Any financial planning process begins with a change in financial behavior and expectations. The degree of change varies based on financial priorities, but in the end, it’s about adopting new habits and abandoning others.

Before you take any of the following steps, it makes sense to talk to an expert who can help you see your whole financial picture. A CERTIFIED FINANCIAL PLANNER™ professional can examine all your sources of income and expenses and find the most efficient ways to cut expenses, pay off debt and boost the money you have for saving and investing.

In the meantime, here are some ideas:

Refinance if you can: Mortgage rates are still at historically low levels. You’ll need at least 10 percent equity (20% of equity will save you the PMI insurance cost) in your home and a credit score exceeding 720 to qualify for the best rates, but start negotiating with your current lender first and see how well you do.

Track your spending for a week: Either on paper or on the computer, write down every dollar you spend in the average week (and cut off credit card use during that week). At the end of that week, start marking out non-essential items just to see how much you could live without. Start with coffee and restaurant or carryout meals and work backward from there.

Make a budget: Once you’ve established how your income covers the essential expenses you must plan for, and a few inexpensive treats that should stay in, build a budget that includes specific amounts you can allocate toward debt. Keep a running total of your spending going forward, and revisit how that budget is working on a monthly basis until you start to see some positive results, and then you can review the performance of that budget a little less frequently.

Reset your entertainment expectations: Find ways to save money with friends – cook more meals at home or rent a movie instead of going out to see one. Also, get used to checking entertainment listings for free events that interest you.

If you can do it safely, take over home and auto maintenance yourself: The do-it-yourself movement is in a new phase with the economic downturn. For any home or auto maintenance chores you may have during the year, learn as much as you can about those tasks and estimate the cost of materials and your time before doing them yourself. Previous generations made do-it-yourself a necessity. See if that option is right for you and you might save considerable money doing it. Also, for bigger jobs, pair up with friends and family and you can help each other save money.

Set a new gift policy with your adult friends and family: Does everyone on your gift list over the age of 21 really need a present for birthdays and major holidays? Suggest to family and friends to have a gift drawing, a budget limit, a moratorium on gifts, or some other alternative where you trade off gifts for quality time. Even though the holidays are a few months away, it’s not too early to think about reining in the traditional holiday overspending.

Go debit: Debit cards wearing a bankcard logo are typically welcome at most stores where credit cards are accepted. This way, you pay cash without carrying cash. If you don’t have such a card, you can get one from your bank to replace your traditional ATM card, but remember to tell them to limit your buying power on the card to only what you have in your account. And use the overdraft protection to avoid fees.

Revamp your shopping list: Give this a shot: start a central weekly shopping list on a single piece of paper and add a dollar value for each. Write everything you think you need to buy on that single sheet, from groceries to clothes for the kids. That way, you’ll see all your proposed spending in front of you, and you can get a closer look at what your true priorities are. You’ll be surprised at all the “essentials” that are not really that essential that you can cross off before you spend.

Talk to your family about spending: When you’re talking to kids about budgeting and lowering your expenses, you have to walk a fine line between discipline and fear. But setting money priorities is part of growing up, and it’s essential to discuss and agree upon them as a family.

Buy used for yourself: Make someone else’s poor luck your good luck. If you need clothing, a car or a new watch to replace the old one that’s past fixing, it might be worthwhile to buy second-hand. The best places to find these gems are on the internet on places like craigslist. Plenty of people have unloaded items in relatively good shape to bring in cash during the recent downturn. You might do very well, and if anyone asks, don’t call it used; call it “vintage.”

October 2009 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V Higgins, CFP, CLU, AEP, a local member of FPA.

One good thing that might come from all the attention on Michael Jackson’s estate is that it may motivate people to get their own affairs in order. In addition, there are lessons to be learned that readers can apply to their own situation.

Michael’s will, dated March 22, 2002 was probated in California on July 1, 2009. The will was actually relatively straightforward and devoid of the weirdness that we have come to expect from Michael Jackson. The will is a pour-over will which many estate attorneys, including me, often recommend for medium or large estates. The pour-over will basically says all money or property that had not already been transferred to the Michael Jackson Family Trust while Michael was alive should be transferred to the trust after his death.

The Michael Jackson Family Trust is a trust that Michael Jackson formed during his lifetime. If his attorneys were crossing their t’s and dotting their i’s, Michael most likely transferred the majority of his assets to this trust. The simplified terms (put in my words) of the trust are likely as follows.

