Financial Factors Couples Should Consider Before Adding a Second Income

Financial factors couples should consider before adding a second home may be a surprise to some, a reality to others and not an issue for still more. In other words, second incomes can have correlated debt management issues if not considered carefully. It is easy to think of a second income as a good thing as it usually means more money. However, more money doesn't necessarily equate to a better life or even an improved financial situation. This article will outline some of the financial considerations that couples may face before adding a second income. It will do so in terms of 1) the couples pre-second income financial profile, 2) the affects of second incomes, and 3) financial management of the second income.

The couple's financial profile:

A second income usually comes in addition to the couple's pre-existing financial conditions such as monthly expenses, budget, financial plan, fiscal know how, life-style costs etc. This financial profile can influence how the new money is to be used, perceived, managed etc. The reason why these pre-conditions and financial profile are important, is because they are partly responsible for how well the new income will be utilized. The following list indicates some of the financial factors that a couple might want to consider when contemplating a second income.

• Full or part time work
• Amount of income
• Number of members in household
• Existing budget and financial plan
• Financial expectations and know how

If the couple is in good financial shape, additional income may be put to good use, and planned for with logical financial objectives. Otherwise, the second income may be abused and simply proliferate existing negative financial habits to a new level. The impact of the new income is thus determined by some of the aforementioned financial factors.

The affects of a second income on couples:

A higher income can mean higher costs in some cases. This is because higher income households may be taxed higher if either the married filing single or married filing jointly tax bracket minimums are surpassed. The same would hold true for a non-married couple as a higher income could mean a higher tax bracket.

If the couple are both working full time for the two incomes, and have children, the question of day care becomes an issue if the children are young. Also, housecleaning may become too difficult to keep up with requiring potentially higher housekeeping fees, and if the couple are too tired to make dinner after work, they may get into the habit of eating out which adds additional expense. Also, if stress is a factor related to the new income, medical or psychological therapy may become an added issue requiring additional financing along with higher spending due to increased discretionary income.

These and other costs can eat away at a second income and in some cases make the income redundant or not worthwhile. For example, if the couple's income increases by $35,000/year, and the additional taxes and costs associated with the higher income add up to $19,000 not including intangible costs, then the net financial gain is only $16, 000 which may not be worth the effort in terms of stress, time and effort. Listed below are some of the potential added costs that may come with a second income and/or financial decisions associated with such.

• Tax bracket
• Child care costs
• Food expenses
• New mortgage
• Housekeeping fees
• Stress related therapy co-pays
• Higher cost of living
• Increased debt

Higher net household income can lead some couples to believe they can afford to carry more debt. This in actuality is taking on more risk because if one of the two lose an income, the debt remains thereby increasing financial risk even if the debt to income ratio is the same as when the household income was lower. It is for these reasons managing a second income can be important.

Managing the second income:

Second incomes don't have to mean more spending; rather they could mean more saving, better investing, less debt and increased financial security. When a second income is managed well, it isn't redundant, meets financial objectives and can improve the couple's financial profile. For example, less reliance on debt could lead to a higher credit score, or increased savings could mean more financial opportunities later on. Below are a few of the variables that managing a second income may encompass.

• Investment choices
• Savings adjustments
• Debt payoff
• Retirement planning
• Future financial opportunities
• Credit building

Managing a second income is financially relevant because it can help optimize the use of that income so it is more beneficial to the couple and hence more worthwhile. An un-optimized second income is financially inefficient and financial inefficiency can lead to financial stasis and even financial disadvantage. If the affects of a second income don't outweigh the advantages, then the couple is better positioned to make good use of the money. And good use of money is less likely to occur if the couple's financial profile is not suited to such, in which case the couple may benefit from an alteration in their financial profile and/or planning.

Financial information for newlyweds

Marriage can have positive as well as negative financial influence for a couple. This is so as each partner may enter the marriage with different individual financial situations. Through the marriage, a number of factors such a joint accounts, beneficiary adjustments to insurance policies and property, debt consolidation, and higher tax exemptions can occur just to name a few of the financial changes that can take place.

Additionally, insurance premiums may lower when multiple vehicles and/or policies are combined into one policy. There are several areas of finances to consider when getting married so as to both optimize financial planning and avoid financial mistakes in marriage This article will outline some of the key areas to consider, specifically those listed below.

• Individual and Joint assets
• Credit rating and debt
• Pre-nuptial agreements
• Property and taxation
• Financial identity

Individual and joint assets

Whatever assets one brings into a marriage generally stay individual unless they are reallocated into joint accounts. It can be a good idea to maintain an individual account not only to preserve a personal financial identity but also in case of future divorce, as such assets are more likely to stay individual after divorce.

