There is nothing less romantic than financial problems.
If you’re among the many couples struggling during these tough economic times, instead of dropping a few hundred dollars this Valentine’s Day on candy, jewelry and fancy dinners, consider sitting down with your loved one to discuss your finances.
Ross Levin, a certified financial planner and president of Accredited Investors says in a difficult economic environment such as this, people in a relationship can react differently to their financial circumstance and communication can become very strained. In order to avoid tension, it is important to step back and ask each other about where your finances are now and what are your future objectives?
“For most people not much has actually changed.,” says Levin. “They didn’t know how much their retirement would be ten years ago and they still don’t.”
Love-Hate Investment Debate
Despite that, however, people often panic, and make unnecessary changes that Levin says “act against their own self interest.”
One such mistake is becoming too conservative with their asset allocation too quickly.
Elisabeth Plax, a certified financial planner and president of Plax & Associates Financial Service, says it is often the case in volatile markets that one person may want to sell everything and go completely into cash, while the other partner may want to ride out the turmoil.
While moving to cash may seem like a flight to safety, it is not a good solution as it can make it difficult for you to generate the returns you need and will prevent you from taking advantage of a recovery once it comes.
The trick, she says, is to compromise by incorporating a middle-ground investment strategy that moves some money to more conservative investments such as fixed income while maintaining enough in equities so you can take advantage of a recovery.
Asset allocation and balanced funds are good options that offer a high level of diversification tailored to many different risk tolerances, she says, as are some long-short funds, which can offer more protection on the downside Saul Simon, a certified financial planner and private wealth adviser with Simon Financial Group, says another major mistake people often make during these times is to stop investing in their 401(K) retirement plan.
In fact, he says, there is at least one good reason to keep investing.
“If you are adding money to these accounts, there is major dollar-cost averaging taking place,” he says, which entails investing in small, regular increments. With price of many securities so depressed, now is actually an opportune time to do this.
Plax agrees that halting these contributions is a big mistake that too many people make.
“Don’t stop contributions to your 401(k)s,” she says. ”Yes, they will go through a horrendously volatile cycle but in a few years from now you will be happy to have bought shares at such low prices,” adding it is important to keep you eye on the long term and don’t give up on stocks because you need the performance.
While not making unnecessary changes to your portfolio is half the battle, advisors say there are a few proactive steps that you can also take, which may be able to help your save a few dimes if money is getting tight.
Savings At Home
According to Levin, one option to consider is refinancing your home. However, you had better do your homework first as this isn’t for everyone.
Currently, homeowners can get some very attractive rates on conforming loans—which are those valued at $417,000 or less. Depending on your current rate, refinancing can save you a lot on your interest payments.
If you decide to refinance and you do not plan to be in your home a long time, you may want to do a zero cost refinance, which does not require you to pay closing costs. Instead those costs are wrapped into the interest rate. So you pay a little higher interest rate but no immediate costs associated with the refinance, which is good for the short term.
If you do plan on staying for awhile and you have the money to pay the upfront costs, that is a better option as you will have a lower interest rate over the long haul. You may find it attractive to go from a 30-year to a 15-year loan, which carries a lower rate bur raises the size of your monthly principal payment.
Levin says rates right now are attractive on both fixed rate and adjustable loans, though “we think in the fixed-rate the rates are attractive enough that it makes sense to go with that.”
He adds that when it comes to jumbo loans, refinancing options are slim as rates haven’t yet come down as much, though he says “if you know you won’t be in the house very long, there is a nicer spread on adjustable loans, which might make sense.
Also, he says, if you have strong credit another option to free some cash may be to do a home equity line, where you may be able to get some really low rates. There is a risk if interest rates move higher but in the meantime you can save a lot of money, he says.
Insurance And Retirement
Another area you may be able to find some cost savings is with deductibles – such as on your property insurance.
If you are able to raise your deductible—the sum that you must pay before your insurance company will pay out—it can save you a lot of money on your premium.
The question, Levin says, you have to discuss is “how high of a deductible are you willing to go.”
For couples that are not experiencing financial troubles but are looking to take advantage of the current environment, now may be a good time to think about transferring some of your wealth.
According to Simon, “interest rates are so low and assets have been depressed from a wealth transfer planning perspective.” As a result you can gift assets at a discounted value to their actual economic value.
In addition, Plax says that now is also the perfect time to consider rolling over your traditional IRA to a Roth IRA. One of the biggest differences between a traditional IRA and a Roth IRA is that with a traditional IRA your contributions are made on a pre-tax basis, and will continue to grow tax-free until withdrawn. Meanwhile with a Roth IRAs, contributions are not tax deductible, however when the money is withdrawn during retirement, they are tax-free.
Because the assets in the IRA are so low and you can transfer them in-kind to the Roth IRA so you are paying taxes on a smaller value and these assets will now start growing again in the Roth and come out tax free.
This can be a good idea for people who have sufficient disposable dollars to pay for the taxes, as you need to be able to pay the taxes from other kinds of savings. However, she says if you are considering doing this you need to determine whether this will put you into another tax bracket, which may not make it worthwhile. In this case, you may want to consider rolling over assets in increments. The IRA switchover is also subject to an income cap, so make sure you qualify.
While tough economic times can put a lot of strain on relationships, a little planning and a lot of communication can help ensure love is not lost.