6 Key Money Lessons for Young Married Couples (And Anyone Seeking Happiness in Life)
Author: Kent Thune
Money and sex. Now that I have your attention, we can clear up a few misconceptions about how these two things are related and then we will get into the less exciting stuff on personal finance (which by the way can enhance these two things if applied correctly).
Also, for those of you who are not young or married, the lessons presented here are universal and can help anyone interested in preventing money from becoming a problem that can harm or destroy personal relationships.1)Money isn’t everything. The two biggest causes of divorce in America stem from money and sex. Notice that money is first. There’s a reason for this. Money problems cause problems everywhere else. But money is not the root of all evil, as conventional wisdom suggests. It’s the pursuit of money that makes people think and act in ways that are potentially destructive.
It is the flawed thinking that more money produces more happiness. When money is made the priority, it has the effect of turning people into something other than who they are. And when we can’t act as our authentic selves, we evolve into different human beings, usually less happy and less attractive than what we once were, such as the time when we begin dating our significant other. Consider this: If more money means better marriage and more happiness, why are there divorced and unsatisfied rich people?2) Time is money’s best friend. Another crucial step in preventing money from becoming a big problem later is to start small early. To do this, you can use a powerful force that Albert Einstein called “the eighth wonder of the world.” That’s a big statement for a guy who is the foundation of modern physics! This force is compounding interest, which can be simply described as “earning interest on top of interest.” To work, it requires two things: the re-investment of earnings and time. The more time you give your investments, the more you are able to accelerate the earning potential of your original investment, which takes the pressure off of you (and your marriage).
Let’s say we have two couples saving for retirement. Couple number one saves $5,000 per year from age 25 to 35, for a total of $50,000 saved. Couple number two saves $5,000 between age 35 and 65, for a total of $150,000 saved. In each case, we will assume an achievable 6 percent annual rate of return on the investments.
Believe it or not, couple number one wins, because they started early, even though they saved less money and for fewer years. At age 65, they end up with over $600,000, but couple number two ends up with about $540,000, although they saved three times as much money in three times the number of years. Couple number one used the power of compounding interest by starting early. And if they continued at the same rate until age 65, they would save over $1 million!3) Know where your money goes. You’re likely to spend more and save less if you are not highly aware of how and where you are spending your money. Yes, I’m speaking of the dreaded ‘B’ word. The idea of forming a budget is up there with dieting on the list of things in life that are least enjoyed. But they are also improperly applied, which is why people detest them, procrastinate, and often fail at maintaining them. The failure rate is high with budgeting and dieting, because they are unnecessarily made to be complex and nearly impossible to achieve, which makes people give up too soon. You won’t succeed if your savings rate is increased to the point of making your day-to-day life miserable, and you won’t stick to a diet if you expect to lose 10 pounds in 10 days.
To make cash flow achievable and positive, you simply do your best to spend less than you make. But what expenses can you cut from your life? To identify these items, track your expenses for three months and see where your money is going. Once you see how your morning lattes, cable bills, and wireless plans add up, you’ll realize that making small, manageable changes in your expenses can have just as big of an impact on your financial situation as getting a raise. For example, a $3 mocha java every day at Starbucks is $15 per week, which amounts to $60 per month or nearly $720 per year. Also, you might cut back by eating less at restaurants. You can also save hundreds per month by cutting back on lunches and dinners at restaurants. But don’t completely deprive yourself, either. Have a once-per-week splurge as a reward for good spending behavior. You’ll enjoy the treat more while you spend less.4) Plan for the unexpected. Marriage increases the need for covering the things in life that are not planned. The first and most important step here is life insurance. There are many different types, but most people will do best with term life. Just as the name sounds, you pay monthly premiums for a certain number of years (the term) for a certain benefit. The premium remains fixed for the term, which will generally come in periods of 10, 20 or 30 years. The amount of the benefit is the part that will vary the most from person to person, but it primarily depends upon the need for replacing lost income. Insurance professionals might recommend 10 times the annual income. For example, a person with a $50,000 annual salary may need to buy a $500,000 life insurance policy.
Another important planning item for the unexpected is an emergency fund. Most financial planners recommend five to six times monthly expenses, which will cover an extreme emergency, such as a job loss, where you’ll need several weeks to replace the income before finding a new job. For example, if your living expenses each month total $5,000, you’ll want at least $25,000 in a liquid account, such as a savings or money market account at a bank. But like the budgeting and dieting mistakes, this goal is not highly achievable for most people; so they don’t even try to accomplish it. Instead, start small and cover the basics with at least $1,000 in an emergency fund. Most emergency expenses, such as replacing an appliance or paying the insurance deductible after an auto accident, are typically less than $1,000 to cover and are more likely to occur than a job loss.**5) Don’t stop learning. ** Although you may already have a college degree, don’t stop your education there. Yes, education can be expensive and you may already have a student loan that won’t be paid off for years to come; but more education can open more doors of opportunity. Consider it an investment. Also, you may develop a greater love of learning, form valuable contacts, and learn more about yourself along the way. And you don’t need another expensive four-year degree to expand your earning potential. You might consider getting a master in business administration (MBA) or take specialized certification courses that can command higher incomes but cost you less money. 6) Find your purpose. This is the all-encompassing item that returns us to the beginning of the lesson. Money and sex are not the primary causes of divorce in America. Most studies about marriage and divorce do not reveal that the real, underlying cause for marital problems is the failure to find meaning and purpose in life. In different words, and as the twentieth century psychoanalyst and philosopher Abraham Maslow famously showed, the highest need for human beings is to be self-actualized. When we can truly be ourselves, we can find satisfaction in everything that we do, and therefore we are more productive in personal relationships and at work. When living and working with purpose, you are fulfilled; you can increase your earning potential and have a happier life at home.
I like to tell clients to always place meaning before money and to keep purpose before planning. Each person’s purpose in life is different, and you may not discover it until you’ve first identified and eliminated things that are not your purpose. Life is too short to be stressed over paying the bills and working in a career you hate just to save enough money for retirement.
Money isn’t everything; your self-actualization and personal relationships are…
Kent Thune is a money manager and the owner of a Hilton Head Island investment advisory firm, Atlantic Capital Investments. He is also a freelance writer and is currently working on a book to be published later in 2015. You can follow his musings on mind, money and mastery of life at TheFinancialPhilosopher.com or follow him on Twitter @ThinkersQuill.