Combining assets can be useful when applying for large loans such as mortgages as it increases a couple's net asset value on the mortgage application and may lead to greater credibility and collateral in the loan consideration.

Joint assets can be classified in a number of ways. Monetary assets held jointly may be held in accounts called Joint tenancy with rights of survivorship and severing ownership of such accounts may require a document with a signature guarantee. Signature guarantees require a financial institution to assume liability if the signatures on the financial document is invalid and thus require a longer term relationship with one's financial institution.

Credit rating and debt

Marriage can adversely affect credit rating when one's debt to income ratio increases. This can occur when debt becomes joint. Moreover, after getting married the joining of liabilities have the potential to affect each partner's credit rating. For this reason, it can be a good idea to consider a marriage partner's credit rating when combining and consolidating debt.

If it is advantageous from a cost perspective to refinance debt into a joint account, this may override the disadvantages to one's credit rating, however it is useful for at least one marriage partner to have a strong credit rating in the marriage.

Managing credit and debt in a marriage can be facilitated by mature discussion of the couple's financial situation. For example, if one partner has a better credit rating than another, sharing advice and collaborating on a financial strategy to boost both parties credit rating can be discussed.

A number of techniques can be used to approach such a situation such as 1) refinancing debt at a lower interest rate that might otherwise be unattainable outside the marriage, 2) re-organizing a joint monthly budget to pay down debt faster and 3) Sharing costs as utilities evenly to avoid an excess of debt being evident on either partner's credit report.

Pre-nuptial agreements

For couples not averse to financial agreements entering into a marriage, a pre-nuptialagreement can eliminate concerns that may arise in the future. (bankrate.com) This can also simplify the process of divorce if such instance arises. Prenuptial agreements are legal contracts that specify division of assets in the event of martial dissolution. Pre-nuptials can be useful if there are a large amount of assets that one party goes into the marriage in when the other party doesn't.

The reason pre-nuptials might be worth considering is that a partner may have worked hard and accumulated a great deal of wealth prior to a marriage. It can be considered good sense to at least consider the advantages of protecting those assets more completely via a pre-nuptial agreement. While the issue of a pre-nuptial may be frowned upon by one or either of the marriage partners, such an agreement does not have to imply doubt or mistrust but rather prudence and risk management.

Property and taxation

Another area of personal finance that can be influenced by marriage is property ownership. Any property that is acquired during the marriage may be joint if 1) jointly applied for in terms of financing 2) co-owned via warrant deed, title or joint tenancy and 3) Acquired in full during the marriage.

The longer a marriage lasts, the more possible it is a large share of martial property will be owned together rather than individually. This can be beneficial in the sense that the acquisition brings joint financial satisfaction and financial teamwork into play within the marriage.

In addition to acquisition of joint property during a marriage are considerable potential tax benefits.(ebtax.com) In the United States, one's spouse is an additional exemption on a tax return and children add additional exemptions.

These exemptions can lead to a lower taxable income through tax deductions via the exemptions that
are financially advantageous. Also, when filing a married filing jointly tax return with the U.S. Internal Revenue Service, total tax deductions also become joint; these deductions include interest on student loan debt, mortgage loans or other deductible expenses and/or credits. If these deductions lead to a taxable income that's financial advantages are better than filing taxes individually, it can lead to a larger net household retained income or savings.

Financial identity and marriage

Financial identity can change significantly after becoming married. It is quite possible that at least some aspects of the financial life one held individually will merge into a joint identity. This is not necessarily a bad thing but is something to think about when getting married.

As stated previously this can affect credit rating, property ownership, and debt. Marriage can also have legal implications of finances such as changes to listed beneficiaries on insurance policies, estate planning, retirement planning and the cost of raising and planning for children's future.

It is probably a good idea to maintain some type of individual financial identity throughout a marriage not only in preparation of the possible and/or unforeseen event of divorce but also to enhance the financial capacity of each partner within the marriage.

When both partners develop an individual as well as joint financial identity within a marriage, it can strengthen each individual's financial competence and financial self-esteem in addition to building the partners' financial planning skills.

In summary, marriage can have remarkable and measurable impacts on finances. Financial identity can change, greater financial efficiency may be attained through a financial partnership, and asset acquisition can be improved. There may also be financial disadvantages such as changes to one's credit rating if debt is consolidated or unevenly distributed within the marriage.

Considering the financial implications of marriage is an important step in both martial teamwork and financial planning. Generally, there are several financial benefits to getting married, but there are also significant financial concerns such as those listed in this article.

Sources:
1. http://www.bankrate.com/brm/prenup.asp
2. http://www.wwwebtax.com/general/filing_status.htm
3. http://tinyurl.com/lhm9c2