Wedding Day Dilemma: Don't Start Your New Life in Debt

April 4, 2016

Photo credit: Digital-Vision-Photodisc-Thinkstock

I’ve never done it, but I’m sure that planning a wedding can be exciting at times. Which venue best reflects the couple; the one in the mountains, near the lake, or in the city? Which restaurant will cater the special day? Will the flowers be displayed in vases or mason jars? While these decisions can cause disagreements between the soon-to-be newlyweds, one thing that many couples have little problem deciding on is to spend a lot of money.

What if you chose not to spend in one day what some people earn in a year? Would you have more options later?

Nothing is certain in this world, but the answer is probably yes.

I get it. It’s the day you’ve been planning your whole life. And if you’re just going along for the ride, I get that you don’t want to rock the boat. What if rocking the boat, or telling your inner child that we can’t have everything we want all the time, will lead to a brighter future with more options? Would you still spend tens of thousands of dollars on your wedding day, entering day one of your marriage in debt or with no savings?

Put another way, what if you chose to take the money you would spend on monogrammed napkins, a limousine for the wedding party, or prime rib for everyone and invested it in your life together? Would your special day still be special? Might you regret it?

“But weddings and affordable don’t go hand in hand,” you say. That’s certainly what the wedding industry would like you to believe, but it can be done and done well. There are websites dedicated to weddings on a budget and Pinterest boards chock full of crafty, inexpensive ideas. Even one of our Dime contributors did a beautiful DIY wedding, and saved a bundle in the process.

Let’s assume the wedding that you want will cost $15,000. That might seem low if you watch wedding reality shows. However, it’s not that far off from the median amount couples spend. The wedding you could have with some creativity, help from volunteers, and hard work is $7,500, half the price. What would the value of $7,500 be in the future if you used the money in one of the following ways?

Contribute to a Roth IRA                                   

You're thinking, "I'm 25 and retirement is 40 years away and I have decades to save for my golden years." True... perhaps. However, the one thing that you have, that people older than you wish they had, is time. The more time someone has to invest, the greater opportunity the money has to grow. You may not think you have enough to start investing, but if you are spending $15,000 on your wedding, you do.

The limit that many people can contribute to an IRA this year is $5,500. For this scenario, each of you will make a one-time contribution of $3,750 into a Roth IRA. The money won’t be touched until retirement and we are assuming an average 6.5 percent return over time, accounting for annual fees.

After 40 years: $46,560 individually or a total of $93,120 in both accounts

What if you contribute an additional $50 per month to each account?

After 40 years: $155,043 individually or a total of $310,086 in both accounts

And the cherry on top? The money would be withdrawn without paying taxes because it’s in a Roth IRA.

Invest in a 529 plan for yourself and/or your future child(ren)

We’ve covered the benefits of 529s in other posts. If you are considering having children, or going (back) to college yourself, these are a great tool at your disposal to save for tuition, books, and more.

Let’s assume you wish to have two children in the future, and would like to setup a college savings account for each of them. The account will sit for 18 years and 20 years, to account for a two year age difference. We will use the historical performance of Colorado’s 529 provider, CollegeInvest, specifically their Moderate Growth Portfolio. The rate of return since its inception in 2004 is 5.44 percent, not accounting for fees. $3,750 is the only contribution ever made to each account.

Account #1 after 18 years: $9,730

Account #2 after 20 years: $10,817

What if you threw an additional $25 per month into each child’s account?

Account #1 after 18 years: $18,742

Account #2 after 20 years: $21,468

Considering the expected cost of college in 18 years, that could cover a few months of expenses at least.

Increase your down payment

Are you shopping for a house, or might be in the future? Sure, mortgage lenders are offering loans with zero to 3 percent down, which places buying a home in many peoples’ reach. Typically, if you put down less than 20 percent, you will pay Private Mortgage Insurance (PMI). This insurance premium ranges from an average of 0.3 to 1.2 percent of your monthly mortgage amount. On a $200,000 house with zero down, that could be $171 per month, according to this calculator and assuming a 3.5 percent interest rate and 1.07 percent PMI rate.

People complain that they’re throwing money away by renting instead of buying, which isn’t always accurate, but what are you getting in return for paying PMI? Nothing. What could you do with an extra $171 per month? Save for an annual vacation? Increase contributions to your children’s 529 plans?

You can request to take the PMI off when you have paid 20 percent of the loan.

Using the same calculator, it would take nine years (108 months) for you to pay 20 percent of the loan amount ($40,000) on a $200,000 mortgage. How much would you have spent on PMI in the above scenario?

$171 X 108 months = $18,468

Now what if you took the $7,500 you didn’t spend on the wedding and used it as a down payment in the same scenario?

While $7,500 still isn’t 20 percent of $200,000, it would help you pay 20 percent in 93 months rather than 108 months. This saves you 15 months of PMI payments.

$171 X 93 months = $15,903

You can celebrate making your last PMI payment by taking a romantic vacation with the $2,565 you will have saved. My vote is for Italy.

Give a boost to (or start) your emergency fund

We all need a bank account, ideally earning interest, which is easy to access and designated for the emergencies we should expect to arrive unexpectedly. As a semi-recent convert to online banking, I have tasted the Kool-Aid and think it’s the greatest thing since mobile deposit.

What if the $7,500 saved from the wedding was put in a savings account to begin your emergency fund? There are numerous high yield savings accounts available, and NerdWallet has done the work of comparing them.

Let’s look at a savings account that earns 1 percent annually. That doesn’t seem like a lot, but remember, this money is for emergencies, not retirement or college.

After five years with no additional deposits: $7,882

After five years with a monthly deposit of $100: $14,031

I won’t speak for everyone, but I sleep better at night knowing that I have an emergency fund. It’s not where I want it to be yet, but it’s getting better.

Your wedding is a day to acknowledge and celebrate the commitment between you and your partner. It should be special, but are you going to allow the cost of it to put your other dreams and aspirations on hold? Only you and your partner can decide, and it’s a decision that will impact the rest of your lives.

Still want to use your life savings for your wedding? This calculator might change your mind if I haven't.