Both Spouses Should Know Money Situation
In many households, one partner handles the finances and the other does not. Often the other has little specific knowledge about income, expenses, investment strategies and the like.
That means that in the event of a death or divorce, one spouse will suffer a serious financial trauma, as well as the obvious emotional one.
But such financial difficulties are relatively easy to guard against if both partners sit down while they are healthy and happy and talk about their money and their financial goals.
Even those who are already on their own can benefit from a thoughtful self-analysis and strategic planning.
How important is it? A widow in Los Angeles said recently that she had lost nearly all her estate through bad investments recommended by a plethora of “advisers.” One investment, now on the verge of collapse, may mean the difference between a comfortable retirement and living almost solely on Social Security income.
Planning is incredibly simple when it is actually done in advance. All it takes is a few minutes once a year--perhaps at the same time as you are preparing an annual tax return--to review all the family’s major expenses, assets and investments.
Much of the information you need is the same information you will have pulled out to prepare a tax return.
For instance, you should have statements that indicate how much interest you have received during the year on various investments. If you are involved in partnerships, you would also get a partnership statement--typically called a K1 form--that would spell out the profit or loss on that deal as well.
Chances are that you’ve also got a number of statements that show how much you’ve paid for a wide variety of assets that were purchased on credit. Although the interest paid on your home mortgage and home equity loan are probably the only items that are still deductible on a tax return, it is likely that your bank will still advise you about the annual finance costs for car and boat loans, as well as for and other personal credit lines.
There are a few additional items you should pull out for a financial discussion with your spouse, however. Foremost are insurance policies on everything from your life to your house and cars. You and your spouse should both know whether you are adequately covered for an emergency, such as a fire or a car accident. And you should be able to figure out how well either spouse could survive on insurance proceeds and other investments in the event that one spouse dies or is disabled.
After tallying assets and liabilities, it is advisable to discuss strategy. Talk about why you have put your money in various instruments--fast growth, preservation of principle, etc.--and whether that’s a strategy you want to continue.
Usually, as people age, they want to gradually move their investments from more aggressive, growth-oriented vehicles to conservative and liquid investments, such as Treasury bills and bank certificates of deposit. That’s simply because they become less able to risk a significant amount of their net worth. Moreover, many worry about investment losses. And, generally speaking, the added return you might earn on a more aggressive investment isn’t worth the emotional cost.
Those who are already on their own can benefit from this yearly analysis too. The investment climate changes year to year, and you might be wise to shift your investments along with it.
A few notes of caution: If you are newly widowed or divorced, don’t rush into anything. Often emotionally distraught individuals make bad business decisions simply because they are not yet able to focus on practical matters. Stick your money in an insured bank or thrift deposit until you are ready to analyze the pros and cons of riskier ventures. Don’t let anyone push you into an investment you don’t fully understand.
When you are ready to deal with investments, hire a seasoned financial adviser. Frequently, individuals take the advice of friends and relatives instead of paying a professional to help them. This is a perfect example of being penny wise and pound foolish. In most cases, you’ll spend less on the adviser than you’ll lose investing in your best friend’s hot tip.
Be careful how you chose advisers, though. Many financial advisers get fees from companies they recommend. For instance, if you buy a life insurance policy, your financial adviser might get a 10% commission from the insurer. Mutual fund companies and promoters of limited partnerships might pay advisers to recommend their shares, as well.
That does not mean that the investments these advisers recommend are necessarily bad, but you should know from the start whether your adviser has a vested interest in certain offers. Weigh investment decisions accordingly. Most legitimate financial advisers will tell you at the onset whether they get commissions and fees from companies they recommend.
