is easier and more permanent than saying no to the coffee shop every day. That money can be automatically allocated to a savings account or an emergency fund every month with no continued effort.
Love, Marriage and Cohabitation
First comes love, then comes marriage, and then comes an entirely new list of financial questions. It’s natural to be optimistic when imagining the life ahead with your partner, but wearing rose-colored glasses keeps many couples from planning for their comingled financial lives. Just as some couples go through pre-marital religious counseling, I highly recommend the same exercise with money.
Understanding each other’s financial habits and aligning expectations can help eliminate a lot of stress during your marriage. Will you have joint bank and credit card accounts or maintain them separately? How will you split expenses? What are your goals for home ownership, children, and retirement? How do you agree on discretionary spending when one person is frugal and the other is not? These are all issues that are better resolved ahead of time rather than in the heat of the moment.
It doesn’t necessarily require a legal commitment for these financial issues to arise as more and more couples live together without getting married.
In my late twenties, I lived with my boyfriend for almost five years. In the beginning, we earned approximately the same amount of money so we split everything down the middle. A few years later, he was out-earning me by several multiples, but we continued to divide our regular expenses in half. I felt uncomfortable asking him to pay more, but I had a hard time keeping up with the upgraded lifestyle he wanted to live. The relationship, and my finances, would have been healthier had I insisted on discussing a different way to divvy up expenses. Speak up and be honest about your financial needs in a relationship.
Family money and inheritances are another potential source of tension for many couples. It can be awkward to ask about what your partner is expecting from his or her family, especially when there is a significant amount of wealth involved. I have worked with women who knew their partners had a trust fund, but had no idea how large it was nor its intended use. These details are particularly important when the couple hopes to have a family since often estate planning is designed around providing for future generations.
Prenuptial agreements are a common way to address these issues before they become a problem during the marriage. Many women push back against this idea because they believe it’s planning for the marriage to fail. Try to think about it as similar to auto insurance. No one hopes or plans to get into an accident, but if it happens then the coverage is invaluable. Even if you stay together forever, it’s useful for both spouses to spell out what they are bringing into the marriage and whether they intend to combine assets with each other. Keep in mind that inherited assets belong solely to the spouse receiving them as long as they are not commingled with marital assets. In other words, if you inherit money and put it in an account under your name only then your spouse has no claim on it. If the inheritance goes into a joint account or is used to buy property where both spouses live, then it may be considered community property.
Welcoming a child into the world is one of the biggest changes that a woman will experience as her priorities and schedule get a massive make over. New mothers in the workforce have the additional adjustment of a change in identity to either a working mom or a stay at home mom. Add in the financial stresses of a new baby and this can be a challenging transition.
The first step is to sit down and calculate how much extra it will cost in your area to care for your baby. Websites like babycenter.com have tools that can help you add up the tally of daycare, babysitters, diapers, food, clothing, toys, medical expenses, and saving for college. This number is critical in the decision of whether both parents, or which one, need to work. You should also consider longer-range upgrades such as private school tuition or the possibility of moving to a larger house or apartment as your family grows.
The most pressing concern for many new parents is preparing for the skyrocketing cost of college. Between 1995 and 2015, the cost of tuition and fees at private universities jumped 179 percent, out-of- state tuition and fees at public state schools rose 226 percent, and costs at in-state public universities shot up 296 percent (Source: US News). Meanwhile, general inflation as measured by the Consumer Price Index increased 55.1 percent and nominal household incomes rose 66 percent (Source: St. Louis Federal Reserve). The sooner you start building your child's tuition fund the better.
Before the baby is born speak with a financial advisor about your options for 529 Plans. Run by a state agency or educational institution, a 529 Plan helps families accumulate funds to meet future college costs. These plans offer tremendous tax advantages, they are flexible, and have no income limits, age limits or annual contribution limits. Financial aid applications can be affected by who owns the plan, however, so be sure to plan accordingly if you expect to apply for aid. Contributing to your child’s college fund can be a great alternative to birthday toys and brand new outfits.
When Love and Marriage Don’t Go As Planned
Divorce rates are on the decline, but the American Psychological Association says that 40 to 50 percent of married couples in the U.S. still split up. Emotions run high during the dissolution of a marriage, so getting your facts straight is key. The first thing you should do is talk to a lawyer and find out if you live in a state that follows the equitable distribution of marital property or community property. This will determine how marital assets will be divided. Next, seek out the financial education you need, especially if you were not previously the one making money decisions. This will give you the confidence required to make the tough decisions ahead.
I was married in my twenties and separated three years later. Despite my economics background, I didn’t have a clue about the financial implications of a divorce. These are some concrete steps you can take to protect your finances as you enter the divorce process.
Open New Accounts in Your Name Only
Your spouse could clear out your checking and savings accounts without your consent or freeze your credit cards if all your liquid assets are in joint accounts. Fund your accounts with enough money for at least 6 months to weather any short-term storms.
Track Online Account Passwords and Keep Hard Copies of Records
Make a list of all your accounts and the online access information. Hard-copies of insurance policies, wills, trusts, tax returns or other legal documents will come in handy when the court asks you to complete a financial declaration with proof of taxes, debts, assets and monthly financial obligations.
There’s a good chance that one of you will move out of the marital residence as you go through divorce proceedings. If you’re the one to leave, you may no longer have access to the property and no way to prove that the things important to you existed. Take pictures of everything, even if it is something you may not want to fight for in the split, and document it as something to negotiate against.
Protect Yourself from Debt
Debt is divided post-separation by who incurred the debt. Translation: if the debt is in one person’s name it’s theirs, if it’s under a joint loan or credit card then the responsibility is shared. There’s not much you can do about joint debt, but if you have a shared credit card you can freeze additional spending. Monitor your card activity and your credit score on a regular basis.
Follow Professional Advice
Take a breath before you sign any legal documents and take advice from your legal and financial team. Don’t give up because you’re tired and frustrated. Our brains are programmed to prioritize current rewards (lack of conflict) over future rewards (a fair settlement). Try to focus on what will be best for you and your family 5 or 10 years from now.
The Death of a Spouse
Women live an average of five years longer than men, leaving more women to face the loss of a spouse (Source: US Centers for Disease Control). Grief can lead to prioritizing emotions over smart financial moves when facing this traumatic life transition, so it’s important to avoid immediate decisions. Watch out if you find yourself using excessive spending as a way to cope with your loss. Travel and home improvements may be therapeutic, but make sure they are not drawing down too much short-term liquidity. Take some time before deciding to either pay off a mortgage or sell your home. You may feel differently about the place you lived with your spouse six or twelve months down the line. This is also a time to be cautious about whom you trust with your finances. Be sure to vet thoroughly any financial or insurance professional before giving them any money. One way to do this is with FINRA's BrokerCheck, a free tool that can help you research the professional backgrounds of brokers and brokerage firms, as well as investment adviser firms and advisers.