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invest for life part 3

Wedding rings on a red tableclothSteve Harmon

This article is the third in a series on personal finance and investing at different stages of your life. As some issues may overlap the different stages of life, they could be covered in a prior or subsequent article. For the full series go here.

Money tips for engaged and married couples

After starting a career, the next life-cycle stage to begin for many people is marriage. Some say it is the most important in terms of financial success. No, they don't mean marrying someone wealthy (although this wouldn't hurt!). What they are referring to is financial compatibility between two individuals.

"Probably my best financial move has been choosing a spouse with similar money habits and views on personal finances," says Scott McKibbon, a do-it-yourself investor in Hamilton, Ontario. "This seems to be particularly important in this day and age as broken marriages have destroyed more personal balance sheets than poor markets."

Here are 10 tips to help sort through the financial risks and rewards of married life.

1. It takes two to tango. As a married person, one needs to realize they are not saving and investing just for themselves. Their spouse will likely have a different tolerance for risk and that should be taken into account.

The Invest for Life series:

  • Part 1: Ten money tips for young people
  • Part 2: Ten money tips for people entering the work force
  • Part 3: Getting married? Ten money tips
  • Part 4: Having kids? Pull out the wallet and get set to invest for the future
  • Part 5: Married, with kids? Ten investing tips
  • Part 6: Financial tips as you climb the financial ladder
  • Part 7: Preparing for retirement: 10 tips
  • Part 8: The retirement years: 10 financial tips

York University professor Moshe Milevsky, a leading expert in financial mathematics, came to the conclusion his personal exposure to stocks should be leveraged by 300 per cent to offset the predominately bond-like nature of his personal wealth (tenured job and pension plan).

"Are you out of your mind?" was his wife's reaction (as quoted in the November issue of the Journal of Financial Planning). And so Mr. Milevsky went with a much lower level of leverage.

2. Set compatible goals. Also realize that one's spouse may have different financial objectives, and compromise is in order on this count as well. On Tim Stobb's blog, Canadian Dream: Free at 45, a recent post recounts a frugal husband's attempt to interest his wife in buying a Tumbleweed Tiny House, which range from 65 to 800 square feet in living space.

The husband thought they could live in such a tiny house since they had no plans for children. His wife responded with: "I will not live in a garden shed, no matter how cool you think it is." The solution settled upon in the end was a thousand-square-foot townhouse.

3. Talk about money, even if it hurts. Some spouses don't like to compromise and may hide what they are doing with the family finances. They don't communicate and that is when money issues can really spiral toward the tragedy of separation and divorce.

In Jonathan Chevreau's financial novel, Findependence Day , the central character, Jamie, decides to borrow $60,000 - without telling his wife - to invest in stocks. But after taking the plunge, the market crashes hard. When his wife finds out about the losses, she tells her husband: "I can't believe you'd be so stupid. That is the last straw." A while later, Jamie receives an envelope from his wife's lawyers requesting a split.

4. Two heads are better than one. But marriage, of course, is not all sacrifice and strife. A team working together can accomplish more than the individual members separately. "The other huge success I've had is finding a partner who enjoys taking part in our financial decisions," declares Brad Ferris, the author of the blog: Triaging My Way to Financial Success.

He illustrates with an example. "As I mentioned in a post a while ago about investing in the stock of Reitmans Canada, my partner's shopping experience and insights into their products … helped me see a different side of the fundamentals than what any analyst could pass on."

5. No 'I do's' without a financial chat first. It is no revelation that money issues are a leading cause of martial discord and dissolution. So head them off before getting married (if one is still at the stage of clubbing around). Don't be blinded by those beefy biceps and a twinkle in the eye. Look for extremes in financial behaviour before saying "I do." For a guide, check out the "lighthearted" Valentine quiz from the Australian Securities & Investments Commission.

Here's a sampling on what to look for: Is your prospective partner up most the night trading oil futures on margin or do they keep "banknotes in the freezer, some gold bullion in the underwear drawer, and regard bank deposits as high-risk?" Do moths fly out of their wallet on the rare occasion they are forced to open it or "have they already spent more than the gross domestic product of a small nation?"

6. Get educated. For Emil Saumier, divorce was the worse thing that happened to him financially. He never paid much attention to the intricacies of family law in his province or realized how much marriage breakdown could devastate one's financial situation. "I really think I would have been better prepared if I had been better educated in finance," says Mr. Saumier, the owner of a martial-arts school in Ottawa.

Christine Van Cauwenberghe, director of tax and estate planning with Investors Group in Winnipeg, would likely agree. She observes that family law can indeed hold some surprises. For example, "In a few provinces the marital home is shareable even if acquired prior to the time of marriage." Her book, Wealth Planning Strategies for Canadians: 2010 , points out other surprises that lurk in family legislation.

7. Know thy spouse-to-be. "It is surprising how many couples have never discussed finances before their wedding," notes Brenda MacDonald, an independent financial counsellor living in Victoria. In the June, 2009, issue of Canadian MoneySaver, she offers a comprehensive checklist of topics that engaged couples should discuss before walking down the aisle. They include: financial goals (and how to reach them), where to invest savings, and debts brought into the marriage.

She also recommends comparing credit scores. If both persons have similar scores, above 750, shout "Hurray for us!" If one or both score lower than 650, the caution flag is waving. Not only could it signal an irresponsible personality but it may diminish the couple's ability to borrow for a house, car and other items.

8. Use your spousal status as a benefit. Marriage presents many opportunities to protect assets and enhance after-tax income. An entrepreneur can protect the family house from creditors by putting it in the other spouse's name. And they can split income by employing a spouse. Other income-splitting moves include contributions to a spousal registered retirement savings plan (RRSP).

The higher income spouse should pay household expenses while the lower income spouse uses their income for investing. If he or she doesn't have enough funds, a loan from the higher income spouse (at "prescribed" loan rates) can be invested without attribution back to them. As well, contributions can be made to the other spouse's tax-free savings plan (TFSA) without attribution.

9. A prenup shouldn't be such a dirty word. Second and blended marriages raise additional considerations. Notably, one or both parties in such unions may be bringing substantial assets to the marriage. A properly executed prenuptial agreement can provide protection (family law may have grey areas and can be changed). And in blended families (both spouses have kids from previous marriages), prenups and other arrangements may be necessary for ensuring an estate is left behind for one's children from the previous relationship.

10. Those who save together, stay together. A study, Fatal (Fiscal) Attraction: Spendthrifts and Tightwads in Marriage, conducted by researchers at Wharton Business School and Northwestern University, found that spendthrifts and tightwads tended to marry each other. Go figure. Anyway, that was not a good thing, the study said, because the greater the difference on the spending continuum, the more likely the marriage would encounter turbulence.

This martial tendency is all the more reason for engaged and married couples to zero in on the financial aspect of their relationship. One step often recommended for resolving disputes is to have separate and joint chequing accounts. But, above all, communication is the crucial factor.

"During marriage, I think one of the most important things that spouses need to do in dealing with financial issues is to communicate," advises Ms. Van Cauwenberghe. "If the couple is experiencing financial difficulty, there are usually ways of resolving those issues, but many couples simply choose to ignore them and allow [problems like]debt to pile up. In many cases the solution is to speak to a neutral third party. A financial adviser is often able to state the obvious things that spouses don't want to admit to each other."