Financial First Steps

Your future starts now

Marriage is the first step in a life together, so this section of Bride Canada deals with some of the common financial and legal issues that should be considered before the wedding day. Like other sections in our guide, this information is gathered from experts – in this case financial planners, mortgage brokers, insurance brokers and lawyers. These people are quite approachable and many offer introductory services so don’t be intimidated about seeking out this type of help.

Financial Planning for Newlyweds

Money is a common source of disagreements in a marriage – how to save it, spend it and share it. The fact that it is a primary reason for marriage breakdown highlights how important it is for you to resolve money management problems early in your relationship.

Few people receive any instruction on how to manage money so it is common for couples to have widely divergent methods and priorities. Bridging this gap and coming up with a strategy that works for the short and long term is a high priority – it’s time for a frank discussion with your future partner and there are some important questions to ask.

Questions to Ask a Future Life Partner

Are they in debt? These debts can become your debts without special protections in place. Are you willing to buy into a long-term plan to help them pay these off or is it every man for himself? Debts can constrict your lifestyle for years and prevent you from developing a sound financial strategy, so know what you are getting into. Debts are commonly the result of a long period of poor money management: frivolous spending, living beyond your means or not planning for unusual expenses.

Do they have expensive hobbies and pastimes that may consume a large part of their income? Are they willing to sacrifice these things in order to make major purchases such as a house, a joint holiday or building long-term savings?

Are they a saver or a spender? If they live in the here-and-now, long-term savings may not be a concern if they have enough money to meet their immediate needs.

Do they have a stable source of income? If your plans require two incomes to fund them, job loss of either spouse can be a major setback. If you can get by with just one income, treat the second as a bonus and build savings or eliminate debts quickly. On the other hand, if one spouse has a significant income, it may not be necessary for the other to have a regular job.

After you have assessed your future life partner based on these criteria, assess yourself in the same way. It’s easier to see the problems in someone else than in ourselves so it could be you that needs to change your attitude about money and how to manage it.

Our experts have identified the following common financial issues couples face. It’s important to remember that there is no one-time solution to these problems. Your financial situation can change; sometimes quickly requiring you to change your plans and develop a new strategy.

Four key issues you need to resolve:

• How to combine and manage two sources of income.
• Agreeing on major purchases.
• How to protect each other, your income and possessions.
• Development of a long-term financial plan.

Combining and managing joint incomes

This is perhaps the single most important financial decision you can make because it determines if one person is in charge, whether money is to be treated as a shared resource and what control each spouse has over the way it is spent.

The simplest approach is to have a single joint account in which both incomes are deposited and bills are paid. Who is the better money manager? That’s the person that should be in charge of balancing the account and making sure that the bills get paid. That doesn’t mean they do not consult the other spouse, particularly when there are major expenses. This person should also be responsible for making a budget so bills get paid on time and you don’t slip into debt. Couples choosing this approach commonly have two accounts, one for chequing and the other for savings. You’ll run into major problems if both people are writing cheques and making withdrawals.

A more complicated approach is for each spouse to have a separate account and share a joint account. Each spouse can be responsible for contributing a percentage of their income into the joint account from which bills are paid. This leaves each of you in some control of your own finances. However, when you take this approach you have to decide/ how much each spouse should contribute. This is more difficult when one spouse earns considerably more than the other. A simple 50% split is likely to leave the person with the lower income struggling to meet their commitment.

For couples seeking even more separation, you may each maintain individual accounts and assign expenses that each is responsible for – a reasonable idea so long as each of you pay the bills and manage money equally well. It’s a plan that breaks down if one of you loses a job or suffers a reduction of income so be prepared to reallocate expenses if necessary. This approach also makes it more difficult to build common savings for major purchases such as a house. In these cases, it’s advisable to create a joint savings account to which both of you contribute and monitor the balance.

