Talking To Your Partner About Money

Studies have shown that money problems are the number one cause of divorce in the United States – more than infidelity, disagreements over raising the kids and all other causes. Disagreements and fights over household finances can escalate quickly, leading to problems with trust, hurt feelings, and other serious ramifications.

That is why it is such a good idea for couples to undergo financial counseling as part of their pre-marriage preparations. Partners who are on the same page financially are more likely to weather the inevitable financial storms, from job losses to unexpected expenses.

If you and your partner are having trouble with the finances, it is important to sit down and have an honest, open and frank discussion about expectations, boundaries and rules. Setting the ground rules will help eliminate any misunderstandings and reduce the chances of future fights over money.

Saver vs. Spender

It is not unusual for one partner to be a dedicated saver – and the other a profligate spender. Spender and saver can get along fine – as long as they both understand the rules of the relationship.

Couples can start by setting a spending threshold – the amount of money each partner can spend without the input of the other.

It is simply unrealistic for partners to consult one another about every business lunch or impulse purchase. The key is to agree on a figure, whether that amount is $25 or $250, and to agree that all purchases over that threshold require the input of both partners.

Be a Good Listener

It is important for couples to be understanding and considerate of each others needs when discussing money.

Decisions about money often go beyond the financial realm – buying a new purse or electronic gadget can make us feel better and give us real satisfaction. Understanding the role emotions spend in financial decisions is critical.

Partners should avoid blaming one another for financial problems, and instead work through future spending decisions as a couple. It will take the commitment of both parties to eliminate current debt and avoid racking up new bills.

Tune Out Distractions

Talking to your partner about money is a serious matter, and it deserves your undivided attention. Set a time and date for the discussion ahead of time, and make sure you and your partner both have plenty of time for the discussion.

Be sure to tune out any outside distractions before you get started. Turn off the TV, switch off your cell phone and computer and keep outside noise to a minimum. This will help you stay focused on the discussion at hand.

Develop a Spending Plan

It is not enough to discuss your current financial situation and views on money. To be successful, you and your partner need to agree on a plan going forward. Developing a budget is a great way to control spending, get out of debt, and save for the future.

Take the time to develop a written plan that includes all sources of income, monthly bills, and anticipated spending. Start with a rough draft, then fine tune it each month to get a handle on your spending as a couple.

Talking to your partner about money is not easy, but it is important. You and your partner do not have to agree on every spending priority, but you do need to respect each other and make smart decisions as a couple. Sitting down and having an honest discussion about finances is a great first step.

Do I Need Life Insurance?

Life happens.

You get rear-ended on your way to work. Hey, good thing you had car insurance.

A huge hailstorm rips through your neighborhood destroying your roof. Nice! You had homeowner’s insurance!

You slip and fall and can’t work for a few months. Thank goodness you had disability insurance.

You like the way icicles look from directly underneath when it snaps off the roof and impales your brain…

Do You Need Life Insurance?

It’s true that not everyone needs life insurance. But if you have someone who relies on you for income, you likely need it.

Like the other types of insurance mentioned above, life insurance is a tool we use to handle a specific need. In this case, it’s keeping loved ones from feeling the financial impact of your absence.

The Needs Guide

In case you’re still wondering if this applies to you, here are a few common situations that I see and whether they needed life insurance or not.

Of course, this list isn’t all-encompassing. Every person’s situation is different and needs to be assessed on an individual level.

However, you may notice a common theme. In each of the situations where life insurance was needed, it was because someone was relying on another person financially.

How Much Do I Need?

Okay. So you’ve determined you need life insurance. What’s next?

The next step will be to calculate how much you need. There are a few online calculators that can get you started.

If you think your need is immediate, I recommend contacting a fee-only financial advisor before going to see your insurance agent.

The bigger the policy, the more commission the insurance agents get paid. They have an incentive to sell you more insurance then you need. Fee-only advisors only get paid by you and will be able to give you an unbiased calculation that you can take to your insurance agent.

6 Universal Financial Goals

Regardless of your age or stage in life, certain financial goals have withstood the test of time and are good to put into practice and maintain for decades.

Here are 6 financial goals everyone should have at any age.

1. Live within your means

No matter what your age or income level, living within your means is key to long-term financial success.

Simply put, don’t spend more than you make or you won’t be able to accomplish the next goal.

2. Be(come) Debt free

What you’re really doing when you borrow money is spending ‘future dollars’ – money that you haven’t earned yet.

In essence, you’re borrowing from your future self. It’s the complete opposite of saving. Duh!

The trouble really comes when you borrow too much and don’t have enough future income to pay for it all.

