Change is good, except when it’s not.
Life is full of uncertainty and change is inevitable. But in most cases, the human brain tends to crave certainty and consistency. This is why we experience physical and emotional stress when faced with a major life change, especially when it concerns finances. When a life change occurs that affects your finances, our brains are met with major uncertainty. This often causes a state of panic or worry. How will you handle these new, often unexpected financial changes?
Today, we’re going to discuss managing finances when life throws you changes. Not all changes are bad, sometimes life throws us a positive change. Both scenarios cause different reactions and circumstances for you to deal with.
Let’s review some positive life changes and how they may affect your finances or other aspects of your life.
Positive life changes and your finances
Getting married is a major event in people’s lives. Two hearts get united with an oath to be there forever in both good and bad times. Finance plays a vital role in this union, both positively and negatively. How you handle these changes determines your overall success.
You’ll encounter a lot of changes once you get married. You’ll have to deal with different legal issues like life insurance, wills, and also planning for a joint retirement. Not to mention, most married couples combine their income, which can create a whole separate set of issues. Of course, this is why communication is vital.
When it comes to life insurance, be aware of the beneficiaries on your policies and then be sure that you both have an updated will. Combining incomes may include eliminating a bank account or opening a new one altogether. Generally, this is the time a shared budget is created. This practice not only aligns your finances into a single picture, but also builds trust in your relationship.
Finally, discuss a retirement plan with your new spouse. This is your time to determine how you will save, your goals for retirement, and develop a plan to achieve them together.
Don’t forget about taxes
Paying taxes also falls into managing money. You’ll have two options while filing your taxes; married filing jointly (MFJ) and married filing separately (MFS). Both do have drawbacks. The drawback of MFJ is when you file jointly, both of your incomes are combined and can move you to a higher income bracket. The pitfall of MFS is that it can cost you more. So, be careful when it comes to filing taxes.
The decision to have children is a big one, and greatly influenced by your ability to financially support those children. Simply put, having children isn’t cheap and introduces a major new cost into your budget. But, there are ways to make room for the new addition.
First, review your budget to add and cut back on some expenses. ‘Adding’ refers to including the cost of your baby items whereas cutting back implies eliminating costs and spending on luxuries. The goal is to carve out room in your budget for the new expense.
Consider setting up a rainy day fund for your kid’s future and having a joint bank account. These two will make it easier for you to manage finances.
Do you know about the 529 plan? It’s a college savings plan that comes with different tax and financial aid benefits. You can also use it for the purpose of saving and investing for K-12 tuition. You’ll find two types of 529 plans, one is college savings while the other is prepaid tuition. It’s usually recommended to use a college savings plan as it serves more benefits than the prepaid tuition plan.
Getting a job
Getting a job is a big transition in life. It’s quite normal to get overwhelmed, especially if you’re impatiently waiting for that first paycheck. But, check your spending compulsion and think twice before spending your hard-earned money. We strongly recommend reviewing and updating your budget when you get a new job.
While adjusting your budget, do your best to dedicate at least some money to savings. If your company offers a 401k program, it’s usually advised to take advantage of it. Doing so, you deposit a portion of your pre-tax amount thereby lowering the amount of your income on which you’d have to pay tax. But, you will have to pay taxes when you withdraw money from the account.
Do one more thing. Choose an automatic transfer account to transfer funds from your savings account to your checking account. The best thing about using such an account is that you can withdraw whenever you need to and write checks without much hassle.
Negative life changes and your finances
Ending a relationship and divorce
Ending a relationship can be heart-wrenching. It often takes a long time to build a relationship, and the sudden ending can be a dramatic shift in your life. Still, we accept it and move on. It’s a life-changing process that’ll form a new ‘you.’
Whatever be the reason to separate, money still matters here. You have to be practical for the sake of yourself. Take the following money moves into consideration if faced with this unfortunate life event.
- Close all joint accounts and split the money equally. Also open a new bank account for yourself. Make sure you are choosing a high yield savings account if you choose to open a savings account.
- Remove both of your names from insurance policies and bill payments. List all bills you have to pay. Then decide and divide the bills amongst yourselves.
- Get a copy of your credit report to know the details like unpaid debt, loans, utility or medical bills.
- Set a budget all over again to control your money, that is, to track income and expenses.
- During a separation, one of you might have to look for a new living situation. If it’s possible, you can opt for living with your friends or relatives for a while to cut expenses and save at the same time.
Note: while it may be tempting, avoid vengeful actions like freezing an account or running up debt in your partner’s name. Ultimately this only leads to more financial trouble for you in the future.
Losing a job or other source of income
A job loss is undoubtedly disappointing and devastating. But life doesn’t come to an end and you have to prepare yourself for a more challenging part, i.e., looking for a fresh job. Before that, you need to manage finances cleverly until you get a job.
- At first, apply for unemployment benefits. The qualification criteria for unemployment vary from state to state. To qualify for this benefit, you must be unemployed totally or doing a part-time job or in search of a job, and you should have at least 12-18 months of working experience.
- Figure out how much you’ll need. While calculating your needs, don’t focus only on paying the largest bills (mortgage or vehicle payments) but the regular payments (buying groceries, paying utility bills, credit card bills, and so on) too.
- Consider updating your budget. Trim the unnecessary expenses from your budget by being aware of the differences between needs and wants.
- Start looking for income sources by paying less heed to salary. You can opt for doing part-time jobs to make ends meet.
- If you had a 401(k) retirement account, it’ll be best to roll it over into an IRA account. Because you’ll have more control over your investments and avoid unfavorable hidden policies, if any, from your former company.
Falling into a debt trap
Juggling multiple debts is a massive headache. But, there are several cures for such a headache. Some of these include:
- The Debt Snowball Method – This method aims to pay off debts sequentially from the lowest balances to the highest.
- The Debt Avalanche Method – The debt avalanche method is a debt repayment strategy that follows the strategy of making more payments towards the highest-interest debt while making minimum payments on other debts.
- Debt settlement is a good option for consumers straddled with unsecured debt like credit cards or personal loans. This method involves an accredited company negotiating with your creditors on your behalf, ultimately reaching a significantly reduced amount owed on your debt.
- A balance transfer is a kind of debt relief option that involves taking out a new credit card at a low or 0% interest rate and then transferring the debts of multiple credit cards into that new card. While this is a widely used method, it’s also a dangerous method of managing debt. Once that promotional rate of 0% interest ends, consumers can quickly become buried in fees and accrued interest.
These are a handful of major life events that can take a great toll on your finances. How you handle these events is paramount to your ability to conquer them. Most importantly, never be afraid to ask for help. As they say, “Your life does not get better by chance, it gets better by change.”. If you would like to speak with one of our licensed agents about your options, we are always here to help.
Your partner in debt relief,
Consumer First Financial