by Kelly Adams, EA, CFP® Novi, MI
There’s an old saying: “Two can live as cheaply as one.” Not exactly accurate, but there are financial benefits when two singles become one couple. When this happens, the partners need to decide how they’ll handle their joint finances.
There are many ways to combine two partners’ finances into one system. The younger the new couple, the easier it is just to throw everything together and consider it all joint. It can be more complicated when at least one partner has been in a previous relationship, especially if there are children. In this case, the idea of “what’s mine is yours, what’s yours is mine” is often not acceptable. You may feel a real need to protect both your children and the assets you brought into the relationship. And there’s often a concern that the relationship may not last forever. Having been through one split, there’s a desire to make a future split easier, at least financially.
Most couples want their finances to be joint to some extent. It shows a commitment to your partner. It says you’re willing to share a very precious commodity, your money. But how do you put your financial house together and still acknowledge your fears? How should all those monthly expenses be handled? What if one spouse makes more than the other or spends more frivolously than the other?
Here’s one method I’ve found useful for my clients. Following these steps will set up a rational system for what is a very emotional subject: how we spend our money.
Start by taking each spouse’s gross income and deducting the amounts over which they have no control (taxes, FICA, Medicare, garnished wages, child support, etc.). Don’t adjust yet for deductions for which you opt in, such as health care or other insurance deductions, 401k contributions, etc. What’s left over is the amount of cash available to save or spend. Once you know this amount, start with one of the most important decisions of your combined financial lives: agree on a percentage each person will contribute toward long-term savings.
Then each partner makes a list of all personal expenses, and the couple makes a list together of all joint expenses such as housing, utilities, food, and vacations.
Next, decide how you will split your household expenses. Will it be a fixed percentage of cash available, or will you each have the same amount for personal spending? You may need to make an adjustment if one spouse has health-care or other family-oriented deductions coming out of his or her paycheck. Open a joint checking account (and a joint debit or credit card) for joint expenses. Any extraordinary expense paid from this account should be agreed on beforehand. This policy prevents an argument if, for example, she proudly shows him the new curtains designed to save money on heat or he shows her the new hydraulic lift to save money on vehicle oil changes.
Consider setting aside some money for a Joint Rainy Day Fund. Whatever is left from each check can go into separate personal accounts for your individual spending. You do not have to justify spending from these accounts to the other partner.
The key to making this all work is open and frequent communication about how you’re feeling about your money management system. Talk about your family’s history with money. That can often explain a lot about your feelings that might seem confusing (or even irrational) to your partner. What’s your money personality? That, too, can help explain conflicting views. If you have problems you can’t work out, find a therapist who can teach you how to talk about money matters.
Once you’ve learned how to communicate about money, remember to allow for fine tuning. Sit down once a month for a “board meeting” to go over your system. Discuss what’s working, what’s not, and why, and make adjustments as needed. If you need to postpone a meeting, set a new time, but don’t cancel it—it’s too important to skip. Many couples find that after they work out the details, they can move to a quarterly board meeting instead of every month.
It’s often a challenge to combine finances that you’re used to running separately. But like anything else, with patience and goodwill you can learn how to make your joint finances work.