Angela writes: I’m getting married – and soon! What are the top investment-related things my fiancé and I should be thinking about?
My favorite investing topics are how stocks and bonds work, how to pick the best funds in your 401(k), and putting it all together into a plausible financial plan.
Unfortunately, the most important investing topic for newlyweds isn’t any of those things — it’s debt. (I know, I kind of want to punch me, too.)
Debt is the opposite of investing. When you invest, you’re turning your money over to someone else in hopes they’ll do something smart with it and give you more money back later. When you take on debt, someone else is investing in you. (Try saying that in a horror movie voice.)
That doesn’t mean all debt is bad, though. It’s just that mixing debt and investing — with a couple of exceptions I’ll get to in a minute — is usually a bad move and most newlyweds bring at least some debt to the marriage.
Let’s say you or your fiancé has a student loan charging 6.8% interest, which is the going rate for an unsubsidized Federal Stafford loan. Paying down this loan is the equivalent of earning almost 6.8% on a risk-free investment (I say “almost” because the interest in tax-deductible, so the effective rate is a little lower).
What is the most you can actually earn on a risk-free investment? About 2.25% on a 5-year CD.
The same goes for credit card debt (duh) and car loans. It doesn’t make any sense to start investing in stocks and bonds when you can get a guaranteed risk-free return by paying off the debt.
Most couples find debt stressful to talk about, partly because it’s easy to see right there in black and white (and red ink). It’s also painfully obvious whose debt is bigger and that’s not a contest anyone wants to win.
You and your fiancé probably already know about each other’s debts, but if not, now’s the time to lay it all out and start talking about how you’re going to conspire to wipe it out.
Oh, and build an emergency fund, too. Sigh.
Exceptions to the rule
Now that the unpleasantness is out of the way, let’s talk about a couple of reasons why you might want to go ahead and start investing — even if you still have some debt around.
Get the 401(k) match. Do your employers offer a 401(k) match? Take it, take it, take it. Even if you have other debt, turning down a 401(k) match is like turning down a raise. Please don’t do that.
Think about your mortgage attitude. If you’re planning to buy a house, some people (like me) argue that you should concentrate on paying down the mortgage and neglect your investment accounts. Others argue just the opposite: mortgage rates have never been lower, you can refinance if they go down further, and you’re likely to earn a higher return on your investments than the interest you pay on your mortgage.
You and your fiancé should have this conversation and if you find yourselves in the “pay it down” camp, consider a 15-year fixed rate mortgage. You’ll get a lower interest rate and force yourself to pay the mortgage down fast.
Maybe I’m not giving you enough credit. Maybe you’re a couple of go-getters coming to the marriage without any debt; maybe one of you already owns a house and the other is moving in. (No, I can’t believe I just said “go-getters” either.)
In that case, you need to make sure you’re on the same page — investing-wise. This is important for two reasons:
- Since you presumably expect to live off a shared pool of savings in retirement, it makes little sense for you to manage your investments with two separate philosophies. If one of you likes index funds and the other is a stock-picker, you need to hammer out a compromise.
- Looking at all of your investments as a single portfolio allows you to simplify your holdings and choose the best funds in each of your accounts. For a great overview of how to do this and why it’s important, see author Mike Piper’s post from the Oblivious Investor blog: It’s All One Portfolio.
Oh, and one last piece of advice: talking about investing on your honeymoon kind of kills the mood. You might want to wait until the night you get back to pull out this column and say, “We need to talk.” That should really win him over.
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