Before Putting a Ring on It, Talk Money
People say you can't put a price on love, but couples can avoid financial headaches and relationship heartaches by having a frank discussion of their individual finances as well as spending and saving habits long before approaching the altar.
Financial matters can be a far touchier subject than deciding whether to have children or where to live, and often fall by the wayside while decisions are made on whom to invite to the wedding and where to honeymoon, said Robert D. Russell, president of wealth advisory firm Russell & Co. in Ohio.
More than a quarter of married or cohabiting couples said disagreements over finances are most likely to lead to arguments, outpacing children, work, chores and friends, according to a 2012 poll by the American Institute of Certified Public Accountants.
Couples who put in the time and trouble to have a frank discussion about their individual financial pasts are often better prepared to not only weather rough times, but take advantage of the economies of scale of a partnership.
So before either partner considers putting a ring on it, the most important first step is to set aside some time to talk money. Not every topic has to be covered in one sitting, but the focus, a least initially, should be airing any dirty financial secrets, such as bankruptcy or significant debt.
The debt one partner brings into a marriage can affect the creditworthiness of the couple so anything that could make it hard to get a mortgage, a car loan or even a credit card should be out in the open.
No decisions on how to handle any issues have to be made early on, but honesty is a must—as is avoiding being judgmental or critical. The goal is a frank discussion, not creating the opportunity for a lecture that will shut down the lines of communication.
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In subsequent conversations, both partners should be able to describe their financial goals, their spending and savings habits, and go as far out as retirement plans, to gauge compatibility.
Each partner should also consider what kind of person they are when it comes to money. One partner could be a spender, the other a saver, and unless they come to some sort of middle ground they will inevitably experience more money stress once the honeymoon is over, said Russell.
In most cases, both parties will need to compromise when it comes to money habits. No one way of managing finances and saving is right. That compromise should leave the couple with a game plan for retirement, plans on how to save, whom to trust for advice and even plans on how to handle future beneficiaries.
Once both partners understand each other's perspective and goals, they can come together to form a road map and budget accordingly. When worthy goals conflict, say, when one partner wants to focus on saving for retirement and the other wants to buy a home, couples may benefit from seeking outside advice to see which approach will be most efficient and equitable.
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When it comes down to the details of allocating assets and writing checks, conventional wisdom suggests that couples should aim to save at least 10 percent of their income and take full advantage of their workplace savings plans.
As for whether to have joint or separate bank accounts, the jury is out, but many couples are choosing to keep their individual accounts and creating a joint account to handle shared expenses.
In more extreme cases in which a partner is entering the marriage with a big debt or significant assets, or if would-be partners would rather not discuss finances, couples should consider a prenuptial agreement.
"In the event that there is a debt issue or other financial matter that needs to be addressed, a mutually agreeable plan outlining how such an obligation will be met should be put in place to avoid any misunderstandings or unpleasant situations later on," said E. Richard Baum, a CPA and attorney at the accounting firm Anchin, Block & Anchin. This disclosure would then not be an awkward circumstance, but rather a collaborative exercise in forging a plan for financial success.
And when it comes to the marriage penalty (no, not the sudden inability to stay out late with your friends with impunity), but the tax hit individual high-income earners may experience when filing their taxes jointly following marriage, Russell advises successful unmarried couples making less than $400,000 each to consider putting off the wedding bells to cut down on their federal income tax burden.
_ By Doug Cubberley, Special to CNBC.com