While there are no "one-size-fits-all" financial plans, certain experiences are common to particular phases of life. As you read the following scenarios, don't get discouraged if you feel "behind." The point is not to provide benchmarks of how far along you should be, but rather to provide guardrails to keep you on track and to help you think through issues common to each phase. Your situation will probably differ somewhat from what's here, so make sure to personalize these to your individual circumstances.
The Young Couple
For many young couples these days, youth translates financially into "easy credit and lots of debt." More than likely, the first decade of marriage is spent paying off school loans, car loans, and credit card bills. Outfitting an apartment or first home can really pack on the debt, especially if you didn't have the discipline of following a spending plan in those early years. Throw in trying to save for the down payment on a first home, building a savings reserve, and paying for the arrival and growing up of your little bundle(s) of joy. And just about the time your education is paid off, it's time to start saving for college for the kids.
Sound bleak? It doesn't have to be. Unfortunately, many young couples waste the most productive financial years they'll have for a while: those early marriage years when both spouses are likely working and there are no kids in the picture yet. This is a golden opportunity to make serious headway financially, but all too often it isn't seized due to lack of planning (and because there's so much fun stuff to buy!). The sense of urgency that arrives with those two exciting words – "I'm pregnant" – often comes too late. Here's what's needed:
1. Make a budget, relying on your existing spending to establish realistic initial estimates in each category. Establish your short and medium term financial goals. Then look at your budget again. Does your available surplus put you in position to realize your goals? If not, it's not unusual to go through several rounds of belt-tightening. Consider these to be normal growing pains—chances are, it's your first experience setting and actually living on a serious budget.
2. Attack your debt, while avoiding further debt. This is tougher than it sounds, since most young couples have yet to establish a savings reserve from which to absorb unexpected expenses. Depending on your debt load and plans for children, it may be appropriate to budget all living expenses from one income, while applying the other entirely to debt reduction and saving.
List all of your debts, including balances and interest rates. There are two main debt-retirement strategies to choose between. If you are highly disciplined, you will save the most money in interest expense by paying off your debt in order of the highest interest rates. But a more motivating strategy for many is the “debt snowball" approach, in which you pay off the debt with the lowest balance first, then the next lowest, and so forth. Don't underestimate the value of this psychologically; if seeing your debts fall one after another keeps you motivated, it's worth the extra interest you'll incur.
3. Start building your emergency fund by opening a money market account and having money automatically deposited into it each month. For most couples, it's a good idea to start saving a small amount even before they've finished paying off their debt. Some of this depends on the interest rate of your loans, but having a small savings account will help keep you from slipping back to your credit cards when unexpected expenses arise. A savings account balance of three to six months living expenses is routinely recommended by financial planners. At SMI, we suggest $10,000 as a medium-term goal. It may seem like a lot, but you'll have plenty of use for it if buying a house or having children are on the horizon.
