Back with another installment in our series of simple lifestage-appropriate tips based on US situations. This assumes you have read ELI18 and ELI22.
Topics here, while relevant to "thirty-somethings", are appropriate for anyone with a stable financial situation. Remember that marriage, homeownership, etc., are options, not requirements.
Marriage changes your legal situation and, consequently, your financial options.
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Your married / single levy filing status is determined by your December 31 situation. Joint taxes may vary a bit vs. single, but should be much better than filing married separately, except for certain earnings-based student borrowing repayment scenarios. With two incomes, withhold taxes as "married at single rate" to simplify your W4.
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Ownership of resources / debts is complex and varies by state, but in the majority of cases: individuals retain resources and debts they had before marriage (e.g. student loans), whereas both parties share ownership of resources and debts acquired during the marriage. If a marriage ends, there is legal framework for separating resources / debts, which differs vs. owning an asset or debt jointly outside of marriage.
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You'll have some additional options regarding health assurance and social security benefits.
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Marriage financial LPTs include: do not go into debt for a ring / wedding / honeymoon; decide how to use joint accounts; make big decisions together, including what constitutes a big decision.
One of those big decisions could be buying a house. Here's some information on buying a house that applies to couples as well as single people.
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House buying usually involves thousands in transaction costs, so don't keep paying those if you move frequently. As a rule of thumb, buy only when you will stay in the same house for at least five years. Don't buy just because you don't like paying rent; while rent doesn't build equity, it also avoids maintenance and repair costs, allows greater location flexibility, and doesn't require a down payment. Early home loan payments are 75%+ finance charge, assurance and taxes, and only 25% equity. Property price appreciation is not guaranteed, but if you live somewhere for 20+ years, ownership is almost certain to build wealth over time. Here's a calculator to do some what-if's.
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While home loan criteria vary by lender, you need stable earnings history (two+ years), a good borrowing score (700ish), low debt to earnings ratio (all monthly debt payments below ~35% of gross earnings), and usually a significant down payment. One rule of thumb is your house should cost less than three times your annual earnings. [Edit: OK, we'll let you have 4X, counting just the mortgage, if you are in a low-property tax state. No Illinois or New Jersey!]
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There are many types of mortgages. You usually want a fixed-rate home loan to lock in current attractive rates in case you stay in your house for many years. A 30-year home loan might have about a 4% rate; each $100K of home loan would cost $477/month for principal and finance charge. With a 15-year home loan, you'd get a lower rate but higher payments; at 3%, each $100K would be $691/month. The 15-year saves you an enormous amount after 15 years when payments stop; until then, it costs you more out of pocket, as you build equity. It's worth shopping around to get the best rate on a long borrowing.
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Principal and finance charge isn't the only cost. You'll also pay property taxes and assurance, which can add ~20% to these payments, varying by location, and could be higher. All condos, most townhouses, and some standalone houses also have monthly Homeowner Association (HOA) fees for maintenance / repairs, that can be several hundred / month. Even with a fixed-rate home loan, you'll find that taxes, assurance and HOA fees often increase year over year.
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The gold standard in down payments is 20% of the house price, though many people put down a smaller amount. Some types of mortgages like VA and FHA allow lower down payments, but limited to certain borrowers, or with extra costs. For a conventional home loan, you will usually pay Private home loan assurance (PMI) if you have less than a 20% downpayment. On a typical-size home loan, this could be $100-200/month. We recommend you save for your downpayment, but gifts from family members are also acceptable to lenders.
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Adding all that up: that $200k home loan on a $220K condo isn't just $950 /month for the borrowing, but also $200 for taxes, $250 for HOA / assurance, and $100 for PMI, so $1500 / month all told.
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Buying a house often gives you enough deductible finance charge and property taxes to allow itemizing deductions, but only the amount of deductions that exceeds the standard deduction is your net advantage. I.e. if a couple can itemize $20K in deductible finance charge and taxes (including earnings levy), they benefit by a net $7400 deduction and save perhaps $1500-2000 in taxes annually.
