Marriage and Finance Part 2: Logistics

In Part 1 of my Marriage and Finance series, I discussed some of the common roles I’ve seen. There are many other roles, but they are rarer. They key is to understand the roles you and your spouse play and nurture the strengths and mitigate the weaknesses. In Part 2, I will discuss the logistics of finances in a marriage. Financial planning takes care of the “basic needs” (think Maslow’s Hierarchy of Needs); i.e. food, shelter, telecommunications, etc. If you are having difficulties fulfilling your basic needs it will be difficult to have good communication or fulfill each other’s sexual needs and/or establish mutual happiness. It all starts with finances taking care of basic needs and good communication.

·         Common goals – Have you seen the Wells Fargo commercial with the customer service rep saying, “Now let’s talk about your…” and then man says “new motorcycle” and the woman says “home repair”?  This is an example of having different goals and can cause financial arguments. Some goals can be mundane (cost of interior design) yet still cause significant controversy in the household. I think good communication in the beginning resolves most of these disagreements. I’ve also found visual aids help facilitate discussion and agreement.  Have each person write down his or her goal and then create a plan on how to get there.  Discuss both goals and plans and see if it helps you come to an agreement.

·         Always point the “blame finger” on yourself first – Men will often say, “My wife has a spending problem” and then after a little research, she indeed has a spending problem; however, he also has a spending problem. Women will often say their husband spends too much money on car parts or video games but neglect their shoe and purse addiction. Usually when blame is placed, it puts the other person in defense mode and then creates an argument. Instead of blaming, try saying, “we have a spending problem and I’ll reduce spending money on video games and you can reduce spending on shoes” or whatever the commodity of overspending is. If one person has a valid spending problem, it may be because they are unfamiliar with finance basics and/or there’s something wrong in the relationship and spending is just a symptom.  If it’s financial ignorance, then seek help from a friend or counselor. Someone in an “official” capacity can say the same thing as you, but it now will be “official”. If it’s something deeper, then you may need to protect the finances from being negatively affected until the relationship problem has been identified and corrected.

·         Account management – There is way too much discussion and debate about whether it is more appropriate to have separate or joint accounts. I’ve seen scholarly articles and books written solely on this subject. Most people think what works for them will work for everyone, like parenting advice. But the real issue is trust. Regardless of how your accounts are set up, the situation must establish trust in the relationship. If both people have separate accounts but have 100% trust then it will be successful and vice versa for joint accounts. However, due to the nature of the military and deployments, it is always important to ensure both people have access to all accounts. Whichever you choose, make sure trust is intact. If the relationship does not have trust, then the issue is bigger than account management.

·         Budgeting – A lot of arguments stem from how to budget your money with one paycheck or with two paychecks. The key to this argument is to ensure you establish equality. Spending and saving money should be equally distributed. The focus should remain on the Family and remember all funds belong to the Family, not to the husband or the wife, regardless of who makes the money. There’s debate on how to best deal with this, whether all funds are deposited into the same account and budgeted in totality or if each paycheck should have a percentage taken out. There are pros and cons to each method and each couple will have to make that determination on their own.

BL:  Be very careful taking financial advice in marriages, to include this article. Every relationship is different and implementing advice that is not suitable to your relationship can cause severe trauma to the relationship. Married people should discuss their financial position frequently. Financial insecurity can bleed over into so many other parts of a relationship. Secure the finances and securing the relationship should be easier.

Marriage and Finance Part 1: Common Roles

I’ve always been reluctant to post about Finances and Marriage because it is such a touchy subject. But a fan of the blog suggested I should, so I shall. This is Part 1 of Finances and Marriage and will concentrate on the common role divisions I’ve typically seen. The list is not inclusive and your marriage may differ on range of the power you and your spouse exerts in the role. Also, I don’t know if it’s the “alpha-male” syndrome in the military, but women are more likely to seek financial advice then men. Some men will go bankrupt, face disciplinary issues and ultimately get a divorce before seeking financial advice. When I volunteered at an Airman Family and Readiness Center, I would only typically see people after the disciplinary issues. But according to an article in Psychology today, couples who fight more than once a week about finances are 30% more likely to get a divorce¹ and the extra pressure only compounds the military divorce rate. Here are the roles I’ve typically seen:

·         Dominant Money Maker – In the military, this is commonly the active-duty member. The money maker makes the money and also handles all the finances. In the beginning of a marriage, this is often the easiest role division. But as time goes on, the submissive spouse will lose independence or feel unequal. If your spouse is financially submissive, continue to update him or her on the family’s overall financial situation; whether they want it or not. This role division could be dangerous if the dominant money maker is reluctant to take financial advice. If the couple experiences financial troubles, the money maker will become emotionally distraught and it will cause a wedge in the relationship. If the submissive spouse is completely dependent, then financial troubles can cause major troubles. Another complication is, in the military, we are held liable for supporting our dependents as long as they are qualified dependents. So when a couple is “separated” the military member is still liable for supporting the dependent, which may have no experience in financial independence.