In regards to managing money there are a few simple suggestions most financial planners offer:

• Protect yourself by creating a nest egg equal to three-to-six month’s income. This will keep you from incurring needless short-term debts and the subsequent interest charges if you make unplanned purchases or incur unexpected expenses. This money should be placed in an account or investment that you can withdraw from without penalty but not so easily that you will be dipping into it frequently.
• Try to allocate 10% of your take-home income to long-term savings such as a retirement or investment plan. If you are young, retirement may be the last thing on your mind but you generate tax advantages for yourself and still get access to these funds when it’s time to purchase your first house.
• Allow each spouse a little “mad money” to spend on personal needs and wants. Even if you have agreed to share everything, you will also want the option to spend even at least small amounts of money without seeking the other’s approval. It will prevent arguments over petty items and the resentment that is subsequently generated.
• Try to pay off debts as soon as possible – those with the highest interest rate first. If one of you has brought debts into the marriage you should decide if these are now a joint responsibility. Paying off your spouse’s financial obligations, if you are able, may not be the best strategy. This decision may require legal assistance to resolve.

Agreeing on major
purchases

A major purchase is a house, furnishings, car, vacation property, vacation or anything else that requires you to save towards, borrow money for or allocate a large percentage of your savings. These are not expenditures to make without some planning because it can take years to pay for them. That means you need a plan which may be nothing more than a list of these items with the approximate date they will occur and the amount the represent. With such a list you can quickly determine how much you need to save and if it is necessary to borrow money.

Getting the priorities right becomes the issue – one spouse wants a new car while the other has a house in mind. Both can’t happen at one time, so someone has to concede. Its time for negotiation while keeping the big picture in mind – there’s more to the relationship than the possessions you acquire.

Credit is offered freely these days to all but those with the worst financial history, which means it is easy to slip into a “buy now – pay later” philosophy. This is a slippery slope which can lead to financial problems. The better your financial track record, the better the terms and potentially lower interest rate you will have to pay but this only continues if you continue to pay bills on time and meet your financial commitments.

Before such easy credit, people were forced to defer purchases until the money was “in the bank”. It’s still a good policy but not the most practical for major purchases such as a house. If you must incur debt, be sure it is for something you really want because the final cost after interest is calculated is much higher than the purchase price. If it’s something you could have easily done without, not only have you made a bad purchase but one at a higher price.

The big purchase – a house

Without doubt, this is the largest single purchase most couples make. You may buy and sell a house several times but it will seldom be as nerve-wracking as the first purchase. It’s not the choice to buy the house that’s the issue, its paying for it afterwards. So unless you have the money to pay cash, you need to talk to a bank representative or a mortgage broker before you go house shopping so you can assess your current financial situation, your eligibility for a mortgage and how much you could qualify for. They’ll also be able to help you estimate payments and give you some tips on how to pay your mortgage off sooner. Believe it or not, lending institutions are interested in giving you a fair deal and keeping you out of financial trouble. Their best customers are able to pay their debts on time.

Here are the common things a lender is going to consider when you apply for a loan or mortgage.

• Your income. Only 30 percent of your gross (before-tax) income can go towards the mortgage, taxes and heat.
• Existing debts. The combination of mortgage, taxes, heat and all debts must be less than 40 percent of your gross income. This includes debts you may not think of such as student loans.
• Income stability – how long you’ve had your job. Switching jobs to advance your career, but staying in the same field, is okay but jumping from job to job is seen as a negative. If you are self-employed, you may have trouble if you have been in business for less than two years.
• Credit rating. What is your past record of paying debts? If you have had problems in the past, why should a lender think the future will be different?
• How long you’ve lived in your house. If you are turning over properties on a regular basis, they may view as this more of a business venture and lend accordingly.
• Other risks. Loans you have co-signed, even if you are not making the payments, plus other potential liabilities you could incur.

A few important things to know before you borrow

Being prepared when you sit across the table from the person determining your eligibility for a mortgage and the terms that will be offered is essential to getting a good deal.

Lenders use a Beacon score to determine your rating. Your score can be between 350 and 900. The closer to 900 your score, the better your credit rating. A better credit rating means you can negotiate a lower the interest rate and have more choices of lenders and types of loans.

