Background: Family
Jack and Michaela are married and have three children. One child is in elementary school, the second will enter elementary school in the fall of 2024, and the youngest was just born.
They are facing a key transition point in their marriage in addition to a series of common middle class money and home management problems.
Michaela's parents live nearby and babysit once a week full time. Michaela's current job allows her to stay home with the children once a week. Child care is only needed three days a week.
Background: Income and Savings
Jack has an hourly position and is paid a regular paycheck with the opportunity for overtime. He also works part-time on weekends at an hourly rate occasionally.
Michaela holds a position that pays hourly but typically generates a steady paycheck. She is searching for a different job that will allow her to work from home and stay home with the children.
They do not have a dedicated account for emergency savings or money for emergencies.
Background: Expenses
Without Jack working a part-time job occasionally on weekends and Michaela earning the same as she earned last year, their income will not cover their expenses.
They appear to have a frugal mindset, and most of their daily spending decisions are reasonable. Moreover, their mortgage, taxes, and home insurance comprise 15% of their household income. This low fixed expense is half the maximum recommended amount and is their most beneficial financial choice.
Michaela has significant student debt at a low fixed rate of 3.25%. Neither shared that this student debt is emotionally burdensome, and the payments are 5% of their monthly net income. Their current plan makes sense. Deferment is an option if necessary.
Background: Overall Financial Wellbeing
The research is clear, financially unhealthy marriages are a leading cause of stress in marriage and divorce. For example, the American Psychological Association's Stress in America Survey has found that money is the leading cause of stress in America numerous times. Moreover, multiple surveys have found that money is a leading cause of divorce.
Jack and Michaela are living paycheck to paycheck with no emergency savings, inadequate life and disability insurance coverage, and no retirement contribution coordination, and not enough saved in their HSA.
Primary Concerns
Jack and Michaela feel uncomfortable putting their third child in daycare because of the child’s unique needs. One of them will need to be the lead caregiver.
Jack has more career advancement opportunities, and Michaela does not, although Michaela's education allows for more flexible career options. They have agreed that Jack should focus on his career, and Michaela will capitalize on the flexibility options her career awards her to help care for a child who currently has unique needs..
Stress is clearly a significant concern. The more time Jack and Michaela spend working, working while trying to parent or away from one another, the more stress they have.
Each factor should be considered in tandem with strategies to improve their financial health by increasing their income.
Most challenges Jack and Michaela face center around money and household management.
Pressing Challenges
Their immediate concern is coming together to devise a plan allowing Michaela to be the lead caregiver and switch careers.
Without Jack working a part-time job occasionally on weekends and Michaela earning the same she earned last year minus $432 saved in child care, their income will not cover current expenses.
Household income cannot be reduced to cover living expenses and be prepared for an emergency by accumulating savings.
Based on the little information provided, there is insufficient long-term disability and life insurance coverage. With three children, this is a serious problem.
Suppose they aim for Jack to focus on his career at Accenture and for Michaela to stay home and work a medical, clerical position. In that case, Michaela’s income must remain the same with a possible short-term exception.
Recommendations
Establish regular household meetings
Until this point, Jack has managed the household finances, and they have an informal understanding of how to manage the home. With their desire for Jack to focus on his career, defined home and money management roles are in order.
An abundance of research has found that couples who have regular household meetings to discuss managing money and what is needed to run the home are happier. The most compelling explanation I've heard is from Rob Cross, the Edward A. Madden Professor of Global Leadership at Babson College and author of The Microstress Effect.
"Microstress is the relentless accumulation of unnoticed small events — in passing moments — that drastically affects our wellbeing.”
Microstress can lead to death by a thousand cuts for middle-class dual-income families with children.
Rob was a past guest on The Modern Husbands Podcast, where he shared that the couples who seemed to handle micro stress best met regularly to discuss household management strategies.
Meeting 1: Organize home management roles
Use the Fair Play Cards to structure a home management system following Michaela's job change.
Jack should begin with the cards in his hands that he is currently responsible for, and Michaela should do the same. Reorganize the cards to reflect who will be responsible for each task moving forward.
Read The Fair Play System: How It Works and listen to the podcast episode with Eve Rodsky embedded at the bottom of the post.
Meeting 2: Assess your financial health
Jack and Michaela should take the CFPP Financial Wellbeing Assessment separately and use the results to discuss their current circumstances and establish shared financial goals.
If it does not impact the current fixed APR, student loan deferment can provide short-term cash flow relief. Consider consulting a professional service such as Student Loan Planner before moving forward.
Meeting 3: Organize financial records and budget
Jack is responsible for managing the money, so how he does so should be a system he is comfortable with. However, Jack's spreadsheets require significant upkeep, and his time is far more limited now than when he originally built them out.
I recommend using Tiller. After taking the front-end time needed to link accounts and label expenses, it automates all transactions into Excel and Sheets. An email is sent each day with updated transactions, and the sheets include a simple one-page overview providing a complete financial overview, which Michaela needs for their money conversations.
Moreover, complicated record-keeping will make for more difficult money conversations. The financials should be visual, high-level, and easily digestible so partners can easily reference them for money conversations.
Meeting 4: Do the math behind Michaela’s job change
Michaela is the breadwinner, and their joint income isn't enough to make it through the year; they also need Jack to work part-time on some weekends. Up until their third child, they paid for child care. Here are the variables that should be included in the math behind Michaela's job change.
