financial planning data

Financial Planning for Newlyweds

The joining of two people in marriage is quite a significant event, not only for the families of the newlyweds, but for their finances as well. While bringing together two incomes is a pretty straight forward endeavor, bringing together various expenses, assets, liabilities and the possible emotion connection to them can be tricky.

In my previous post “You’re Engage, Create a Financial Plan”, I discussed some of the advantages of having a financial plan before you’re actually married. In short, creating a financial plan can help you and your future spouse explore your life’s goals and objectives before tying the knot. This will help significantly reduce the possibility of disagreements when managing your finances in the future.

If you are a newlywed or recently became engaged, start the financial planning process by defining your combined goals and objectives. Once complete, the following steps will help you merge your finances and create a joint financial plan.

Data Collection and Analysis

During this memorable time in your lives, it’s important to locate all of the data that will impact your financial well being. This information will be used to construct your financial planning statements and determine the strengths and weaknesses that exist in your current financial situation.

The first step is to gather your qualitative financial planning data. This information will help you explore and document your risk tolerance, past experiences with money, feeling towards different investment products and your retirement expectations. This data is mostly used in the consideration of shared values and the emotional connection to various financial decisions.

In contrast, quantitative financial planning data is more numerical in nature. Gathering this data can be accomplished by listing the title and value of your cash accounts, insurance policies, estate planning documentation, and historical tax returns. This data will be used to develop forecasts and determine the affordability of your goals and objectives.

Once you have gathered and listed all of your financial planning data, it’s time to determine which accounts and policies should be merged, eliminated or simply left alone.

Merging Accounts and Financials

The decision to merge accounts and other financial planning tools, can be difficult. This is not only due to the volume of forms that will have to be filled out, but also the fear of losing control over a very important aspect of your personal life.

To begin merging accounts, it’s important to understand the advantages and disadvantages of each one. This will help determine if there could be any savings or added complexity from merging accounts (such as consolidating insurance policies or changing beneficiaries).

Once all of your options have been laid on the table, it’s time to merge the accounts that have the most advantages. When merging accounts, remember you don’t have to do it all at once. As long as there is open and honest communicate accompanied by a clear action plan, you can merge your financial accounts when it’s best for you and your schedule.

In today’s fast moving and advanced world, marriage is more than a romantic commitment to the person you love, it’s a business arrangement as well. Newlyweds should take the time to create a financial plan. This will ensure that the business side of you relationship is healthy and moving in the right direction.

Organizing Financial Planning Data

At this point we will assume that you have collected all of your qualitative and quantitative financial planning data and are ready to start the analytical portion of the financial planning process.

However before jumping into the details its important to organize the financial planning data and create a few different reports that help turn the data into information. Once you have relevant information, you can begin to determine the strengths and weaknesses in your current financial situation. After you gain an understanding where your financial plan needs the most attention you can begin to make the necessary changes to get yourself on the right track.

Organizing Financial Planning Data

There are four major types of financial data; income, expenses, assets and liabilities. It’s important that you understand the definition of each. You will use them later to construct your financial statements.

Income - Income can be defined as any monetary asset that is received in the form of compensation, tips, interest, dividends, rent and other forms of earnings. They can also be described as cash inflows.

Expenses - Expenses are defined as an outflow of cash or other valuable asset that is usually provided in exchange for a product or service.

Assets - Assets can be described resources with positive economic value. Assets include but are not limited to: cash, stocks, bonds, houses and cars. Assets can be both tangible and intangible. Assets should not be confused with income, as their are used to describe two similar but different types of data.

Liabilities - On the other hand, liabilities are obligations that may result in a transfer of assets sometime in the future. Liabilities are usually outstanding loans and other types of debts. Keep in mind that liabilities are not the same as expenses as they are an obligation to pay in the future.

Introduction to Financial Planning Statements

There are two major statements or reports that a Financial Planner usually creates with a Client’s financial data. These statements allows them to assess the health of a financial situation, similar to how accounting data helps investors determine the financial health of company. The following are the two most common financial planning statements.

Statement of Cash Flows - The Statement of Cash Flows in financial planning is a little different than that in the accounting industry. In financial planning the Statement of Cash Flows (or Income Statement), is a listing of cash inflows and outflows. This report is extremely effective in illustrating where all financial resources are coming from (income) and going to (expenses).

Statement of Net Worth - The second popular financial planning report is the Statement of Net Worth. In accounting, the Balance Sheet provides generally the same information. The Statement of Net Worth seeks to determine total assets, total liabilities and then the difference between the two being net worth. Thus this report totals all of your cash, investments and other assets (assets) and subtracts the value of the money that you owe (liabilities). What is left is your net worth.

Now that you have organized your data into income, expenses, assets and liabilities its time to go into more detail about how to create your Statement of Cash Flows and Net Worth. These two reports will help you understand your current financial situation and where your financial plan needs the most attention.