5 Things Newlyweds Must Know About Investing
There's a ton of excitement involved in getting married. There's the big day, which you may have been planning for many months, the honeymoon, and setting up your home together.
Before long, though, you have to get down to the business of actually running your household, which includes investing for your future. Here are a few investing essentials every newlywed couple should know.
1. Confidence Is Not the Same as Skill
Men and women tend to come at money from very different perspectives, and that's certainly true when it comes to investing. According to a Merrill Lynch study, 55% of women agreed or strongly agreed with this statement: "I know less than the average investor about financial markets and investing in general." Just 27% of men agreed or strongly agreed with that statement.
This difference in investing confidence leads to notable differences in investing behavior. For example, according to a Barclay's study, men are more likely to attempt the impossible: time the market.
While men may have more confidence in their investing abilities, some studies have found women to be more successful investors. The Financial Times reported on a study of hedge funds, finding that those managed by women outperformed those managed by men — by a large margin.
The take-away? Choose which spouse will take the lead with investing based on track record, not confidence.
2. You Probably Have Different Comfort Levels With Risk
One of the most important investing decisions has to do with asset allocation — that is, how much of your portfolio will you invest in stocks, and how much in bonds?
That ratio has to do with your investment time frame and risk tolerance. Each of you should take an investment temperament quiz and then compare results. If the national studies are reflected in your marriage and he is more comfortable with risk than she is, meet in the middle when making asset allocation decisions.
Or, you could take your investment temperaments out of the equation by using target-date funds for your investments. Just make sure you understand how target-date funds work.
3. Your Best First Investment May Have Nothing to Do With the Stock Market
I will always remember a couple that approached me during a break in a financial workshop I was leading for engaged and newly married couples. She had tears in her eyes. He looked irritated.
Their wedding was coming up and they couldn't agree on where to live. He was about to graduate from law school, assumed he'd land a job at a large firm, and wanted to buy a nice condo in a trendy part of town. Knowing she was about to marry into six figures' worth of debt, she wanted to rent for a few years in order to aggressively pay off their loans.
As diplomatically as I could, I suggested that her plan might be better for their finances and their marriage.
You may not have six figures' worth of debt, but if you're like many newlyweds, you likely have debt. One of the best investments you can make is to pay it off as soon as possible.
If you're paying 18% on a credit card balance, paying it off would give you a guaranteed 18% return on your money.
But paying off debt isn't just a good financial investment. A study done by Utah State Assistant Professor Jeffrey Dew, found that "consumer debt fuels a sense of financial unease among couples" and increases the likelihood that they will fight more often, and not just about money. On the other hand, Dew found that newly married couples who paid off their debt within the first five years of marriage reported being more satisfied with their marriage than those who did not.
So, if you're starting your marriage with debt, pay it all off, with the possible exception of a reasonable mortgage before starting to invest.
4. You Have Some Control
When it comes to investing, there's a lot you can't control. No one knows which way the market will go next, how high inflation will get, or when the next market-moving world crisis will hit. But one factor you can control is how much money you invest.
One of the best bits of advice my wife, Jude, and I received before we got married was to base most of our essential living expenses on one income, especially housing costs. So, we bought a condo in what realtors euphemistically described as an "up and coming" neighborhood on Chicago's northwest side. There were no coffee shops nearby, but we could easily afford it on my salary alone. That enabled us to save and invest much of Jude's salary, which gave us a nice head start on our investing by the time our first child arrived four years later and we decided to become a one-income family.
As you decide where to live and how much to spend on everything from clothing to vacations, make sure you budget some money to invest.
5. The Future Arrives Faster Than You Can Imagine
Another factor you can control is how soon you start investing. When you're young and newly married, retirement may seem like some vague, distant destination you can worry about later. Besides, you have furniture to buy and trips to take.
But consider this. A 30-year-old who invests $400 per month, generates an average annual return of 7%, and stops investing at age 70, will end up with a little over $1 million. If she waits until she's 40 to get started, invests the same $400 per month, and generates that same 7% average annual return, she'll end up with less than $500,000. By waiting 10 years, she will have invested just $48,000 less, but she'll end up with half the money!
Compound interest favors the young, so the earlier you start investing the better.
How are you and your partner managing your investments?
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