For many couples in their 20s or 30s, financial life together evolves much like everyday life, with connections taking root on ever-deeper levels. But it's also a time when the wrong decisions about money can have a major impact on long-term goals, such as being able to afford a home and save enough for retirement, according to financial experts.
And the decisions that have to be made aren't necessarily very complicated. It's mainly a case of developing good habits and sticking to them.
Investment or fiscal planning advice for couples who are early in their professional careers is remarkably similar to the game plan of a single person at the same age: budget wisely, tackle debts such as student loans and credit card bills, and begin saving as much as possible.
The difference is that as a couple you can tackle these goals as a team, often getting ahead financially much more quickly than a single person could.
Assuming the relationship is a stable one, and both spouses have similar long-term plans such as buying a home together, it really pays for the couple to manage themselves as a single economic unit, financial experts told CBC News. Here are some investment and financial tips they shared for young couples:
The advice here is unanimous among the investing pros interviewed, and it's simple. Wipe debt out as quickly as possible.
Eliminating any non-tax-deductible debt, including student loans or lines of credit, should be a top concern for most people in their 20s and should usually take priority even over buying a house.
The focus should be primarily on the debts that have the highest financing costs, such as credit card bills. If you're carrying large sums on credit cards, consolidate the debts into a lower-interest loan and then concentrate on erasing that single loan. A recommended approach is to have the bank automatically take a specified amount from your account on payday and apply it to paying down a consolidated loan, so that you get used to how much disposable income you have available and don't have to struggle to save up money for lump-sum payments.
Figuring out a workable household budget sounds like a no-brainer, but many people never get around to it and often end up living paycheque to paycheque. A budget is a crucial part of any financial plan — which applies to all age groups — and involves taking an honest look at how money is being spent.
The advantage of an early start
Although many people in their 20s may have other priorities, even putting a small amount of money for retirement can yield big returns in the long run.
For instance, if a 25-year-old starts with an initial RRSP contribution of $2,000 and continues adding $2,000 each year, they will have $330,095 by the time they are 65, assuming a compound annual growth of six per cent.
If they start 10 years later, they will have slightly more than half that amount, mainly because there is less time for compound interest to works its financial magic.
That number drops to $79,985 if a person starts at 45.
Apart from fixed monthly expenses, particular attention should be given to irregular costs, including one-off purchases, says Rose Raimondo, a financial planner with Calgary-based Raimondo & Associates Ltd. Small impulse buys can add up over time, and keeping them under control can keep money that's important to long-term investing goals from being frittered away on unnecessary purchases.
A budget can keep a lid on spending, and keep money from slipping through couple's fingers. Young couples should get their spending under control as soon as possible and, hopefully, that will form the foundation for good fiscal habits for life. Then they can start turning their attention to investing for the future — since part of a budget includes making sure part of any disposable income is either paying off debt, or being put aside for a major future purchase like a vehicle or home.
Home and retirement
Working towards the purchase of a first home, which includes amassing a down payment, is a worthwhile goal and becomes a main priority for young couples. It's such a massive expense that it often consumes all of a couple's financial attention.
However, they need not abandon retirement planning while saving for a home — they can do both at once.
Under the government’s Home Buyers’ Plan can withdraw up to $25,000 for a down payment as long as they return the money over a number of years. So contributing to an RRSP early can provide an immediate tax benefit, and also help with a house purchase.
Once a home has been purchased, paying it down becomes the main focus for most couples. However, any extra money beyond the regular mortgage payments should probably be invested in either a registered retirement savings plan or a tax-free savings account, according to the experts, rather than being held in a simple investing account.
"It’s good to do a little bit of saving for the retirement," says Judith Fulton, a senior consultant with the Calgary-based office of T. E. Wealth.
An RRSP provides immediate tax savings, but you'll pay a penalty if you need to dip into that money before retirement. Alternatively, money can be put into a tax-free savings account, where the growth is sheltered from tax. The money in a TFSA can be put towards emergency expenses if necessary, or held as a long-term retirement nest egg.
Either way, getting money into a savings plan early can yield big savings over the course of the couple's next 40 years thanks to compound interest.
Two incomes, but act as one
Apart from the obvious advantage over single people of having two incomes, couples can reap rewards by treating their finances as combined resource.
Spousal contributions to RRSPs, for instance, are one way to transfer immediate tax benefits to a partner, since the initial investment results in an up-front tax savings, Raimondo says.
For couples who are self-employed or who own a business, there are often ways to reap tax savings as a couple, too, which a tax expert can help identify.
Finally, the things that promote financial health have a lot in common with the things many people say promote a healthy realtionship.
A key part of a couple’s financial development, Raimondo says, involves having an open conversation about what their future plans are — and just as importantly, where each partner stands in terms of income and debt.
Only by having a clear picture of assets and debt can a couple make the most of their financial resources and make a solid spending and investing plan.
"If you don’t have those conversations early on, it’s not going to get easier," Raimondo says. "It’s going to get harder."