Michael named himself as the first trustee and while he was alive, he could do anything he wanted with the property in the trust. He could spend the money, burn the money, buy property, buy an interest in royalties of the Beatles music, buy art, incur debt, whatever he wanted.

Note that Michael’s will, like virtually all wills, became a matter of public record. The exact terms of the Michael Jackson Family Trust, however, are not a matter of public record. That is an additional advantage of the trust for those preferring to keep their affairs private. In the state of California, though, some details of the trust become a matter of public record, so we know that the beneficiaries of the Michael Jackson Family Trust include Michael’s mother, Katherine, the singer’s children and a charitable trust.

Three co-executors of the will were named in 2002 including long-time Jackson attorney, John Branca, music executive, John McClain, and Jackson’s accountant, Barry Siegel. However, Barry Siegel resigned from his role as executor in 2003. It is now the responsibility of Branca and McClain to transfer any assets that were not already transferred to the Michael Jackson Family Trust to the trust. In addition, Branca and McClain will also serve as successor trustees of the Michael Jackson Family Trust.

So, one lesson is that someone even as screwy as Michael Jackson had a will. The pour-over will is an excellent method of keeping your affairs private. A bigger advantage for most readers, however, is that the configuration of a pour-over will with a family trust avoids probate. For most people avoiding probate, though not critical, is usually a good thing. Avoiding probate reduces fees that the state charges, reduces attorney’s fees and keeps the court out as much as possible.

The most interesting thing to me about Michael’s will is the contingent guardian of his minor children. His first choice was Katherine Jackson, his mother, a choice many parents make. In the event Katherine either isn’t able to serve as a guardian or declines to serve as a guardian, Michael’s next choice is singer, Diana Ross!

Another lesson that parents of young children can learn is that Michael did the responsible thing of making a will and stating who he wanted to be the guardian of his children in the event of his death. Even if a parent of a young child or children has no money or no life insurance, they should still do a will to make known their choice of guardian in the event of their death.

You may question whether leaving his children to the care of his 79-year-old mother, Katherine Jackson, was wise. Another thing you may question is whether his contingent guardian (in case his Mother could or would not serve as guardian), 65-year-old singer, Diana Ross, was wise. For one thing, the will was dated July 7, 2002 when they were five years younger. The important thing, however, is that Michael presumably considered the matter and made his wishes known when he prepared his will. I wish all parents of young children would do the same.

If you are interested in reading Michael Jackson’s will, please click on the following link.

http://www.docstoc.com/docs/8016703/Michael-Jacksons-Will

Taking Things a Little Deeper: A Life Insurance Lesson

Certainly we will hear many things regarding Michael’s estate in the coming weeks, months and possibly years. Assets like Michael’s 50 percent interest in the Sony/ATV music catalog (including rights to thousands of hit songs by everyone from the Beatles to the Jonas Brothers) valued between $500 million to $1.5 billion certainly pique our attention. The fact that the estate is also burdened by his personal debts of an estimated $500 million will most likely also receive a lot of attention.

One lesson is that if you have assets that are hard to value and are not terribly liquid, you should consider life insurance. The life insurance proceeds, if set up correctly, would be free of income taxes and estate taxes. The proceeds could be used to pay debts of the estate and taxes on the estate. If Michael had sufficient life insurance, his interest in the royalties would not have to be sold in a fire sale to pay the taxes on that same asset—something that may happen now.

There is another lesson that will probably not be talked about by anyone except me. So, here is some unique wisdom. This advice is terribly relevant for millions of IRA and retirement plan owners today.

A 401(k) Lesson

Though not much is known about Michael Jackson’s estate planning, if he got good advice, it is a good bet that Michael had either a 401(k) plan or some type of retirement plan. Since he made a lot of money, he may have been limited in how much he was allowed to deduct on his federal and California taxes for the contribution to his 401(k). Even if he wasn’t allowed to deduct it, it still would have been wise for him to make the highest contribution allowed. After-tax dollars inside a retirement plan, incidentally, are conceptually the same as a nondeductible IRA. He may have had other retirement plans and possibly an IRA. For our discussion, let us assume that he had a 401(k) plan and the ultimate beneficiary of his 401(k) plan is a trust for the benefit of his children, the oldest of which is 12 years old. Because his children are likely to be taxed at the highest rates for the rest of their lives and because trusts in general have the highest tax rates of any entity, it is a good bet that the IRS will collect a lot of taxes on that money. The IRS will likely collect both estate taxes within nine months of his death and income taxes on those retirement funds, though hopefully they will have to wait for the income taxes.

