My personal journey in a blended family

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There is no lack of hurdles and challenges in bringing two separate and distinct families together in a blended family environment.  The merging of finances and financial decision making is one of the most important aspects of the marital relationship in a blended family. 

Today’s writing centers on the cash management within a new blended family.

Many young couples often ask the question, what is the best way to handle our cash at the bank? 

• Should we have two separate checking accounts and one joint savings? 
• Or should we have one joint checking together and one joint savings? 

The scenarios for account titling and setup are numerous.  And here is how I respond to those questions…..There is no one right way to do it.  Every couple is different.  What works for some, may not work for others.  

There are some common traits though that dictate banking success for a new couple.  A cash management system that allows for a couple to have transparency on where their money goes, along with open, honest communication is a system poised for success. 

Accountability to one another, along with accountability as a family are important facets of a sound cash management plan.  I encourage open, honest communication together, in order to establish what is the best set up in a cash management system for a new couple.

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FOMO

“Fear of missing out” is a phenomenon that many new parents and young families contend with in multiple facets of their lives. It can be a contributing factor to poor financial decision-making. One area that I see many young folk falling victim to this phenomenon is in investing. Social media has played a huge role in encouraging people to share every detail of their lives and this has extended to investment strategy.

FOMO comes in when you find yourself feeling anxious about the fact that you see people sharing their investment successes and you are falling behind because you haven’t done the same thing or enjoyed the same success. This phenomenon has been most noticeable in cryptocurrencies and “meme stocks” and has contributed to increased volatility in those markets.

The best piece of advice that I can give to a young family that is thinking about the merit of investing is to be deliberate in your financial planning and to avoid getting ahead of yourself. Don’t allow FOMO to seep in and cause you to make a financial move that you are not ready for. The following are some financial considerations that young families should keep in mind and take care of before focusing on investments. 

• Emergency Funds – each family will have a different set of circumstances and a different funding level in an emergency fund
• Risk management- as a family grows, it is exposed to more risk. Proper reviews of your risk and insurance policy design should be done periodically
• Legal documents such as Will/POA/Living will – make sure they are up to date. Many young parents will not have legal documents yet. This is your sign, hire an attorney and get them done.
• Income and expenses can fluctuate so a consistent focus on budgeting and expense control has to take priority to investment strategy for young families.
• Income protection: The largest or most valuable asset for a young family is the future earning potential of the breadwinner. Consider insuring that income.

MONEY DO’S AND DON’TS: Stop managing your money like it’s the 50’s!

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Work Up Some Numbers For Me

My last two pieces may have shocked your current thinking. “How in the world does it make sense to consider NOT paying off your home?” I’m hoping to make my final case here.

Begin with the example I used previously: A $400,000 home requiring 20% down, leaving a $320,000 mortgage. Today’s interest rates are ABOUT 5.5% for a monthly payment of $1,816.92. I use calculator.net for these examples so you can go there to check my math.

Making no extra monthly payments, it’s easy to see the principal and interest payments over the life of a 30-year mortgage. And it does in fact take thirty years to pay off.

“But ALL of that INTEREST!”

So, to avoid paying more in interest, a person sends an extra $1,000 monthly payment to principal, reducing the mortgage to 14 years, in effect self-amortizing the mortgage in half. The amortization schedule⁽¹⁾ shows how the payments play out over 14 years, obviously paying off the home in fewer years for an additional total outlay of $160,458.

But you own your home!

Consider this alternative: Over that same 14 years, what if you put $1,000 a month away into an account earning just 3%? At the end of 13 years, you would have $187,413 of CASH sitting in that account.

“But I still have a mortgage.”

Yes, of course you would, with a $240,458 balance remaining. But you also have $187,413 of SPENDABLE DOLLARS (with an effective remaining mortgage balance of $53,045⁽²⁾) for your future not sitting in the equity of your home that you cannot spend until:

• You sell it
• Or get another loan against it.

Now imagine that you got a higher rate of return in your cash account, the type you might expect from a long-term investment into your 401(k). At just 5% in 13 years, you would have over $212,000 of spendable dollars not sitting in your illiquid home equity. Add to that any odds that you and your family may not stay in that home for longer than 13 years, when you would sell it anyway, and the math is undeniable:

You can’t eat your house.

The key here is liquidity in your future. Pensions are all but extinct, and if a pensioner needed additional money pensions do not send extra payments because you need $10,000 to fix the transmission in your car.

Links and references:

(1) https://www.investopedia.com/terms/a/amortization_schedule.asp

(2) Current mortgage $240,458 – cash $187,413 = $53,045, only you have kept the extra payments.

So You Think You Want to Retire?

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I was too busy to think of retirement at 70.  I was going to work as long as “the boys” at SDP would let me, or until I couldn’t work.  Oh, I envisioned slowing down and taking a day a week off, but retiring wasn’t really on the radar!

Looking back, I think a big part of me being too busy was really fear that I would let people down. 

I didn’t want to let them down by “bailing” when I know they need me.  I have clients of 50 years!  I don’t know what that says about them, but I know they are special to me!  No one knows them as I do.  No advisor could possibly have the relationship and understanding I’ve spent years developing.  It’s too often these days that I get “The Call”.   It’s the call telling me that someone is seriously ill or that they died unexpectedly.  That’s when my friends rely on me.  I’ve seen it over the years and those tough times are much more complicated than just a few years ago.  

All that’s true, but if I am honest, I think it was a fear of losing my identity.  How foolish of me!   My foremost identity is as Brenda’s husband, a father, grandfather and now great-grandfather!   That’s what’s important.

The tracks of time become familiar pathways.  We look forward to the anticipated and familiar view from just around the next bend.  It’s like stopping at that favorite overlook and drinking in the view.  That’s how meetings with long-time clients go.  “How are the grandchildren?  Do you have pictures?” or “Tell me about that trip!”  I think that kind of interaction is something I knew I’d miss.

Join me next time as we look forward.