Short-term financial considerations
Cash flow impact
Childcare cost savings
Income derived from the new career
Income volatility
Stress relief for the family
Value of allowing Jack to focus more on his career
Long term considerations
The long-term impact needs to be calculated to understand the opportunity cost of either choice. Assuming Michaela earns $71,000 annually, she will experience a lifetime total income loss (including retirement) of $160,903 for one year out of the labor force.
Jack and Michaela pay $432 monthly child care costs. Assuming Michaela takes only the pay cut that equals the cost of childcare expenses they are saving, that loss would be around $35,000 in lifetime income for each year she makes this choice.
Meeting 5: Purchase term life and disability insurance
Term Life Insurance
Jack and Michaela must collect the life insurance information provided through Accenture to assess whether it is sufficient. Term life insurance is cheap. Experts recommend purchasing insurance that provides a benefit of ten times your income plus $100,000 per child.
Click here to learn more about purchasing life insurance.
Disability Insurance
1 in 4 Americans will require disability insurance at one time or another, and SSDI pays, on average, $1,400 if the maximum amount of SS credits has accumulated.
Jack and Michaela must investigate if disability insurance is included in their current benefits and, if so, calculate how much more will be needed.
Disability insurance must fully replace an income. Jack is on salary, so short-term disability insurance is not a pressing need, whereas it would be for Michaela.
Click here for details on how to purchase affordable life and disability insurance.
Meeting 6: Organize bank accounts
Checking Accounts
Jack and Michaela have separate checking accounts but need a dedicated account for emergency savings. An abundance of research shows a correlation between pooled accounts and marital happiness, and groundbreaking research conducted by Dr. Olson found that joint accounts cause marital happiness in first-time marriages, which she discussed in a past podcast episode.
Read How Should Money Be Split in a Marriage? to learn more.
If one spouse or the other refuses to combine all of their finances, use the Yours, Mine, and Ours strategy. The structure of the strategy is essential. Based on Dr. Rick's book, Tightwads and Spendthrifts, I created the image below and our conversation on the Modern Husbands Podcast. Based on reviewing their expenses, perhaps they could each have $100 monthly deposited into their own accounts for independent spending choices.
Read How to Split Your Finances: Psychological Money Laundering to learn more.
Savings Accounts
The most effective strategy for saving automatically is to open a savings account in a high-yield savings account at a different bank or credit union than where you do your primary banking. Here is the recommended step-by-step process.
Leave enough in checking to pay for expenses one month in advance to smooth out income and expense volatility.
The remaining amount can be used to open a savings account.
The criteria for selecting the best account in these circumstances is zero minimum balance requirements and a savings yield over 4% APY.
Establish a split deposit directly from your paycheck to this savings account. Do not oversave to avoid needing to continually dip into savings to cover regular expenses.
Related: Maximize Your Savings With Raisin
Meeting 7: Organize Medical Expenses
With three children, the odds are high that they will meet their full deductible annually. The out-of-pocket maximum is $6,000. The annual maximum family contribution in 2024 is $7,750. Because HSA money can be invested and rolled over, and contributions are above-line income tax deductions. Unlike a 401k, they are also exempt from payroll taxes. Therefore, consider maxing out HSA contributions before making non-matched 401k contributions.
It’s important to note that out-of-pocket maximums often differ for out-of-network treatment. Ideally, an HSA savings balance could cover the next year’s full risk in-network and out-of-network risk exposure.
They have more medical expenses than can be paid in cash without wiping out their accounts. Take advantage of the interest-free hospital loan by establishing a payment plan to elongate the payments for the year to all be paid before the final date counted toward their out-of-pocket max.
Michaela is in the medical industry and is best situated to own all responsibilities around making these payments.
Meeting 8: Retirement
Before the meeting, they must collect all the pertinent information needed to review each other's retirement balances, contributions, and employer match information.
Jack and Michaela believe they contribute just enough to receive the full company match, but not more. Neither knew what the other was doing.
At least 1 in 4 married couples are losing free money from their employer's matching contributions because they fail to coordinate their retirement contributions. The study authors who reported these findings estimate that the average foregone match is nearly $700 annually.
There are solutions. Read 6 Easy Solutions for What Couples Get Wrong About Investing For Retirement.
Piecing together current retirement account balances and making contribution assumptions, they should have around a million dollars saved at retirement age. This assumption includes earning the market average minus fees and inflation.
This provides $40,000 a year of retirement income, using the recommended 4% withdrawal rate.
On their money date they need to begin the conversation by discussing what they would do if they had a million dollars and no debt, a hack I picked up from Dr. McCoy on the Modern Husbands Podcast who runs the Financial Planning Program at Kansas State University. This is a far more enjoyable way to begin a conversation about money.
Coordinate retirement contributions to maximize company matches.
Consult with a fee-only financial planner to select the best investment options for them. Use the following tools to select a financial planner.
FINRA's BrokerCheck: BrokerCheck is a free tool to research the background and experience of financial brokers, advisers, and firms.
SEC's Investment Adviser Public Disclosure databases: Search for an individual investment adviser representative and view that individual's professional background and conduct, including current registrations, employment history, and disclosures about certain disciplinary events involving the individual.
The CFP® board recommends asking your financial professional these ten questions to understand what you are being charged.
Jack and Michaela have various retirement plans from previous jobs that should be consolidated. Use the professionals at Fidelity for rollover assistance.
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