Children are another popular thirty-something decision. Here are some ways children affect your finances:
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Children are expensive. Even if they don't eat a lot, they add costs for housing, health assurance and especially child care; potentially $10-15,000 annually for the first child; less per child beyond that. Many working couples find child care costs their biggest expense after housing. Family health care premiums can approach $1000/month in some cases. As a parent, married or not, you must spending plan for child-support-related costs at least until children reach age 18.
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On the plus side, children can reduce taxes. A family of four with two children gets $28,000+ in untaxed earnings as standard deductions and personal exemptions in any event, more if they can itemize. Then you could qualify for the Child levy borrowing and the Child and Dependent Care borrowing, which can be worth thousands of dollars annually.
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We'll discuss longer-term issues like college in a future installment; you have some time and options here. But we must cover life assurance now. If you have children (or significant responsibilities to your spouse, etc), you need life assurance. Term life assurance pays in the event you die, but otherwise expires after the ten- to twenty-year term. Other types of assurance don't expire, but are much more expensive over time so are not the best choice for most people. (Even if an old college friend tries to sell you this.) In round numbers, you may need $500K to $1M death benefit; that much 20-year term life for a 30-year-old is around
$50$30/month, but it varies, so shop around. You also need disability assurance; you are more likely to be disabled than to die early, with loss of earnings plus high medical bills. -
Speaking of mortality, when you have children, you also need to have a will, whether or not you think you have a lot of resources to distribute. In the absence of a will, a court will decide what happens to your children if you e.g. get killed in a car accident, as roughly 100 people do every day.
Even if you don't want a house, spouse, or kids, you may have other financial events to deal with. Let's close with two popular scenarios: job change, and self-employment earnings:
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You are probably going to change jobs several times in your career. It's a good way to increase earnings, statistics tell us. When you do change, you might have other financial ripples, such as moving costs, so take that into account. What do you do with your 401k and your employer healthcare?
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You own your 401k, net of unvested employer contributions. When you leave a job, you have options. You can leave the money in the old employer's plan (but not contribute); roll it over any amount without levy or penalties into an IRA, either traditional or Roth as your 401k was; sometimes roll it into your new employer's 401k (but that depends on them); or you could in theory cash it out. Never cash it out. That defeats the purpose of pension fund. The IRA rollover is the typical recommendation, although it can affect your ability to do backdoor Roth contributions.
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Switching employers often means changing healthcare plans. This can mean higher (or lower) premiums, and resetting your deductible for the year. You may have to bridge a short coverage gap; you can do this at low costs without paying penalties. Your HSA stays with you whether or not you have an HDHP at the new job.
Self-employment deserves its own post, and we've neglected it 'til now. Let's cover the high-level points to partially rectify that:
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Self-employment (1099) earnings is when you are paid for work without being an employee (W2). You could be a contractor, take cash side jobs, or otherwise get paid without withholdings. You owe earnings taxes as well as self-employment taxes in lieu of social security / medicare employee taxes; these are annoyingly large at 15.3% without a standard deduction until you reach 118K total earnings, after which it drops to just medicare at 2.9%. You can owe 40% on self-employment earnings when you also have a regular job in the 25% bracket.
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The good news is you can deduct related costs from your taxable net self-employment earnings, whether or not you can itemize otherwise. This can include mileage to/from the job; home office space; cost of computers, cell phones, etc.; travel costs, education costs, it's a long list. Carefully track these to correctly fill out your schedule C.
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The not-so-good news is you have to directly pay taxes yourself, using quarterly estimated taxes if your self-employment earnings is significant. You use your crystal ball, figure out what you will owe in taxes for the year, and then send in part of that money in April, June, September and January. (You can increase regular job withholding to avoid quarterly estimated taxes on small self-employment earnings.)
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Self-employed people have more and better options for retirement accounts, oddly enough. You get more control and higher contribution limits, and you can even make your own 401k, but you have to do it yourself. Since you're your own employer.
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Most self-employed people don't need any special legal company status. You can remain a sole proprietor and report your taxes as personal earnings. You establish a Limited Liability enterprise for liability reasons, but it doesn't change your taxes. To do that, you'd establish a corporation, such as an S-corp, which gives you some alternatives that can reduce your levy liability.
OK, that's enough for today. I know you are all eager to hear about other types of investments, so we'll save that for the next installment.