It is a reasonable bet that the advisors involved will know enough to ensure that the distributions from the inherited 401(k) plan should be distributed over the children’s lifetimes. The impact of making small distributions over many years is to defer the payment of income tax due when the 401(k) plan or a portion of the 401(k) plan is distributed to the children.

It is an important lesson to IRA and retirement plan owners as well as beneficiaries to plan for the deferral (or putting off) of the income taxes on the inherited 401(k) or IRA as long as possible.
What the advisors to Michael’s family likely don’t know is that Michael’s children could make a Roth IRA conversion of the inherited 401(k) plan. Just like individuals making a Roth IRA conversion, his children could pay income tax on the inherited 401(k) plan now and have all future growth of the plan income tax-free.

In effect what they would be doing is paying tax on the seed and reaping the harvest tax-free. Interestingly enough, if Michael had made a trustee to trustee transfer (more commonly known as a rollover) from his 401(k) plan to an IRA, his children would not have the option of making a Roth IRA conversion of the inherited IRA.

Though he probably had a bigger balance, to make it more relevant to more readers, let’s assume Michael had $1 million in his 401(k) plan. The benefits to the children for making a conversion of the inherited 401(k) to an inherited Roth IRA could be measured in tens of millions of dollars over their lifetime (details available).

One of the lessons here is that beneficiaries of 401(k) plans have options upon the death of their loved one.  They should not blindly follow the advice of the person at the bank or even their attorney or financial advisor.  I would bet that the big shot attorneys Michael was dealing with do not know about making a Roth IRA conversion of an inherited 401(k).  True, this is a relatively new law, but it is so important, it pays for consumers to keep up.

A more relevant lesson for many more people is to question the old wisdom of automatically rolling over (technically doing a trustee to trustee transfer) of your 401(k) plan to an IRA.  Several potential benefits of keeping your money in your existing 401(k) plan or even creating your own one person 401(k) plan include:

1. Possibility of a good fixed-income account in your existing 401(k) often referred to as a GIC (Guaranteed Income Contract).  This would only apply to keeping money in your existing 401(k) plan.

2. The ability for the 401(k) owner to make a Roth IRA conversion of after-tax dollars inside the 401(k) to a Roth IRA without having to pay the tax.

3. The protection of ERISA (Employee Retirement Income Security Act) meaning a higher level of creditor protection than just an IRA.

4. As mentioned above, the ability of the heirs to make a Roth IRA conversion of the inherited 401(k) that they could not do with an inherited IRA.

Remember, if you already have the bulk of your retirement plan dollars in an IRA and still have earned income, you may be able to create your own one-person 401(k) plan and make a Roth IRA conversion of the after-tax dollars inside of your 401(k) or IRA tax-free.

I hope readers will learn from Michael’s estate and some of the weirdness will be overlooked by the lessons to be learned.

* * * * * * * * * * * * * * * *

James Lange is a nationally recognized IRA, Roth IRA, 401(k) and retirement plan distribution expert. He is the author of two best-selling editions of the book, Retire Secure! Pay Taxes Later (the 2nd edition was released in February 2009 by Wiley). Mr. Lange has been quoted 30 times in The Wall Street Journal and is a frequent contributor to numerous media outlets including Newsweek, Bottom Line, and Kiplinger’s Retirement Report. He also founded the Roth IRA Institute this year to “advise advisors” and launched his own radio show on KQV am 1410 in Pittsburgh. Audio archives are available at www.retiresecure.com.

James Lange is a tax attorney and CPA with a thriving retirement and estate planning practice in Pittsburgh, Pennsylvania.  He focuses on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, will and trust preparation, and intricate beneficiary designations for IRAs and other retirement plans.  Jim’s advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, and his articles are frequently published in Financial Planning, Kiplinger’s Retirement Report and The Tax Adviser.

After a marriage breaks up, about the last thing most people want to do is sit down with one more attorney. But no matter how old you are or whether you have kids, it’s important to consult both financial and legal experts to make sure you have an updated estate and financial plan for your new life once the divorce decree is final.

It’s also best to blend estate planning with financial planning post-divorce. If you weren’t working with a financial or estate planner during the divorce process, it’s time to do so now. The immediate months after a divorce can be disorienting – even if you don’t move, you are literally starting a new household that you will have to direct yourself, and that means new money issues to face.

