In this podcast, Molly Herndon interviews Dr. Barbara O’Neill. Dr. O’Neill continues the discussion from our August 28 webinar, Family Finances Series: Financial Planning for Life Events, including financial planning throughout the lifecycle, finances and cohabitation, finances and marriage, and smart steps to take when buying a car.
Let’s get started by talking about some key lifestyle trends that you talked about during the webinar.
Some of the lifestyle events that I talked about involved changed relationships (e.g. somebody gets married), and some of them involved large purchases (e.g. purchase of a car). It was kind of a combination of things that are happening in people’s lives and things that people are spending large amounts of money on. One of the things that we talked about is the increase in the number of people that are living together (i.e. cohabitation). The biggest increase is among those who are age 50+. Also, we have seen in the United States the highest average age ever for first marriages, and the age of first time mothers has increased. It was 26.3 in 2014. We also saw the average monthly payment for a new car break the $500 barrier. The average monthly payment is now $523, and the average loan amount is $31,453 for a new car. The average loan term is 5 years 9 months, so almost 6 years now is the average length of a car loan payment. We also mentioned leasing on the webinar. Leasing comprises about 31% of new car sales transactions. We also talked about student loans. About 44 million Americans owe about 1.5 trillion dollars collectively on student loans. We also talked about later life financial planning decisions. The average retirement age in the United States is now 64.6 for men and 62.3 for women, and it’s estimated that only 42% of US adults have estate planning documents such as a will or a living trust. So you can see that we had a very eclectic webinar. We got into many topics related to people at different stages in the life cycle.
That’s amazing. So what steps should people who are unmarried and living together take to manage their money?
Well I think just like married couples you need to develop some kind of method for bill paying. If you’re sharing a household, you’re sharing lots of expenses (e.g. rent or a mortgage payment, utilities). So figuring out a way to do that whether it’s separate bill paying or proportionate bill paying- where people put money into a pot based on a percentage of their income (i.e. if they earn 60% of the income, they would be paying proportionately 60% of the total expenses). Some people do both, so that they have a little bit of separate bill paying and also some proportionate bill paying as well. The other thing I think people should do is beware of co-mingling their assets and debts, and keep good records of who’s paying what for large purchases. Should the relationship end and people have to kind of deal with the separation of property, it helps to have some documents that established very clearly who really paid for particular items. That kind of begs the whole issue of cohabitation agreements. If the relationship seems to be a long term one, people might want to consider a legal document that kind of spells out the specifics of their financial arrangement with one another. It’s kind of similar to what you’d have as a prenup if you were married, but it would be a cohabitation agreement among people who are sharing housing. Also understand the fine print on all the documents that might be signed in your living arrangement (i.e. the lease on your apartment, various loan documents, utility services, etc). Do make sure that both parties are aware of who’s responsible for making payments. Regardless of how the relationship turns out these bills are still required to be paid.
Speaking of marriage, how can people save money on the cost of a wedding?
Well that’s a big issue. Weddings have gotten pretty pricey. I think the last figure that I saw was somewhere North of $30,000 as the total cost of a wedding when everything was tallied together. There are some things that people can do. The venue where you’re having your reception tends to be a major cost, so you can choose an inexpensive venue. That could be something like a home party tent or a rented meeting hall. Some people have weddings at public libraries that rent out their facilities or even park pavilions. The venue is important. Also like anything else that you’re buying in the marketplace, timing is important. If you can choose an off-peak time to hold the wedding, you might have lower expenses (e.g. holding a wedding on a Thursday evening instead of a Saturday afternoon). You can also choose less expensive meal options. Some people have a potluck where family members put together the food, so you’re not paying for a restaurant or caterer to provide the food. If you do decide you want to go with catered food, having a brunch or a buffet is going to be less expensive than a plated dinner. Also, limiting the liquor obviously is a real cost-saver. Rather than having an open bar, you can maybe just have wine. In some cases, some people have liquor-free wedding receptions too. That’s another option. Finally, the last rule I have for people getting married is follow the Rule of Three. For every service that you’re going to be purchasing (i.e. DJ, photographer, florist, etc), find three different options. Compare three different providers of these products or services and use the information that you gather in your due diligence. It’s not just price. You also want to look at their experience and maybe get some referrals from people. Then pick out the best one after you’ve compared three options.
That’s great advice. How do you recommend married couples manage their finances? What steps should they take?
