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You and your new husband just started your blissful life together. The last thing you want to think about is money. But there are some important financial moves that you need to make early on that will get your new life started off on the right foot.
Take this fundamental advice from the experts and you won’t go wrong.
#1) Make Saving Money a Priority
We’ve all heard it before. You get married then you buy a house, right? Not necessarily. Daniel Greiner, finance professor at the IU Kelley School of Business, suggests you should make saving money more of a priority in the early years, and hold off purchasing a home until you’ve accumulated at least a 15% down payment.
The reasoning is simple… Sure, purchasing a home early can mean tax breaks for you and your new husband. But if you purchase too soon, you will probably make a smaller down payment and end up with a higher monthly payment. The higher payment, combined with property taxes, insurance, maintenance, and other monthly expenses, could easily offset the tax break. Consider renting for a few years.
Also, you should cut as many other non-essential expenses as you can, from everything to your coffee to your clothes to your car. Greiner suggests leasing a car, rather than buying, since the payments are typically lower.
Let me point out that the key here is to invest the money each month. Don’t turn around and spend that freed-up money on other things. You should use it to start building your nest egg.
#2) Take Advantage of Tax-Deferred Savings Plans
Investing early is key. Invest as much as you can now, while you are young, because your investments will have decades to grow, your earnings will compound more times, and you will also be able to ride out the ups and downs of the market.
Fidelity Investments Group suggests that you can maximize your savings by minimizing your taxes. With tax-deferred accounts, all your earnings remain in the account and are only taxed when you withdraw them. This means that your money will compound faster than it would in a taxable account.
Fidelity suggests taking advantage of the tax-deferral features of your 401(k) or 403(b) plans by maximizing your company’s matching as much as possible.
To supplement your employer’s 401(k) plan with additional tax-deferred savings, consider an individual retirement account (IRA). You can have one for yourself and for your husband. With a traditional IRA, your contributions may even be tax-deductible. For a quick overview of traditional vs Roth IRAs, check out The Vanguard Group’s IRA comparison page.
Fidelity Investments suggests a third option for tax-free savings, which, they say, not enough people take advantage of. A health savings account (HSA), which is offered in conjunction with a high deductible health plan (HDHP), allows you to make pretax contributions to an individual account. If you use it for qualified medical expenses, you can withdraw it federal tax free. This means you never pay federal taxes on that money. The funds can be used at any time, from now until retirement.
Obviously, there are many options besides just these three tax-deferred choices, including mutual funds, stocks, and bonds, but these are a great place to start, since they will maximize the opportunity for compounding through the years.
#3) Manage Debt
The first step to managing your debt is knowing the difference between good and bad debt. Credit card debt is considered bad debt. It often bears interest rates of 15% or more, diminishes your ability to save and costs you greatly over time. Borrowing to pay for a home, however, is considered good debt because as you pay down your mortgage, you gain equity. Also, your mortgage interest payments can be deductible on your income taxes.
The first thing you need to do is get those credit cards paid off. The Vanguard Group suggests paying off the card with the highest interest rate as quickly as you can, while making minimum payments on other cards. Once the first card is paid off, they say you should divert those payments to the next most expensive card until it is paid off. Continue to do this until all of your credit cards are taken care of. Then, shred those cards and stay out of this type of debt.
Establish Your Priorities
The early years of your marriage is time to be proactive about setting up the foundation for the rest of your lives. If you keep your priorities straight and take this advice, you will be able to achieve all of your financial goals.