The next time we got together, Michael and Megan had done their homework. Their combined figures showed that Michael was making $42,000 a year and Megan was earning $55,000. Their total monthly take-home pay was $6,228.
| Target Percentage | Target $ on Combined After-tax Income | |
| Must Haves | 50.00% | $3,114.00 |
| Savings | 20.00% | $1,245.00 |
| Wants | 30.00% | $1,868.00 |
“Your combined ‘Must Haves’ are actually almost right on the target. Where things need to be realigned is the Savings and Wants area. Michael, your savings are currently all going toward paying off your student & car loans, but none toward retirement savings. Is that right?” I asked. He agreed.
“Megan,” I asked, “Aren’t you a member of a pension plan through your employer? Most health care professionals are.”
“I think so.” She replied. “I never paid much attention to it. I signed a bunch of forms when I started work three years ago. I know they are deducting from my pay cheque towards the pension plan, but I don’t know how much, or what it means long-term.”
Going online, we were quickly able to determine that Megan was, in fact contributing $323 a month to a Defined Benefit Pension Plan.
“That’s excellent,” I commented. “It’s a good split for the two of you, because you will have to save for Michael’s retirement income on your own, and make all your own investment decisions. With Megan’s pension, the decisions are made, and the risk is borne by the employer. While both employer and employee contribute, the plan sponsor, usually the employer, is responsible for providing a certain payout upon retirement.”
We talked about the importance of starting to save for retirement as early as possible, given the magic of compounding. We also agreed that paying off the credit card balance was the priority in the short-term, as it carried the highest rate of interest.
Here is what Megan and Michael decided to do with the $1245 a month for Savings:
- After recalculating to take Megan’s $322 monthly pension contribution into account, they decided to redirect the remaining $923 to the credit card balance and the furniture loan until those were paid off, which would take a little under a year.
- They would then allocate the savings:
- $250 per month to Michael’s retirement plan. This had the added benefit of providing a tax refund of $940.
- $700 a month to the car loan until it was paid off, which would take a little over a year.
- Once the car loan was retired, they would turn the $700 towards the student loan. As the interest on it was tax deductible, it made sense to leave this until all the other debt was paid off.
“OK,” I said. “Now onto the ‘Wants.’ We left this until last because here is where the wedding comes in, and also, here is where we set up the structure for how you’re going to manage your funds on a day-to-day basis. By their very nature, Wants can be more emotionally driven. It’s hard to get really excited about debt reduction or a new retirement plan or insurance option, even for financial people, but Wants are a different matter,” I grinned.
“Remind me how much we are working with, again?” Michael asked.
“About $1900 a month. That’s 30% of your combined, after tax pay.”
“Wow! We’ll never spend that much. How much does a case of beer cost, anyway?” Michael said, somewhat tongue in cheek.
“Maybe on your own, you won’t.” Megan said. “But we’re doing this together now, remember? So far I’ve been looking after all the shopping for us as a couple, including outfitting the apartment, gifts for friends and relatives, buying food & alcohol for entertaining, etc. It all adds up. Plus, we have a wedding to plan for. We need to decide how we’re going to do that.”
“This is a very important point,” I agreed. “Remember we talked earlier about your Positive Cores? This would be a good time to review those. You have very different thinking and behavior preferences, and your values are different, too.
“When people’s values are violated, they have a visceral reaction. Like yours, Michael, when you thought Megan was being frivolous with money, and you Megan, when you sensed Michael was being stuffy and rigid. It will be important for you to be mindful and respectful of each other’s Values, in particular, as we begin planning the wedding.”
Michael nodded, smiling at Megan. “Sorry I sounded off earlier. I do appreciate how hard you work to make a warm, inviting place for us. If it were left to me, we’d have a leftover futon from someone’s garage sale and a bunch of milk crates for tables. I also enjoy all the entertaining and cooking we do together. Kraft dinner can get really old, very fast. We just have to do better figuring it out together.”
“Thanks.” Megan responded, relaxing a little. “I know I got a little carried away, and I’ll make more effort to prioritize in future. So where do we go from here?”
“You’ve hit the nail on the head, Megan, with ‘prioritizing,’” I said. “Wants are not a matter of right and wrong. They’re a question of picking your pleasure, which may well be someone else’s poison. Must Haves and Savings only need to be reviewed periodically, once the mechanics of funding them are set up, because the amounts tend to be fairly consistent. Wants take a good deal more thought and management, especially in today’s environment where every retailer is working hard to capture your attention and dollars on the latest/greatest/best. With you and Michael, your wants seem to focus around having a comfortable living space to entertain family & friends, eating well and of course, the upcoming wedding.
“Your homework for this week is figuring out how you want to allocate among those. I’d suggest you do some more research on venues & costs for the wedding. It sounds like you’ve already had a good deal of input from your respective families. It’s time for you to clarify your ideal day. Next week we’ll figure out how to make that all happen.”