I recently came across a question written by a young lady with a predicament that applies to many young couples. Here is her letter, followed by my advice:
My fiancé and I are in very different places financially. He is coming into the marriage with around $90,000 in loans, and no income as of yet. I’m coming in with a few years of working under my belt, and about $65,000 in savings. He lives fairly comfortably (on loans), I live fairly frugally. (I’m not cheap, but I’m definitely mindful of my spending.)
We both want to combine finances within reason, though not completely – maybe a joint account in addition to separate accounts. We just can’t quite figure out how to do it. The loans will be accruing interest in a few months, and I’d love to just pay off $50,000 to $60,000 of it right off the bat because that will save us a huge amount of interest. I know the interest accrued will be my interest too. But I don’t feel comfortable just giving away $60,000 of my hard-earned savings! (He has not asked me to pay it off, and when I brought up the idea he was not so into it.) I know this will be my husband, and in a few years we won’t know whose money is whose, because it will all be one, but I can’t grasp the concept of giving away all my savings to someone else.
So fine, we don’t pay it right away and pay the regularly monthly amount. How do I teach him that he needs to rein in his spending a little bit? He isn’t an outrageous spender, but he does spend on lots of things he enjoys, and that give him some peace of mind and calm time (for example, dinner out at least once a week so he doesn’t need to worry about cooking all meals, or things that will make his life a little easier, like paper plates and utensils when he has regular dishes and utensils).
In the beginning of the marriage we will be living completely on my income and savings, and I want him to live to my standards a little bit without being the one stuck washing all the dishes all the time, or cooking all meals or feeling guilty about him having to cook meals.
How do I do this? I am not trying to manipulate him, but I want him to see my side of things.
This is an important letter, which describes a complex but not uncommon financial situation. Since I am an accountant and not a rebbetzin or psychologist, I’ll deal only with the financial aspects of this kalla’s question. I must say, however, that getting started on the right foot financially is a foundation for a happy and peaceful relationship, and a little forethought can help that happen. The young lady has two main questions: how to deal with the debt and how to merge their spending habits in mutually satisfying way. Let’s start with the debt.
Dealing with the Debt
Perhaps I am reading too much into the letter, but it seems to me that the writer is subtly implying that she is more responsible than her chassan because she has assets and he has debts. That leads to the question of whether college loans are wise or foolish. Although this question is “water over the dam” in this case, let’s ask it anyway, so others can learn.
In general, the facts of life dictate that going to college for real job training makes sense and leads to higher lifetime earnings and more financial security. That education costs money, not only for tuition but also in the form of lost wages while one is in school. Still, money spent for education is likely the best investment you will ever make.
Some important information is missing from her letter: First, what does she do for a living, and how much does she earn? Perhaps she has a low-paying job and it took a while to save this money. She might have been better off if she had gone to school and incurred debt.
Second, what degree will her perspective husband have? How well does that field pay? When will he start earning money? In plain English, if he is a doctor, lawyer, or even an accountant, taking on debt was well worth it. If he was a history major, his earning potential is less assured.
Obviously, you do not want to pay more for an education than you have to. This means that if a local college is good enough, opting for an out-of-state college seems wasteful. On the other hand, in some fields, attending a big-name college is a major advantage. For example, Harvard Law School is a lot better than a regular law school because of the prestige and the opportunity to forge professional connections. I could not possibly know which college is the wisest choice for any particular individual for each field that exists. You need to ask people who are knowledgeable in each field for specific advice.
Let us assume that the chassan has a worthwhile degree. If so, the value of his education is far greater than $90,000. (I doubt the kalla would object if the chassan owned a home worth $500,000, subject to a loan of $90,000.) Nevertheless, the student debt does need to be repaid, and the longer that takes, the more interest they are paying. But, again, if the debt was worthwhile, the interest on it is also money well spent.
The Specific Strategy
Now for the important part: Should this couple take the girl’s $60,000 and apply it to the debt, which will reduce their debt to $30,000? I would not do that. Here is what I recommend.
Every couple seems to start off marriage by renting an apartment and then, a few years later, they think of buying a house. Folks, they have nothing to show for the rent money they paid all those years. It is not building any kind of wealth. How about taking the $60,000 and buying a house? This will give them a 20% down payment on a $300,000 house. The house should have a basement that is livable and rentable, meaning that it needs a private entrance, a (mini) kitchen, and a shower. It might cost the young couple a few bucks to get it up to snuff.