If you do not have a credit history or your credit rating is less than perfect, you will need to fix this before applying for a mortgage. Begin by always paying all your bills on time. Even if you have a spotty credit history, by starting today, you can improve your credit rating.

Institutions have different polices so if you are rejected by one there may be other alternatives. This is where a mortgage broker can be an asset because they represent dozens of companies, some of which you may not be familiar.

A pre-approved mortgage will tell you the approximate maximum price you can afford. That said, keep in mind that this is a maximum based on your existing income and expenses. A change in these may leave you cash-strapped and scrabbling to make the payments.

Pre-approved mortgages guarantee your interest rate for 30 to 120 days. If interest rates go up while you’re looking for a house, you will be locked into a lower rate, which can save a lot of money.

Even small differences in the interest rate you are charged can make a considerable difference to your overall payment because mortgages commonly last for 15-20 years. Take your time and don’t be afraid to shop around, especially if you have a good credit rating.

Keep in mind that there are a lot of initial and ongoing expenses that need to be factored into the price of the house. As a renter, you may not be paying for utilities, taxes, maintenance and many other costs associated with owning a home.

The higher your down-payment the better the terms you can commonly negotiate. Lenders like borrowers to be “on-the-hook” with their own money. In Canada the law requires that if you borrow more than 75 percent of the purchase price of the house, the mortgage must be insured by either CMHC or GenWorth Financial. This insurance is not for you; it is for the lender. The cost depends on the percentage you are borrowing and range from 0.5 percent to as high as 5 percent of the total amount borrowed and is added to your mortgage.

If a family member helps you with the down-payment, it needs to be in the form of a gift, and not a loan or this will increase your existing debt obligations and reduce the amount you can borrow. If it is a gift, get this confirmed in writing – the lender will probably what to verify this.

It is possible to get a mortgage for 100% of the purchase price but is only available to people with an exceptionally good credit rating. It usually means a higher cost of borrowing.

Going “short” or “long” applies to the length of time the interest rate is locked in. A mortgage with a floating rate or one that adjusts each six-months or a year is considered short-term. In periods of stable or gradually increasing rates people tend to go “long” to lock in a favourable rate and have predictable payments.

Protecting your
dependents, income and possessions

Life & Disability Insurance

Life insurance is arguably one of the most selfless things you can purchase because there’s no way you can collect on it personally. In fact, it’s not life but death insurance, and is most commonly used to provide income to dependents and eliminate debts and liabilities. You may question why you need it, so consider some the following questions.

• Will your spouse be able to maintain your current lifestyle without your income?
• Will your children have the same opportunities?
• Will you leave your spouse with considerable debts, such as a mortgage, which they cannot manage on their own?

The reality is, insurance does not replace the person but it can solve many of the financial problems that occur if you die. The loss of a spouse or a parent can be a terrible blow only made worse if there is a financial crisis brought on by the loss.

Disability insurance is essential for the self-employed and may be necessary if you are not a member of a group benefit plan at work. This insurance is designed to protect your income in case of illness or injury and may last for a few months or many years. Ask yourself the following questions when deciding whether you need this insurance.

• How long will my income continue if I am sick or disabled?
• How large is our emergency fund? Do I have enough savings to replace my income?
• Do debt payments such as a mortgage continue if I am sick or disabled?

With either type of insurance, the role of the agent or insurance broker is to help you determine how much insurance is needed and select a company that provides the coverage. They will ask questions about your financial situation, income and expenses and short and long-term plans. These factors influence the amount of coverage you need and there are common methods for helping determine these values – it’s not an arbitrary decision.

Whether it’s an agent or broker, they are paid by commission on the product they sell so there is not usually any additional cost other than the insurance premium.

Applying for insurance is not complicated and if you are young, and the amount of coverage not excessive, can be very easy to do assuming a regular medical history. What do insurers look for when assessing the risk?

Here’s a short list of what insurers consider when you apply.