·         Dominant Dual-Income Role – This is also quite common in the military with one spouse being the active duty member and the other having a civilian job. At least from what I’ve seen, there isn’t a correlation from the person making more and them being the dominant member. Usually the spouse with the most financial fluency takes the dominant role. Like everything in marriage, communication is the key to success with this role division. The submissive spouse needs to be engaged in the “end goal” and the direction the family is going financially. After the goals are set, the submissive spouse just needs updating. I’ll cover the logistics of making this role division work in Part 2 of the series. This role division could be dangerous if there is disagreement in the goals or if the submissive spouse unexpectedly decides to take a more dominant role. Again, constant communication is the key.

·         Submissive Money Maker – For a lot of military members, finances are the last subject they want to think about after a difficult day at work. In this situation, the spouse becomes the dominant financial decision maker. I found this role division works the best if there are no other complications in the marriage. But if there are other surface cracks in the relationship, this role division could be difficult to maintain. If the job becomes too stressful, the money maker could feel like a “slave”—working all day and someone else getting the money. The spouse needs to ensure other aspects of the marriage are sound before trying to fix any financial issues. Often times the money maker can feel like the spouse is “lazy” and not keeping up his or her “end of the deal”. The submissive money maker is usually okay with relinquishing control if they are happy with the “stay at home” duties.

·         Equal Roles – At least in the military, I’ve found it very rare that both spouses are equally interested in being dominant in financial planning. In this division role, both spouses are usually both dominant in all areas and continuously butt heads from simple decisions to life-changing decisions. The marriage, in general, is highly volatile. They have the highest of highs and the lowest of lows. Like everything, strategic communication is the best advice. This may sound unorthodox, but visual aids help greatly to keep emotions from flaring. Go to a website, create an excel sheet, or even make a PowerPoint to ensure a logical, rational discussion is held. Banks DO NOT care about the fight and make-up you all just had.

Regardless of the type of division role you have, I highly recommend that when discussion finances, both spouses try to use the word “we” as much as possible. Try to say, “we need to cut expenses,” or “we should save more.” I’ll recommend how to manage accounts, maximize finances and how to prevent financial fights in future parts of Finance and Marriage. What kind of role do you and your spouse have? Is it working?

¹http://www.psychologytoday.com/blog/communication-success/201304/how-money-issues-predict-divorce-how-prevent-them 

Everything You Need to Know About Dividends

If you’re not fluent in finance, then hearing two people talk about it can sound like two people speaking a foreign language. I met another military blogger, Starting from Zero, and his site focuses on investing with an emphasis on DIVIDENDS. Here’s some information about Dividends so you can increase your finance fluency and how to invest with them.

What are dividends? Dividends are paid out to shareholders by companies. When a company goes “public” it offers up shares in exchange for money. The company can use this influx of money to make the company bigger. The shares represent a portion of the company. If the company offers up a large portion of shares, then it most likely will offer a Dividend too. A dividend is a portion of a company’s sales returned to the shareholder. In industries where companies are mainly owned by shareholders, like utility and phone service companies, you will find larger dividend amounts. In industries where companies have few shareholders, like technology stocks, you will find smaller dividend amounts.  Some companies are legally required to pay out a dividend, like Real Estate Investment Trusts (aka REITs) and carry very large dividend yields; though their stock price remains stable.

How do you invest with dividends? Dividends are an essential element for anyone investing. Some people create portfolios, or collection of investments, solely on maximizing dividends. There are several mutual funds dedicated to find the safest and highest dividend amounts through Fidelity or Vanguard. You can measure dividend amounts by a stock or mutual funds’ dividend yield. A dividend yield is the amount of dividend divided by the stock price. Large dividend yields don’t always mean a good investment.  If a stock is about to go bankrupt or is failing horribly, its stock price will go down and its yield will look huge. For the riskiest investors, this may present a short-term gamble, but for most of us, this is to be avoided.

The best idea is to look for large companies that pay out large dividends and increase them regularly. Look around your house and determine what you purchase every week and see if it’s the same brand. Coca-Cola (KO), currently offering a 3.2% yield, and Johnson & Johnson (JNJ), at 2.9%, are favorites among dividend investors. Over the long history of the companies, they also raise their dividends. AT&T (T) and Verizon (VZ) are also favorites because telephone-service companies pay out large dividends; 5.7% and 4.5% respectively.