So we’ve taken care of the wedding and now the couple is married. Just like I said before for people that are co-habitating, you need to come up with a method for bill paying. Again, that could be paying bills separately, putting money into a pot and then paying bills proportionately, or any other way the couple decides to do it. Proportionately seems fair, so you’re not having the lower paid spouse ending up with no income because they’re putting in the same amount as somebody who gets paid a lot more. You have to kind of develop that. Some couples obviously would have lived together ahead of time and maybe worked that out before their wedding. Then you want to develop joint financial goals. What is it financially that you want to do together as a couple? Do you want to buy a house? Do you need a new car? Is somebody going to go back to school for education? You need to work that out, and then develop a joint spending plan otherwise known as a budget. You need to put that down on paper. A lot of people will use a spreadsheet these days, but you can do paper and pencil too. Getting firm numbers on all the expenses you’re going to have will really help you to manage your money as a couple. You might need to adjust your tax withholding cause you’ll be filing probably as married filing jointly as opposed to two single individuals. Depending on the proportion of the incomes of the individual spouses to the total income, this could result in additional tax or less tax. So you might want to do a mock tax return ahead of time just to kind of plan where your taxes might be and then take steps to adjust tax withholding through a W4 form (if spouses are employed) or (if you’re self employed) adjust your quarterly tax payments that you send into the IRS. Another thing to look at would be employee benefit plans, whether each spouse can cover the other on their plan. You want to avoid any duplication, particularly if you’re paying for duplicative health insurance or any other employee benefits. You want to probably pick the better of the two plans, if that plan can also cover the new spouse. Then you want to coordinate your retirement savings plan options. Depending on what options let’s say the husband has from a 401k for example, then maybe the wife would want to have different options. Maybe you have some international exposure in one plan, and then maybe you have a standard Forbes 500 Index Fund in the other plan. That would be important as well.
So what money management steps should a couple take if they decide to have children?
So obviously when you have a child you’re going to have new expenses related to getting the gear to have baby (e.g. car seats), so you want to revise your spending plan because you’re going to have these new child related expenses. In some families, there’s going to be decreases in income. These decreases in income might be from somebody dropping out of the workforce, at least temporarily, or cutting back their work hours, or not seeking a promotion because they’re kind of in a time crunch. So decreases in income also need to be considered too. Revise the spending plan to reflect the new reality of the couple’s situation with a child. Again, you want to go back to the IRS and see what you can get in the way of tax benefits. With a child, you have the Child Tax credit, which was increased for the Tax Cuts and Jobs Act to $2,000 per qualifying child. You’ll want to factor that into your tax planning. Also, if both spouses are going to be working and needing childcare, then you have the Child and Dependent credit that you can take off on your income taxes as well. I mentioned baby care before. Another thing a couple might want to do is just look for inexpensive options. You don’t have to get everything brand new. I volunteer at a thrift shop, and we have things that are available at very reasonable prices for a baby. Another option is hand-me-downs (e.g. clothing that you used for an older child). That’s a good way to get some clothing and baby accessories. Finally, update your will or prepare one for the first time if you’ve never had one. Make sure you name a guardian, someone who can take care of the child if both parents were deceased. Also, when you have a baby, you want to think about starting an education fund. If you have 18 years to save, you’re going to have a lot more money accumulated than if you wait and the child is 10 or 11 years old before you start saving. Try to save as much as possible, and maybe some grandparents can also pitch in some gifts towards the child’s education fund.
Now that we’ve travelled through the life cycle, let’s talk about another life event. What tips do you have for buying a car?
So most families are going to do this a number of times throughout the life cycle, and it is a big life event. With the exception of a college education, it’s probably the biggest ticket item that many families will be purchasing. What you want to do is get educated. Get information. Check out different car pricing websites that are out there. Ideally, what you want to look for is the dealer’s invoice price and the dealer’s true cost, which is what the dealer actually pays after they get some incentives back perhaps from the car manufacturers. Then use those numbers to negotiate from. You don’t want to negotiate down from the sticker price. You want to negotiate from the invoice price or the dealer’s true cost. Then you want to go online and check out some calculators, if there’s any kind of promotions going on where you have the opportunity to get a low interest rate or a cash rebate offer. There are calculators which will help you determine which of those is the better option. Another key thing is that you want to negotiate each part of the transaction separately because there are three parts to a transaction for a lot of people. There’s the purchase price. There’s the financing. Most people will have to finance. Occasionally people can pay cash for a car, but that’s pretty rare. So the financing is part two. Then, if you have a trade in car, that’s part three, so there’s three moving parts to this calculation. What you want to do is negotiate the purchase price first. Don’t mention anything about financing. Don’t mention anything about a trade in value. Get that purchase price locked in, and then move on to exploring those other parts of the transaction if you have those other parts. You might also consider buying a new used car. By new used, I mean something that’s maybe two or three years old, where a lot of the depreciation has already occurred. Hopefully the car is in good shape, and you can get one with low mileage. You’ll be able to pay a lot less than if you bought a car brand new. Then what you want to do is avoid being upside down. This can happen when you lease a car, and it can also happen when you buy a car and don’t make much of a down payment. Upside down means that you owe more than the car is actually worth. If you’re in that situation, there’s something called gap insurance that you should buy to literally cover the gap between what you owe and what you would be compensated if your car was lost or stolen or in an accident. Those are some good tips for car buyers.
Those are great tips. We presented a webinar on smart car buying a few years ago, so I’ll add that link to our webinar recording resource document. Thank you very much. That wraps up our first episode of MoneyTalk with OneOp Personal Finance. Thank you very much for your expertise, Dr. O’Neill, and thank you all for listening. You can learn more about OneOp at www.oneop.org and follow us on Facebook and Twitter.
Music: “Happy” by MBB via Soudcloud.com, CC0
Family Finances Series: Financial Planning for Life Event webinar recording
Smart Car Buying webinar recording
Barbara O’Neill, Ph.D– Financial Resource Management Specialist for Rutgers Cooperative Extension, has been a professor, financial educator, and author for 35 years. She has written over 1,500 consumer newspaper articles and over 125 articles for academic journals, conference proceedings, and other professional publications.
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