First comes love, then comes marriage, then comes the baby in the baby carriage… or so the old nursery rhyme goes. For modern millennials, this tune sounds a little different. Adulthood looks different for everyone now, but there are a few financial milestones many of us reach that have a significant impact on how we manage our money. We’ll teach you how to navigate these financial milestones below.
Financial Milestones: Managing Finances With Your Partner
If you choose to build your life with a long-term partner, you need to talk about money. Simple enough, right? Not so fast! When the question of how to manage your finances comes up, it can be very challenging to navigate.
Splitting rent is easy enough, but when childcare, vacations, renovations, or real estate come into the mix, splitting things down the middle isn’t always the best option. We spoke to Stephanie Chabot, who runs financial education Instagram account @thefinancediaries, for a few tips on how to do it.
“There are a lot of ways that finances can be combined,” Chabot says. “The most important thing is to decide what works best for your partnership and what you can both agree on. Everyone will probably give you a different answer on the “best” way to do things. In my opinion, the best way to do things is whatever makes you both happy.”
Chabot recommends three methods for managing finances as a couple.
One Pot Method
First is the “one pot” method. A couple pools all their money into a joint account, and purchases are made through this account. It seems straightforward, but Stephanie warns that it could create significant friction unless both people have the same spending habits. Make sure you maintain ongoing communication about what you’re both comfortable with.
The second method simply involves splitting costs. In this case, each person keeps a separate bank account. All the couple needs to do is decide how to split up the bills, and who pays what. You may want to add up all your expenses and see what makes sense for the both of you.
The third method is the proportional method. In this scenario, each person contributes to the household bills at a rate that’s proportional to their income. For example: if one person earns half of what their partner earns, they only pay half of what the higher earner pays when it comes to expenses. For some couples, it might make sense for the bigger earner to cover more costs, while others may find it leads to resentment. Do what’s right for you.
Chabot explains there is no one-size-fits-all prescription when it comes to combining finances. The only sure thing is that managing money with minimal conflict requires open communication, transparency, honesty and shared goals.
Financial Milestones: Starting a Family
Having a baby is scary, exciting and also expensive. Not only does having a baby cost a lot of money out of pocket, but parents usually experience a loss of income if they take parental leave. In this case, there is no magic bullet for this financial milestone – only magic preparation. A good strategy for any stage of life is to address financial debt. In this case, it’s even more important.
First, try to reduce the amount of “bad debt” you have. Chabot says it’s important to reframe how you think about debt, as in some cases it’s useful: “There is such a negative connotation to debt. So many people think debt is the source of all evil. In reality, debt is a tool. Debt can help get you things that you would not have been able to afford otherwise. That being said, not all debt is good debt.”
Wipe Out as Much Debt as Possible
Before navigating this financial milestone, Chabot advises wiping out credit card debt, payday loan debt and any other debt owed to high-interest creditors. Once expenses rise with a child in the mix, it can feel impossible to wipe out this kind of debt.
The two most popular strategies for wiping out debt include the snowball method and the interest method. With the snowball method, you pay down your loans starting from the smallest balance to the largest balance. With the interest method, you pay down loans from the highest interest rate to the lowest interest rate. Don’t worry too much about debt, though: Chabot says that student debt, a mortgage and car payments can all be managed along with starting a family.
Have a Strong Financial Plan
Chabot says not to panic if you’re worried about debt, just make sure you have a strong financial plan that will allow you to pay off the debt quickly. Understand exactly how much money you’ll need during that first year where your income may be lower, and make sure you can cover your expenses.
Factor in your benefits: does your work top up parental leave? What about your partner’s work? Consider splitting the parental leave in half. If your partner’s work has a more generous benefit package, you could also have them take a majority of parental leave. Lastly, stick to your budget! If you aren’t currently budgeting and you need guidance, free budgeting tools like You Need a Budget and Mint are great options.
Financial Milestones: Start a Retirement Savings Account
Two words: compound interest. You’ve probably come across this term at some point in your life, but essentially it means that your money makes money for you. So, the longer you have money in a retirement account, the more money you’ll have in retirement.
Chabot echoes advice from other finance experts that you should start investing, even if you’re terrified: “The longer you wait to start investing, the much more aggressively you will need to start saving and investing. Start ASAP!”
Here’s an example from Chabot:
Sara is 20 years old and starts putting $200 per month into her Tax-Free Savings Account. She invests in an index fund averaging 10% in annual returns. At the end of 40 years, Sara is 60 years old and will have $1,119,121 in her TFSA, which she can withdraw tax-free. Tom is 35 years old and realises he should start putting money aside for retirement. He contributes $400 a month to his TFSA and invests in similar index funds giving 10% in annual returns. In 25 years, he checks his investment portfolio: $497,663.
The Three Principle Factors of Investing
So, why is it that when Tom contributed double what Sara did, he ended up with less than half of her portfolio value? The answer is time. You can invest very aggressively, but in general, investments rely on three principle factors: contributions, compound interest and time.
The contribution is how much you put into your investment account. Compound interest is the ability for your money to grow more money. The final and most important element is time. Time is on Sara’s side in this scenario, as she has 40 years’ worth of compounding interest, while Tom only has 25. In comparison, Tom has a lot less time in the market, which means limited compound interest despite his higher contributions.
This financial milestone is a little more straightforward than the other two because you will benefit even if you do the bare minimum – but you have to do something! Start saving for retirement as early as possible with 5% of your gross income and try to increase it to 20% as soon as you can afford it. A common benchmark financial experts use is to save the equivalent of one year’s salary in a retirement account by the time you are 30 years old.
You can invest through your bank or try investing apps. The stock market has never been more accessible than it has today, and retail investing is booming. The important thing is to start!
More on Financial Wellness
This article is part of our financial wellness series. Want to get more and save more money? If you’re not already, here’s why you should start investing (even if you’re terrified); your guide to negotiating what you want at work; and why we need to talk about salary (and how to do it).