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Forming a Financial Partnership:
What are you worth?
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By Heather Walsh, Vice President,
Wealth Management Advisor, Merrill Lynch
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When getting married, couples often combine
their belongings only to find themselves with two toasters, two
different bedroom sets and, more importantly, two unique
financial situations. However, unlike the spare toaster that you
hide in the cupboard, you cannot merely ignore your better
half's financial history.
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Photo by
AAA Budget Weddings |
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Getting married means establishing a lifelong
relationship of sharing - including sharing information about
your finances. A discussion to determine what you are both
bringing to the table is essential to establish long-term
financial goals as a couple. You must assess your current
financial situation, identify your needs and goals, and explore
strategies for realizing your financial objectives - from
short-term objectives like managing your college loan debt to
longer-term objectives like owning a vacation home.
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To determine your net worth, you and your future spouse must
create a list of all of your liabilities and your assets. I
recommend to my clients that each future spouse bring a list to
their first meeting with a financial advisor of all the items
that will help them paint the most accurate picture of their
financial situation - like a recent 401(k) statement, credit
card bills, savings and checking account statements, and loan
statements.
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Step 1. Total
Liabilities = Her Liabilities + His Liabilities
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I recommend that you list your liabilities first. This
is your opportunity to discuss any unsettled credit card
debt or outstanding college loans that your future partner
may not know about. It is best to be open and honest about
any debt that you have. Keeping debt a secret will not make
it go away, and talking about your debts is the first step
toward realizing your financial goals. Liabilities to
tabulate on your list include: the unpaid balance of a home
mortgage or other mortgages, school loans, the balance of
automobile loans, installment debts, outstanding credit card
debt, unpaid bills and unpaid taxes.
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Step 2.
Total Assets = Her Assets + His Assets
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Items of value that you should write down on
your asset list include savings accounts; a home or payments
made on a home; the cash value of life insurance, retirement or
profit-sharing plans; cars; stocks and bonds; and other
possessions that can be converted to cash. Don't forget to
include any collectables or antiques that you own. That Tiffany
lamp you inherited from your great aunt may be worth money and
be part of an asset class called alternative investments. Any
investment not associated with the traditional asset classes of
stocks, bonds and cash can be considered an alternative
investment, and can include anything that has value in the
marketplace such as classic cars and boats, paintings, art and
rare coins. While you may not realize it, these items can
appreciate significantly in value and should be included in your
asset list.
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Step 3: Your Net Worth as a Couple = Total Assets - Total
Liabilities
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The difference between your combined assets and
liabilities is your "net worth" (if positive) or "net
indebtedness" (if negative). If you have just purchased a
home, chances are that you will have a rather large net
indebtedness. However, it is important to realize that
investing in real estate can significantly enhance your net
worth through the appreciation of property and tax savings.
While you may feel like you are drowning in a sea of debt if
your net indebtedness is a result of other liabilities like
credit card debt or unpaid loans, now is the time to commit
yourself to a plan to get out of debt and start saving. Keep
the list you have just created - your net worth statement -
to monitor your financial progress.
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Now that you know where you stand, you can begin to set
financial goals and develop strategies and benchmarks for
achieving these goals. All couples dream of financial affluence,
and determining your net worth is the first step you will take
towards achieving that goal. Some of the more important goals
that newlyweds should consider are starting an emergency savings
fund, saving for retirement and purchasing life insurance.
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Establishing a Safety Net
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Since few of us are immune to job layoffs, realistically
plan how long it would take to replace your job and fund
expenses through that period. I recommend putting aside at least
six-month's salary in a savings account or money-market fund.
This emergency savings fund will provide you and your partner
with a sense of financial security, and is incredibly valuable
if you do experience a period of unemployment.
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Saving for Retirement
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Beginning to plan financially for retirement now is crucial
if you want to have a comfortable retirement during which you
can concentrate on spoiling grandchildren rather than worrying
about the next week's grocery bill. If you and your future
spouse both work, you should both take advantage of your
employer-sponsored retirement accounts. If managed correctly
with other retirement investments employer-sponsored retirement
accounts, such as a 401(k)s and IRAs, can provide a significant
tax-efficient way to save for retirement and create a complete
retirement portfolio.
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If you are paying off college debt, you may be more
concerned about paying your loans than saving for your
retirement. However, it is important to balance these current
financial obligations with future financial planning for
retirement. Because many retirement savings programs earn a
higher interest rate than you are paying for your student loans,
they often provide for a net gain over putting that money
towards your college loan debt, not to mention the benefits of
investing pre-taxable income. That being said, if you have
outstanding debt from school loans, you must also incorporate
managing that debt into your financial plan.