This is why that the weeks immediately after a divorce are a good time to revisit short- and long-term spending and planning goals. Here’s a general road map to that process:

Start with a financial planner: Whether you plan to stay single, remarry or move in with a new partner, it’s good to get a baseline look at your finances as early as possible after the divorce is final.  Expenses for the newly single can pile up quickly and unexpectedly, and a financial planning professional can help you review your new current spending and savings needs, compare strategies to achieve long-term goals like college and retirement and give you critical tools to protect your assets and loved ones if you die suddenly. Even if you have a good relationship with an ex-spouse and you addressed key issues for your children as part of the divorce proceedings, you need to revisit all these issues as a single individual before you move on to the next stage.

Talk with a trained estate planning attorney about wills and other critical documents: True, there are software programs and other kit solutions available to write basic wills, powers of attorney and certain simple trust agreements. But it makes sense to coordinate the activities of a financial planner with an estate planning attorney who can tailor an overall estate plan specific to your needs no matter how basic they might be right now. Even if you are very young with few assets, it makes sense to get some solid advice in this area so you’ll be able to manage such planning as you age and your finances get more complex. Particularly if you have kids, such planning is important if you plan to remarry and if you want to guarantee that specific assets are guaranteed for them when you die.  In some cases where a spouse dies unmarried with minor children, an ex-spouse might automatically gain control of assets that were supposed to be earmarked for the kids. If you don’t want that to happen, you need to plan for that legally.

Make a guardianship game plan for your kids: It’s not enough to plan how money and assets will go to your children if you or your ex-spouse die suddenly or are incapacitated.  If your children are minors, it’s particularly important to make sure you and your ex-spouse have a guardianship plan for their upbringing as well as any assets they may inherit. You might completely trust your ex-spouse’s new husband, wife or partner to raise your kids if your ex-spouse dies before you, but there may be others better-equipped to do so – spell that out now.  Also, if there are any trust or wealth issues that will become effective for your children once they reach adulthood, it’s also important to establish an efficient legal structure for distributing those assets as well as appointing a trustee in a will to train and guide your kids through that financial transition.

Plan for special needs kids: If one of your children is disabled and is expected to need lifetime assistance of some type, then you should consult a qualified attorney to help you create a special needs trust. It will help protect your child from having to give up any public or social financial assistance as well as access to special doctors, medical help, special prescriptions or treatments that could be taken away if they were to personally inherit assets that would disqualify them for these programs. When such assets are held in trust, they are not counted as the child’s assets. The advantage is that those inherited assets may still be used to support their housing or other personal living needs.

Get solid protection in place: Most people focus on what may happen to their health insurance if they get divorced, but insurance issues like life, property/casualty and disability insurance are sometimes put on the back burner.  If you’re newly single, you definitely need the best health coverage you can afford for yourself and your kids, but life, property, liability and disability insurance becomes doubly important, particularly if you failed to address those needs during the divorce.  Even if your ex-spouse is cooperative with financial support, it’s wise to insure yourself as if they weren’t. A financial planner should be able to go through those options in detail.

Review all your investments for primary ownership and beneficiary information: Even if you were advised correctly to change the names on assets you and your spouse were dividing between yourselves, it still makes sense post-divorce to review that the names are indeed correct on those assets, and most important, to make sure all beneficiary information is correct.

June 2009 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V Higgins,CFP,CLU,AEP, a local member of FPA.

What is it?

Marriage is an important step in anyone’s life and brings many challenges with it. One of those challenges is the management of your finances as a couple. The money decisions that you make now as a couple can have a lasting impact on your financial future together. Careful planning of your finances can ensure that together, you achieve financial success.

Budgeting your money

In general

When you were single, you managed your finances in a way that was comfortable for you and that you understood–no one had to approve or disapprove of your financial decisions. Now that you are married, however, both you and your spouse have to agree on a system for budgeting your money and paying your bills.

Discuss financial situations

You and your spouse must discuss your respective financial situations and expectations, and take stock of your individual assets (what you own) and liabilities (what you owe). Revealing your financial situation is an important step when budgeting as a couple. If either of you has a financial problem, it is best to identify it now and begin solving it together. This is the time to address questions such as what do each of you earn, and what additional sources of income do you have? What do you own? Will both of you work now that you are married? Who will hold title to property acquired before and after the wedding? In addition, be sure to disclose all of your financial commitments. If you pay child support, let your partner know the amounts. If you have to repay student loans, discuss that as well.

The worksheets that follow will assist you in determining your current financial situation.