Once that is done, they should rent out the upstairs of the house and live in the basement. The rent they collect from the upstairs will (almost) cover their mortgage payment. I estimate that their mortgage payment will be about $1,750, and they can rent out the upstairs for $1,600. Had they rented an apartment, their rent payment would have been $1,000 per month or more. With this plan, their housing expense is only $150 per month, That means that they now have $850 per month available to pay down the student loans. Living in the basement should also keep their utility bills low.
If they are paying 3% on the loans, it will cost $1,617 per month to pay off the loans in exactly five years. If the interest is 6%, it will cost $1,740 per month. They will use their rent savings of $850 and add $767 from current earnings, which will total the $1617 monthly payment.
At the time of their marriage, this young couple had a net worth of negative $30,000. Where will they be in five years if they follow this plan? 1) They will be out of debt; 2) Their mortgage will have been paid down by $23,000 and the house will hopefully have gone up in value by $30,000; 3) Since they paid 20% of the home’s cost as a down payment, they avoided expensive PMI, private mortgage insurance.
They bought the house for $300,000 and put down $60,000. They will now own a house worth $330,000 with mortgage of $217,000 ($240,000 less $23,000). Their balance sheet will have improved from a negative $30,000 to a positive net worth of $117,000 – a gain of close to $150,000!
The next step will be to decide how much longer they can live in the basement. That decision is very subjective, but when they feel they need to move upstairs, they can then rent out the basement. Their mortgage payment is $1,750, so if they rent out the basement for $700, the mortgage will cost them only $1,050 per month. That is less than most people spend on rent! And since their mortgage payment is so low, they can add extra money each month in order to pay off their mortgage earlier than 30 years, saving a lot of interest.
In another 15 years or so, they can stop renting out the basement and convert it into bedrooms for guests, grown children visits, or even for an independent teenage child of two – plus a Pesach kitchen.
The more general question the writer asked was regarding spending habits. I do not have enough information to know whose lifestyle is correct here. In any case, the issues may be subjective so that no one is right or wrong. Furthermore, people often think they are being frugal and do not realize that they are spending more than they think. I like luxuries. I respect a person who is careful on waste so that he or she can look forward to expensive things that add to the quality of life. For example, I would scrimp on regular wasteful spending and save for a trip to Israel. That is my value judgment.
To eliminate friction regarding spending habits, here is what I recommend for all married people: 1) create a budget; 2) read the finance guide books; and 3) track all spending on Quicken. Let me elaborate:
Create a budget: When couples consult me, I use Excel to help them create a reasonable budget. This budget is something both spouses agree to. For example, I will ask each of them how much they need to spend on clothing each year. Once that is on the budget, and as long as you are not spending over that amount, the other spouse cannot complain. This is critical. Without a budget, each and every purchase can become a flashpoint for a disagreement. Lacking structure, every article of clothing and every pair of shoes can be a source of bickering.
With a budget, you automatically eliminate a lot of waste. For example, a client will tell me what they spend on cell phone service. If I hear a high number, I tell them that they can surely do better and should shop around for cell service. Ditto for car insurance. If eating out adds to this husband’s quality of life (a subjective feeling), I will empower him to save in other areas to allow for what is important to him. In addition, every budget allows for pocket money for the little things that should not be tracked. There’s no need to enter every coffee or candy bar on Quicken.
Read the guide books: There are many good books on the market that address financially responsible living. Three authors come to mind: Dave Ramsey, Suze Orman, and Amy Dacyzion. Read them and learn.
Tracking on Quicken: After they agree on a budget, I tell couples not to discuss money except for once a week, when everything gets entered into Quicken. Without setting aside this time, money can become a daily topic of discussion and stress. I suggest Saturday night. It should take about 30 minutes, which is enough time to enter everything and pay all bills online.
Tracking your expenses shows you immediately if you are adhering to the budget. If you are, your financial life should go according to agreement and plan, allowing you to live a comfortable and financially responsible life.
One more thing: I think that all marital assets – including house, cars, bank accounts, etc. – should be titled in both spouses’ names. You are getting married after all. Saying you will not put money into a spouse’s name is like saying you do not trust him or her, and that is not a good attitude to have when marrying. Just my take on life. Now, I know that lawyers and even some rabbis will not like this and will suggest a prenuptial agreement. To me, that does not seem in the right spirit, but then again, I have not seen what they have seen.