If you’ve ever had a discussion with a financial advisor, you’ve probably heard the phrase ‘financial implications’ a time or two. But if you weren’t quite sure what it meant, you have come to the right place. So, what does financial implications mean?
Financial implications are the, implied — or realized — outcomes of any financial decision. And while the phrase often carries a slightly negative connotation, financial implications can be either good or bad. For example, the financial implication of saving money is an increase in your net worth.
On the other hand, the financial implications of financing a car are: a decrease in monthly cash flow, and tying your net worth to a depreciating asset. That one’s not so good.
For the rest of this article, I am going to cover some of the financial implications of a number of financial, (and not-so-financial) decisions and situations. Hopefully, this will help you gain a strong grasp on the concept.
Let’s jump right it.
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Financial Implications Of Marriage
Marriage is one of life’s great adventures. There’s nothing quite like the romance, love and joy that can be shared between a husband and wife. But, beyond the relational aspects of this wonderful union, marriage also comes with a number of financial implications.
Combined Income
When you are single, your entire cost of living depends on your own paycheck. So, if you make a less than stellar income, this can make life a little restrictive, and difficult. But, when you get married, you suddenly step into a life with two incomes.
This can open up a number of financial doors. For example, with two incomes, you have a greater opportunity to save money and invest for the future.
Tax Advantages
Believe it or not, marriage comes with tax advantages. For instance, couples that get married will often find themselves in a lower tax bracket when they file jointly. Additionally, an unemployed spouse is still eligible to contribute to a Roth IRA, whereas unemployed singles cannot.
Health Insurance
One of the greatest financial benefits of marriage is that your options for health insurance open up a bit. First of all, marriage counts as a qualifying life event, so if you want to change your insurance after you get married, you can do so no matter the time of year.
Additionally, if either you or your spouse has health insurance through either one of your employers, you can usually decide between the two. That means, if one of you has better insurance than the other, the spouse with the less optimal insurance can be added to the better policy. In some cases, it may still make sense to keep your insurance the way it is, but marriage at least gives you the option.
Now, this may not be the case in every situation, but it is worth looking into.
Increased Financial Stability
Losing your job is rarely something to celebrate. And when you’re single, it can make life extra difficult. However, in the case of marriages where both spouses are employed, a job less can be a little less difficult.
The financial stability of two incomes can help you bridge the gap between jobs, and make this tough situation a little more manageable.
Financial Implications Of Buying A Home
Depending on your financial situation, buying a home can be either a blessing or a curse. For people who are prepared, it can reduce their cost of living significantly, and even provide some long-term financial stability. However, people who buy a home without consideration to the long-term financial implications, it can end up causing serious financial harm.
Homes Typically Appreciate
One of the biggest arguments for buying a home, is that homes are typically an appreciating asset. This means that, in general, the value of a home will increase over time. That means increased equity for the homeowner.
Predictable Monthly Payments
One of the biggest problems renters run into are annual rent increases. So, if you purchase a home in cash, or for a low, fixed interest rate, predictable mortgage payments can be a nice benefit.
In other words, unlike rent, you don’t have to worry about annual increases on a 15-year fixed rate mortgage.
Long-term Financial Commitment
One of the biggest negatives of taking out a loan to purchase a home, is that it is a very long-term financial commitment. If you take on a 30 year mortgage, and don’t consistently pay extra toward the principal balance of your home, you will be limiting your monthly cash-flow for thirty years. That is a long time to be paying interest, so you should take that into consideration when you purchase a home.
More Risk Than Renting
Sure, rent prices may be higher than you might pay on a mortgage, but homeownership comes with significantly more risk. For example, as a renter, if your furnace goes out, or the roof starts leaking, you are not the one that has to pay for it. Whereas, if you own a home, you are financially responsible for any repairs that need to be made on your property.
The unexpected expenses that inevitably come with homeownership, increase your financial risk.
Higher Maintenance Costs
One of the other financial implications of buying a home, is an increase in maintenance costs. That means, landscaping, HOA dues to pay for community maintenance, home repairs, pest control, and many more.
Financial Implications of Having A Baby
Having a baby is one of the most thrilling, tiring, and joy-filled experiences on this planet. I know, because at the time of writing this, I have a beautiful little 4-week old baby. And in addition to the wonderful impact a baby can have on your personal life, babies also have a profound impact on your finances.
Medical Expenses
I think it’s fairly obvious that babies increase your medical costs. From the numerous appointments throughout pregnancy to hospital bills and random doctor’s office visits, babies need proper medical care. So, the moment you find out you’re going to have a baby, it makes good financial sense to start preparing for these expenses.
Increased Cost Of Living
We already talked about the increase in medical costs, but babies increase your overall cost of living as well. You see, babies need clothes, a crib, food, diapers, wipes, and so much more. And these are just the everyday expenses. Babies also need health insurance, which can cost a couple hundred dollars per month.
Tax Benefits
Thankfully, when you have a baby, you qualify for the child tax credit. At the time of writing this, the tax credit for every dependent child in your home (in the U.S.) is worth up to $2,000 per year. (source)
Greater Need For Life Insurance
When you become a parent, it is important to protect your family in the event that you pass away. That’s why here at Be The Budget, we highly recommend that you purchase term life insurance. That way, if something tragic were to happen to you, your family would not have to worry about making ends meet.
Future Expenses
One of the other financial implications of having a baby, is that you will need to pay for a number of future expenses. I’m talking about everything from youth sports to college tuition, and even wedding costs. Children grow up, and as they do, their expenses tend to increase.
Financial Implications Of Budgeting
Forgive me, but I always try to bring financial conversations back to my favorite topic; budgeting. I mean, this is Be The Budget after all. So, it would be out of character for me to miss an opportunity to promote the benefits of managing, planning and controlling your financial life with a well-planned budget.
Control Over Your Money
First and foremost, budgeting puts you in control of your money. The long-term implications of this are extremely good. The more you control your money, the more likely you are to build wealth, and use money as a tool for good.
Financial Clarity
The more you track and actively manage your personal finances, the less likely anything is to slip through the cracks. Budgeting keeps everything out in the open, and helps you to make thoughtful and wise financial decisions.
Helps Reduce Impulse Spending
When you live your life on a budget, every purchase you want to make has to pass through the budget. This holds every dollar accountable, and keeps you on track for achieving your long-term financial goals.
Budgeting leaves little room for impulse spending, which can have a wonderful effect on your long-term financial well-being.
Final Thoughts
If you think about it, almost every important decision you make in your life carries financial implications.
In some cases they may be good implications, like the tax advantages that come from getting married, having a baby, or living on a budget. In other cases they may be less beneficial implications, like the long-term financial commitment that comes with debt.
The point is, no matter what decision you make, it is important to consider the financial implications. And now you know exactly what that means.