After you discuss your financial situations, you should discuss your financial goals. You can start by each making a list of your short- and long-term financial goals. Short-term goals are those that can take anywhere from three to five years (e.g., saving for a down payment on a home or a new car). Long-term goals are those that take more than five years to achieve (e.g., saving for a child’s college education or retirement). When you have each determined your individual financial goals, you should review your goals together to achieve common objectives. You can then focus your energy on those common objectives and strive to attain those goals (short- and long-term) together.

Decide on the type of bank account(s) you will keep

Decide whether you and your spouse will have separate bank accounts or a joint account. Advantages to consolidating your checking funds into one account include easier record-keeping, reduced maintenance fees, less paperwork when you apply for a loan, and simplified money management. If you do choose to keep separate accounts, consider opening a joint checking account for household expenses.

Caution: When sharing a checking account, be sure to keep track of how much money is in the account at all times since both of you will be writing checks that draw from the same account.

Prepare an annual budget

The first step in developing a financial future together as a couple is to prepare an annual budget. The budget will be a detailed listing of all your income and expenses over the period of a year. You may want to designate one spouse to be in charge of managing the budget, or you can take turns keeping records and paying bills.

Tip: Make sure that you develop a record-keeping system that both you and your spouse understand. Also, keep your records in a joint filing system so that you can easily locate important documents.

• Begin with your sources of income–list salaries and wages, alimony and child support, interest, and any other form of income that you and your spouse may have.
• List your expenses. It may be helpful to review several months’ worth of entries in each of your checkbooks to be sure that you include everything. Put all the expenses that are paid monthly into one category, and put all other expenses (every other month, quarterly, semiannually, annually) into another. Some common expenses are:

Savings	Major purchases
Rent or mortgage payments	Insurance
Student loan payments	Car repairs
Groceries	Clothing
Pet care	Tax payments
Utilities	Medical expenses
Car payments	Gifts
Credit card payments	Automobile gas
Alimony/child support	Child day care
Household items	Entertainment/dining out
Personal care/grooming

• Estimate your expenses for each category. How much money do you spend on these items on a monthly basis and on an annual basis? Try to come up with a realistic amount for what you think you will spend in a year’s time. Add another category to the irregular expenses list, and call it Contingencies. This can be a catchall category for expenses that you might not anticipate or budget for. The amount to budget for contingencies should be about 5 percent of your total budget.
• Add your sources of cash and uses of cash on an annual basis. Hopefully, you get a positive number, meaning that you are spending less than you are earning. If not, review your expense list to determine where you can cut your spending. Consider using computer spreadsheets or programs like Quicken for assistance.

Create a cash flow system

After you have developed a budget, you should create a system for managing your monthly inflow and outflow of cash. It is a good idea for both you and your spouse to become involved in this process–at least at first–so that both of you have a clear understanding of the costs of running the family and household.

Cash flow systems like the one described below are simple and painless to operate. Once they are established, you will find that making financial decisions becomes much easier because you have done your homework.

• Separate your regular monthly expenses from irregular expenses (every other month, quarterly, semiannually, annually) by using a different bank account for each. Otherwise, you may be tempted to use money that has been earmarked for something else. You should limit the number of checking accounts that you have in order to avoid confusion.
• Each time you get paid, deposit some money into an account for irregular expenses. The amount of money you deposit should be equal to the total amount needed for the irregular expenses, divided by the number of paychecks you each receive annually. In so doing, you will have the money for the outlay when it arises. The rest of your pay should go into your checking account, to be used for regular monthly expenses and savings.
• One variation to this system of cash flow management is to establish one or two additional bank accounts for one or both of you for personal spending money. Allocate the budgeted amount for personal expenses (e.g., lunches, haircuts, gifts) to this account. This way, you are free to spend the money in this account in any way you like without having to worry about meeting regular monthly expenses. However, all of these bank accounts may have fees.

Saving and investing your money

In general

At some point in your married life, you will almost certainly encounter some large expenditures, such as a new home, your own business, or a college education for your children. Chances are, you won’t be able to meet these expenditures from your current income. You and your spouse must discipline yourselves to set aside a portion of your current income for saving and investing your money to ensure its steady growth or, at the very least, protect it against loss.

Save a percentage of your earnings

When figuring out your budget, savings should be considered one of your monthly expenses. Think of savings as a fixed payment (like a car payment) that must be made every month. If you don’t and you wait until the end of the month to save whatever you have not spent, you’ll find that nothing ever seems to go into your savings account. A good rule of thumb is for you and your spouse to save 4 to 9 percent of your combined gross earnings while you are in your 20s and then double that savings percentage as you reach your 30s and 40s. In some cases, a dual-income couple may be able to live off one spouse’s salary and save the other salary.