These dividends should be reinvested immediately back into the stock or mutual fund it came from or to your cash balance to purchase different stock. You can set the automatic re-investment through your bank. If you are under 55, you SHOULD NOT be spending your dividends. Reinvesting dividends is one of the top strategies of rich people.

You must also think about taxes. If you’re receiving dividends through your IRAs, then they are tax-free.  If you are receiving them through a taxable account, then the dividends may increase your tax rate. As of now, dividends are only taxed as high as 15%.  They can be taxed at 20% for the ultra-rich, but I don’t imagine they would be reading this blog if they were.  You can read more about dividend taxes here: http://www.irs.gov/publications/p550/ch01.html#en_US_2013_publink100010066

Current News on dividends. Some companies retain a large amount of cash on hand. In times of low-interest rates, like we are currently seeing, investors become angry when companies “sit” on large hoards of cash. If there are enough shareholders becoming angry and there are enough shares to have a controlling interest, then the company will be pressured to offer a dividend or increase its dividend. Most recently, this has happened to Apple (AAPL). Its size and success has made it to difficult to invest the money into Research and Development or future projects and the cash is just building. Investors got together and forced the company to pay out a dividend.  AAPL currently offers a 2.3% dividend while Google (GOOG) does not. Microsoft (MSFT) was forced into a similar position and offers a 3% dividend.

BL: For the average investor, we rely on our IRAs, TSP and/or 401(k)s, so dividends aren’t such a big deal. But for those of us investing ourselves, dividends should be a big deal. Your total portfolio of investment should have a yield equal to or higher than the interest rate on a 10-year bond. Unless you are extremely confident with your stock picking abilities, then there should be no reason you are taking on the risk of stock market losses AND earning less than a 10-year bond. You can find the dividend yield on any stock or mutual fund by using Google or Yahoo! Finance.

Learn More About Your Thrift Savings Plan (TSP)

Source: www.tsp.gov

 There are some common misconceptions about the Thrift Savings Plan (TSP) causing investors to “lose” money. By understanding how the TSP works, you can make more money for your retirement. An active role in the TSP can earn you a better return and help you retire earlier. Here are some of the misconceptions with the TSP (Roth or Traditional) I’ve seen.

·         I’ve started my TSP, so I’m good right? If you’ve gone to MyPay or have gone to your local finance office and started your TSP, then you’ve only accomplished the first step. When you start TSP, by default, your money automatically gets invested in the “G” Fund. The G Fund is the safest fund, and as such, has the lowest rate of return. You will never actually lose money, but you mathematically “lost” money by not being in higher rates of return funds. According to TSP.gov, the G Fund has returned 3.4% over the last 10 years compared to the “C” Fund which returned 7.4% over the same time.¹ You must go to www.tsp.gov to change your fund allocation. This is a crucial step for retirement planning. If changing the allocation stresses you too much, then consider one of the Lifecycle (L) funds.  Pick your target retirement date (or the date nearest your 55^th birthday) and place it all in that L Fund.

·         I’ve changed my fund allocations, so I’m good right? Changing your fund allocation should be an annual event. Leaving your fund allocations stable, isn’t necessarily a bad thing and will earn you average returns from the Dollar Cost Averaging method. But if you want to maximize your earnings, you should check your fund allocation every year and change it as applicable. If the stock market is down then you should invest more in the C or S Fund to take advantage of the low market prices.  Or conversely, you’ve seen a huge increase in profits in your C or S Funds, so you can reduce those contributions and put more into your G Fund to take advantage of a potential sell off.

·         I’m following the market closely, but I can’t be as active because I have the TSP and not an active investment account. This is a very common myth. You can “buy and sell” out of your TSP funds at any time. Some people even engage in TSP day trading. “Buying and Selling” is accomplished by doing an Interfund Transfer (IFT) by going to www.tsp.gov or by calling TSP directly. There are some limitations, so day trading isn’t necessarily as easy as in a normal investment account, but you can actively trade. Instead of waiting for your annual allocation change (like mentioned above), you can take $10K out of your G Fund and move it to the S Fund and vice versa as the market changes. This differs from changing your fund allocation because you’re “locking in” the gains you’ve made in the fund you are transferring out of.

Bottom Line: Make sure, especially if you are under 45, that all your money isn’t being put in the G Fund. After you’ve adjusted your allocation to meet your investment needs, then consider changing it annually or more frequent if you do sufficient market research.

¹ Annual TSP Returns: https://www.tsp.gov/investmentfunds/annual/annualReturns.shtml