It is a modern two-income-family tale:
Two well-paid people get married. They are too busy to cook and therefore dine out often. They spend the remainder of their money on vacations and shopping.
They buy a house, which they can afford because their parents help them out. After they have children, they upgrade to a larger home with another bedroom or two for the children or for mom and dad to visit. Their debt load increases accordingly.
What remains constant throughout all this is the upscale lifestyle to which they've grown accustomed. As far as spending, it is business as usual.
"I don't know if you'd always call it a blessing to have two incomes, because people often don't know how to manage it," said Mary Sullivan, a chartered financial consultant with Protected Investors of America of San Francisco. "I tell people when they get married that they should live on one income and save the other so they'll have that money for a house and kids."
Her first step with client couples is to have them fill out a budget sheet and examine it with her. They immediately see where the money actually goes and realize the danger of living beyond their means. They'd just never thought it through before.
"I suggest to two-income families that they look at the family as a business," said Evelyn Zohlen, certified financial planner and president of Inspired Financial in Huntington Beach, Calif. "Every business needs a controller who controls cash flow, but the controller can't operate in a vacuum and must also report to a chief financial officer."
Put one spouse in charge of the checkbook, because trying to divide the act of writing checks increases the chances of something slipping through the cracks, Zohlen said. Sit at a table and pay bills while the other person completes other household tasks, thus facilitating ongoing conversation about family finances.
Changes in society have altered the psychology of two-income families.
"People are getting married later, so they know better how to manage their own money and may not be comfortable turning that over to someone else," Zohlen said. "Also, sometimes after divorce people feel as though they didn't have a good enough grip on what was going on with their money, so they vow never to let that happen again or to share control with anyone else."
Financial decision-making must take into account the personalities of both spouses. Because attitudes about handling family money often date back to the childhood experiences of each spouse, old habits can die hard.
"There is an important distinction between paying the bills and making decisions about money," said Stuart Ritter, a certified financial planner with T. Rowe Price Associates in Baltimore. "It is one thing to say you're paying the Visa bill and quite another to decide when to use the Visa card."
An emergency fund is important for a two-income family, as it is for one income. But the two-income household can make do with a smaller emergency fund, Ritter said. Using the guideline of three to six months of expenses set aside for a rainy day, having two steady incomes means you can be comfortable on the shorter end of that range, he said.
Calculate how far you'd get with all your fixed costs if one paycheck was lost.
"If one of the incomes goes away, which would be more important to you saving for a child's education, cable television, a new car or a family vacation?" Ritter asked. "There's no particular right answer to many of those questions, but they do indicate that you can't have it all and must decide what is most important."
More financial advice for the two-income couple:
Avoid overlap in employee benefits that could be costing you money. One partner may be paying $700 a month for health insurance and the other $500, when it could be possible for both to be covered for less on one policy. Financial planners see overlap often.
If one spouse's company offers a 401(k) matching amount and the other's doesn't, load up on the plan offering matching funds first. A company match is basically free money, so take advantage of it. If you can max out both 401(k) accounts, that's best of all.
Don't merely assume that your spouse is covering any long-term financial goals, such as retirement planning or taking care of college savings for children. That may not be happening, and you shouldn't discover it when it is too late.
While coaching clients in setting lifetime goals, Sullivan asks how they'd live their life if they had all the money in the world, how they'd live their life if they had five years to live, and what they'd regret not having done if they were 85 years old and looking back on their life."Couples who had considered money the most important really open up when answering those questions and realize it isn't most important after all," Sullivan said, noting money merely represents the means to accomplishing goals. "Instead, it is family and friends and having time to do things."
Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, P.O. Box 874702, Tempe, AZ 85287-4702, or by e-mail at [email protected].