Example(s): Mary and Richard, a married couple in their 20s, earn a combined annual gross income of $60,000. Together, Mary and Richard save 5 percent of their combined gross income each year, or $3,000.

As another example, Christine and Tom, a married couple in their 30s, earn a combined annual gross income of $80,000. Together, Christine and Tom save 10 percent of their combined gross income each year, or $8,000.

Build an emergency cash reserve

The savings that you accumulate can serve as an emergency cash reserve. Ideally, you should have in savings an amount that is comfortable for you to fall back on in case of an emergency, such as a job loss. A common formula used for calculating a safe emergency fund amount is to multiply your total monthly expenses by 6. When determining how much cash should be in your emergency fund, a major factor is your comfort level. If you and your spouse feel secure with your jobs and are confident that if you lost your current jobs you would be able to find a new one fairly quickly, an emergency fund of three times your monthly expenses should be sufficient. However, if either of you has an unpredictable income, you may want to have an emergency fund that is equal to 12 times your monthly expenses.

Example(s): Christine and Tom, a married couple in their 30s, plan to build up an emergency cash reserve. Both Christine and Tom are attorneys and feel quite secure with their present jobs. Christine and Tom have monthly expenses of $3,000 and plan to build up an emergency cash reserve that is equal to 3 times their monthly expenses, or $9,000 ($3,000 x 3).

As another example, Mary and Richard, a married couple in their 20s, plan to build up an emergency cash reserve. Both Mary and Richard are employed as freelance writers and feel that their incomes are at times unpredictable. Mary and Richard have monthly expenses of $1,500 and plan to build up an emergency cash reserve that is equal to 12 times their monthly expenses, or $18,000 ($1,500 x 12).

Investing your money

When you have established an emergency cash reserve, you can begin to invest your money to target your financial goals. There are three fundamental types of investments: cash and cash alternatives, bonds, and equities. Cash and cash alternatives are relatively low-risk investments that can be readily converted into currency, such as money market accounts. Bonds, sometimes called debt instruments, are essentially IOUs; when you invest in a bond, you’re lending money to the bond’s issuer–usually a corporation or governmental body–which pays interest on that loan. Because bonds make regular payments of interest, they are also known as income investments. Equities, or stocks, give you a share of ownership in a company. You have the opportunity to share in the company’s profits and potential growth, which is why they’re often viewed as growth investments. However, equities involve greater risk than either cash or income investments. With equities, there is no guarantee you will receive any income or that your shares will ever increase in value, and you can lose your entire investment. In addition to these three basic types of investments–also known as asset classes–there are so-called alternative investments, such as real estate, commodities, and precious metals.

No matter what your investment goal, your overall objective is to maximize returns without taking on more risk than you can bear. You’ll need to choose investments that are consistent with your financial goals and time horizon. A financial professional can help you construct an investment portfolio that takes these factors into account.

Establishing good credit

In general

Establishing good credit is an important step in the path towards a solid financial future. A good credit history can enable you to make credit purchases for items that you might not otherwise be able to afford. Most creditors will require a good credit history before extending credit to you. If you do not have a credit history, it is important to establish one as soon as possible. If you have a poor credit history, you should take steps toward improving it right away.

Individual or joint credit

Married couples can either apply for credit individually or jointly. One of the benefits of applying for joint credit is that both you and your spouse’s income, expenses, and financial stability are considered when a creditor evaluates your overall financial picture. However, applying for separate credit has its advantages. If you and your spouse ever run into financial problems (e.g., illness or job layoff), separate credit allows one spouse to risk damaging his or her credit history while preserving the other spouse’s good credit. In addition, separate credit can also protect you and your spouse from each other. If you and your spouse cosign a loan or apply for a credit card, you are both responsible for 100 percent repayment of the debt. In other words, if your spouse does not pay his or her share, you can get stuck with paying the whole amount. On the other hand, if your spouse takes out a loan or applies for a credit card on his or her own, generally your spouse is solely responsible for the debt.

Tip: While the general rule is that spouses are not responsible for each other’s debts, there are exceptions. Many states will hold both spouses responsible for a debt incurred by one spouse if the debt constituted a family expense (e.g., child care or groceries). In addition, in some community property states, both spouses may be responsible for one spouse’s debts, since both spouses have equal rights to each other’s incomes. You may want to discuss your state’s laws with an attorney if you live in a community property state.

Forefield Inc. does not provide legal, tax, or investment advice. All content provided by Forefield is protected by copyright. Forefield is not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.