Best practice to live debt free throughout your lifetime, but especially during retirement since most retirees have limited income.

3. Build and maintain good credit

Some things it actually makes sense to borrow for, like higher education or a home since these things usually cost more than what we have the ability to save for.

That’s why maintaining good credit is important for those purchases that are simply too difficult to afford in a cash payment.

Being able to lock in a low-interest rate on a large purchase will save you tens of thousands of dollars in the long run.

4. Have an emergency fund

An emergency fund is important because it will provide a cushion to support your living expenses during periods of transition, disability, or other unexpected events.

When calculating an appropriate emergency fund, be sure to use the expenses that wouldn’t go away in the event you couldn’t work such as insurance premiums and essential living costs.

In general, you’ll want to have an emergency reserve to cover three to six months of these expenses.

It’s also wise to keep a modest amount of physical cash on-hand (at least $1,000, or an amount consistent with the cash covered by your homeowner or renter insurance).

5. Maximize retirement savings for your income

While it would be nice to be able to put $19,000 per year into your 401(k) — the IRS’s limit for 2019 — for many people, it just isn’t feasible because they don’t earn enough. Instead, focus on maximizing retirement savings for your income level.

A good rule of thumb to follow is to start at 10% and slowly work your way up to 25% as you advance in your career and your income increases.

Saving at this level is a sure-fire way to significantly build retirement assets and it also helps you live well within your means.

6. Find value in your money

Finally, know why money is important to you and then align it with your values.

There is no sense spending your money in areas that don’t bring you joy.

How Long Should I Retain Financial Documents For?

Some financial documents are worth holding on to, but many of us are not sure how long to retain them for.

I’ve included a list below of some common financial documents and how long I generally recommend holding on to them before it’s okay to discard them.

PRO TIP: Instead of keeping paper files, scan the following items and organize them on your computer. Make sure you back up your computer to an external hard drive or the cloud often so the files don’t get deleted or destroyed!

Tax returns and supporting documents

The IRS has six years to challenge your return if you underreported your gross income by 25% or more. Keep all your supporting data with your returns (i.e., W-2s, 1099s, 1099-Rs, receipts, etc.) for at least seven years in case the IRS comes knocking.

This information can also come in handy if your Social Security earnings history is incorrect or incomplete, so it may be worth hanging onto longer than seven years.

You, your employer and Social Security share responsibility for the accuracy of your earnings record. Since you began working, Social Security has recorded your reported earnings under your name and Social Security number.

The agency updates your record each time your employer — or you, if you are self-employed — reported your earnings. But you are the only person who can look at the earnings chart and know whether it is complete and accurate.

Normally, you cannot correct your earnings after three years, three months and 15 days from the end of the taxable year in which your wages were paid, according to the Social Security Administration.

However, you can correct your record after that length of time if you have proof of your earnings such as a tax return, a W-2 form showing wages earned and taxes paid or a pay stub.

Retirement Plan and Brokerage statements

Most financial institutions will retain a digital copy of your statements for up to seven years by default, so you really don’t need to. Once you get a notification that your statement is available, look at it for accuracy and then forget about it.

If you still receive monthly paper statements, think about keeping them until your annual statement comes and then save the annual statements for 3 to 7 years.

If you make non-deductible IRA contributions, you’ll want to keep the statement with that transaction(s) with your tax documents. You should be including Form 8606 with your tax return every year if you have basis in your IRA, but it’s always nice to have the statements in case you switch tax preparers one year and the Form 8606 is forgotten.

Home improvement and other real estate records

These records establish your cost basis in the home and could help lower your capital gains tax on the property when you decide to sell.

Retain the records until you sell your home, plus another seven years for tax purposes.

Utility bills & CREdit card statements

You can shred these documents once you have received the next statement showing that you paid.

Bank records

Keep monthly statements for one year.

Hold on to bank records related to your taxes, business expenses, home improvements and mortgage payments for seven years.

Insurance policies

I recommend keeping insurance policies until the policy has lapsed (in the case of life insurance) or the property that the policy covered has been sold.

Household inventory of valuable items

Detailed records of what you own can be invaluable for both insurance and estate planning purposes.

I recommend keeping the list in an Excel file (or something similar) that can be updated on the fly and with little effort when items are bought, sold, or gifted.

Share this running list with the executor of your estate — or at least let them know it exists and how to access it — so they have it in the event you pass away. They’ll need it!

The Gift Tax Exclusion

I was in line at the grocery store this past week and I overheard the family behind me talking with their teenage son about gifting him a car.