• Smoking – smokers pay about 40% more for life insurance.
• Existing illnesses such as diabetes, heart conditions, etc.
  Your driving record – a poor driving record or an impaired conviction will increase your rates.
• Dangerous hobbies – hang gliding, scuba diving and auto racing increase your rates.
• World-wide travel – traveling outside North America for extended periods of time increases your rates.
• Your occupation – a member of the SWAT team will pay more than a secretary.
  Your gender – women pay less than men.
• Family medical history – almost 1/3 of all applications for life insurance are declined due to family history.

Even if you don’t have children and your spouse is financially independent, situations can change and future medical conditions may affect your eligibility so many agents suggest buying a policy when you are young. Rates are usually quite low, especially for term insurance, and within most couple’s budget.

Here are a few things to consider when buying life & disability insurance.

• Life insurance comes in a variety of types, some of which include savings plans, limited payment periods and fixed premiums. Ask for a complete explanation of each before you buy.
• Rates can be as little as $20 – $30 month for basic Term life insurance. This is a highly competitive market with great prices.
• Mortgage insurance is offered by most lending institutions. Rates are commonly similar to that offered on individual plans so compare the prices. If you go with your own plan, you will likely need to specify the lender as the beneficiary.
• Joint life policies insure both of you under a single plan with some minor cost-savings. It only pays once, on the death of the first person.
• Disability insurance is limited to approximately 60% of your income but is treated as tax-free benefit when the premium is paid for in after-tax dollars.
• Life insurance premiums must be paid for in after-tax dollars in order for the benefit to be non-taxable to the beneficiary.
• Life insurance is generally protected from creditors and is paid to the people designated as beneficiaries on the insurance policy.
• Life insurance is generally guaranteed renewable until a maximum age as specified in the initial agreement so even if become ill after you have the policy, it cannot be cancelled due to ill health. Similar conditions apply for disability insurance.

Financial Planning with Help

If what you have read to this point leaves you feeling overwhelmed, you can get help by talking to an individual or firm offering financial planning services. In addition to acting as a mentor, the financial planner can advise you in ways that other family members may not be able to because of their personal relationship with you. Objectivity is something you need.

Financial planners come form a variety of backgrounds, most commonly investments and insurance. They may sell the products you offer or direct you to someone else. Some charge a fee for advice while others assume they’ll paid on the products you purchase. If you ask, they’ll disclose how they are paid for their service – there’s no secret here. The best way to find the right person is through a referral and brief meeting. If you don’t feel comfortable with them, to the point that you can reveal your financial situation and problems you face, look for someone else.

Financial planners are typically going to take you through a process of assessing your current situation, helping you set priorities and develop a plan to get you to where you want to be in the time frame you have set. They’ll tell you frankly if what you have in mind is reasonable and what you may have to sacrifice to reach your objective. Most importantly, they’ll help you understand that financial planning is not static; things change and you will need to revise plans several times during your life.

Here some of the most common suggestions they’ll make.

• Set goals and timeframes. If you want to buy a house, when and what type? How much will it cost and where will it be?
• Planning on a family? Again, decide when, how many children and determine if one spouse is leaving work to provide care.
• Assess your current situation. How much do you make, how much do you spend and what’s left over? It’s the leftovers that can determine if you will reach your long term objectives.
• Set some priorities and create a budget. Plan your expenditures instead of living from paycheck to paycheck hoping you can make ends meet. If your lifestyle and subsequent expenditures are preventing you from realizing long-term plans, reduce expenditures or increase your income.
• Create an emergency fund to protect yourself against short-term setbacks.
  Save money on a regular basis – if possible put aside 10% of your income to longer term savings.
• Purchase insurance to protect yourself, your dependents and property.
  Avoid unnecessary debt. Where possible, defer your purchase until you can afford to pay for it in cash. Don’t get drawn into easy credit plans and discount prices on items you don’t need.
• If you are investing, do so for the long-term. Unless you are an expert, and in that case you may not need the advice being given here, and can afford to take losses, don’t play the market.

In this section of Bride Canada, we have attempted to help you get off on the right financial foot so you can avoid pitfalls and realize your plans sooner. Financial planning is not easy but is essential and well worth the time it takes.