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Purchasing Life Insurance
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It is necessary to prepare for the financial consequences of
an unexpected death of a spouse. In the event of a loss of a
spouse, it is important to consider the financial implications
for the surviving spouse. Purchasing a life insurance policy
naming a spouse as the beneficiary ensures that the surviving
spouse will have a safety net to manage this transition phase in
their life from a financial perspective. Life insurance provides
income to preserve the beneficiary's standard of living for when
the insured dies. You may also want to consider disability and
long-term care insurance in your overall financial plan.
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It's important to understand that securities-based lending
involves some risk. If the market value of the pledged
securities decreases, you may be required to deposit additional
funds or to liquidate some or all of your assets without notice,
leading to possible adverse tax consequences. Be sure to
carefully review all risks and consult your advisors to better
understand the tax implications associated with pledging
securities as collateral.
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Other Considerations
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Other financial goals you may want to consider now include
saving to start a family, saving for continuing education for
yourself as well as your children and buying your first home
together. There are several tax-deferred college savings plans
to help you save for education costs. In addition, purchasing
your first home together so that you can build wealth from
owning, rather than renting real estate property is a great
investment for your future. Discuss these goals with your
financial advisor to determine a strategy appropriate for your
unique needs.
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After sitting down to discuss your net worth, assets,
liabilities and financial goals you will most likely find it
necessary to blend your financial habits into a financial plan
that you are both comfortable with. While men may have
traditionally managed family finances, don't assume that your
future partner is the wiser investor. A groundbreaking
nationwide study recently released by Merrill Lynch Investments
Managers (MLIM) found that women investors make fewer investment
mistakes than men - and make them less often. Specifically, the
study found that women are far less likely than men to:
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Hold a losing investment too long (35 percent of women
reported having done so at least once vs. 47 percent of men)
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Wait too long to sell a winning investment (28 percent of
women vs. 43 percent of men)
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Buy a hot investment without doing any research (13
percent of women vs. 24 percent of men)
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In addition, the study found that women are less likely to
repeat their mistakes than men. What is the key to women's
success? Think back to the most recent road trip when your
fiance got lost. Just as your fiance may have refused to ask for
directions at gas stations, in general, men also tend to not
seek out advice as often as women do when navigating their
financial plans. The key to women's success is that they invest
with a plan and seek and take professional advice.1 However,
while women may take the initiative in planning and seeking out
a financial advisor, it is very important for both you and your
fiance to be involved throughout the entire planning process.
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Seek the Help of a Trusted Financial Advisor
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To create a roadmap for achieving your financial goals, seek
the expertise of a trusted financial advisor. Not only will your
financial advisor help you develop an investment strategy to
maximize the return on your investment, your financial advisor
will provide you with the peace of mind that you are making
sound financial decisions to meet your long-term financial
goals.
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According to a study conducted by the Certified Financial
Planner Board of Standards, couples with a written financial
plan are more likely than those who manage finances on their own
to feel satisfied with their financial planning. Typically,
these couples also tend to seek out guidance when looking to
make major financial decisions. On the other hand, those without
written plans are more likely to be worried about not being
financially prepared for retirement.2 So just as you have been
taking an inventory of all of your domestic wares to plan your
registry list, now is the time to sit down with a trusted
financial advisor to assess your current financial situation as
a couple, identify your needs and goals and explore strategies
for realizing your financial objectives.
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1Merrill Lynch, Merrill Lynch Investments
Managers Survey, April 18, 2005
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2Certified Financial Planner Board of Standards
Inc. 2004 Consumer Survey
http://www.cfp.net/downloads/CFPBoard2004ConsSurvey.pdf
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About the Author: Heather Walsh
is a Vice President and
Wealth Management Advisor for Merrill Lynch in Burlington.
Heather assists clients in developing long-term financial
plans and helps them develop strategies to manage their
personal and business finances. She can be reached at hwalsh@pclient.ml.com.
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Any information presented about tax considerations
affecting client financial transactions or arrangements is
not intended as tax advice and should not be relied upon for
the purpose of avoiding any tax penalties. Neither Merrill
Lynch nor its Private Wealth Advisors provide tax,
accounting or legal advice. Clients should review any
planned financial transactions or arrangements that may have
tax, accounting or legal implications with their personal
professional advisors.
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