The father mentioned that he was pretty sure there was a limit to how much can be gifted to a person before it became taxable.

I politely introduced myself and asked if he is referring to the annual gift exemption of $15,000. “Yes, that’s it!” he proclaimed.

As you can imagine, they had a few more questions about how these gifts work so we spoke for another 10 minutes about it.

This topic is often misunderstood so I thought I’d take the opportunity to cover it this week and hopefully break it down so that it’s easy to understand.

what is the gift tax?

The IRS lumps together all gifts you make during your lifetime with gifts you make as bequests from your estate when you die and assesses a 40% tax that a gift-giver must pay to the Federal government on those gifts.

In the IRS’s eyes, the federal gift tax applies to any gift you make during your lifetime – all the way from the $1 you gave to your niece to something as large as paying off someone’s student debt.

You are technically supposed to track every single gift you make, no matter the size. But the IRS knows that is impractical so they have two options for avoiding the gift tax.

The first is an annual exclusion and the second is a lifetime exemption.

The Annual Gift Tax Exclusion

The annual exclusion allows you to make gifts up to $15,000 per year per person (as of 2020) without being impacted by the gift tax.

You read that right. You can give $15,000 to an unlimited number of individuals in a year without even thinking about the gift tax.

It gets even better if you are married. You and your spouse are each entitled to a $15,000 exclusion and can give up to $30,000 per person.

These gifts don’t count against your lifetime exemption. It will only kick in when you exceed this annual amount in a given year. 

The Lifetime Exemption

Only the gifts above the $15,000 annual exclusion begin to impact your lifetime exemption of $11.58 million (as of 2020). And it’s not until you go over the lifetime exemption that you are required to pay the 40% tax on the gifts.

Keep in mind that you do need to report gifts over the annual exclusion to the IRS on Form 709. This records how much you’ve gone over the annual exclusion each year (the amounts that count against your lifetime exemption).

Of course, you are free to pay the taxes on the gifts when you file the tax return. You are not required to let them count against your lifetime exemption.

Eventually, at the end of your life when your estate settles, all these annual overages are added up and applied to your lifetime exemption. It’s only when your excess gifts plus the value of your estate exceed the lifetime exemption of $11.58 million that you’ll be taxed.

A Gift Tax Example

If a father makes a gift of a $30,000 car to his son, $15,000 of that gift is free and clear of the federal gift tax, thanks to the annual exclusion. The remaining $15,000 is a taxable gift and would be applied to his lifetime exemption if he chose not to pay the tax in the year he made the gift. 

Remember though, the mother could also gift part of that car, and in this case, none of it would impact their lifetime exemptions.

But what if that car was worth $80,000? The father and mother could both use their annual exclusion of $15,000 ($30,000 total) but the remaining $50,000 would need to be reported on Form 709. There would technically be two Form 709’s – one for each of them – as each individual is responsible for their own 709.

This is a relatively straightforward and oversimplified example. Things can get really complicated when you begin to consider gifts of community property. A topic for another article for sure!

What does the irs consider a gift?

The Internal Revenue Service considers a gift to be virtually any transfer of cash or property in which the giver doesn’t receive something of equal value in return.

If you give someone cash with the understanding that they won’t pay you back, that’s a gift. If you sell someone a $300,000 home for $150,000, you’ve made a gift of $150,000. 

This is all based on the IRS definition of “fair market value.” Cash is what it is, so there’s rarely any doubt there. As for that house, the IRS says its fair market value is what someone could be expected to pay for it if neither the buyer nor the seller was under any sort of duress to commit to the transaction.

tax-exempt Gifts

There are a few types of gifts that are inherently tax-free, regardless of the lifetime exemption. These include:

  • Gifts to IRS-approved charities
  • Gifts to your spouse (assuming he or she is a U.S. citizen)
  • Gifts covering another person’s medical expenses, as long as you make the payments directly to medical service providers
  • Gifts covering another person’s tuition expenses, as long as you make payments directly to the educational institution. (Payments for room and board, books, and supplies don’t qualify for this exception, but you can cover those costs by making a direct gift to the student under the annual exclusion.)

Remember state estate taxes

Even if your estate isn’t big enough to owe federal estate tax, your state may still have an estate tax.

For example, in Oregon, estates worth more than $1 million may owe state estate tax. Property left to a surviving spouse, however, is exempt from state estate tax, just as it is exempt from federal estate tax.

More information on each state’s estate tax.

A few states also impose a separate tax, called an inheritance tax, on a deceased person’s property. The rate depends on who inherits the property; usually, property that passes to spouses and other close relatives is not taxed or is taxed at a very low rate.