Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Thursday, December 15, 2016

Managing Finances with your Partner!

Y'all my sister got married last year! This was a lot of fun.
Photo Credit to the amazing Bonnie J Heath Photography

You and your boyfriend/girlfriend/romantic partner/flame/sweet heart/babe/one and only/spouse/significant other/mate/husband/wife/better half/lover look great in pictures, but what does your financial picture look like? I’ve heard stories of people bringing up finances on a first date, or even in a Tinder profile, but that is generally monumental jerks bragging about how much they make (read: exaggerating) but that is probably a little too soon. On the flip side, I have heard of people not finding out about significant debts until after the ceremony. If you are trying to figure out an appropriate time to bring up finances, try some time in between these two examples.

In all seriousness, it is never too early to start. When you first start dating, there may be some pressure to make a date particularly nice. If your taste falls either more expensive or more frugal than your partner appears, bring it up! Tell them that you appreciate the steak and wine for dinner but you don’t mind a modest night in with takeout and the latest Netflix original (Last Chance U or The Crown, for me right now). If you’re tired of peanut butter sandwich “picnics” in the park, propose something more your style. This can get the conversation started about expectations on spending.

Your first big trip or project together will be a big expense too. Absolutely talk about how you will pay for it, and how you will approach paying for it later. If it is clear that one partner makes the bulk of the money, understand what that money pays for and what it doesn’t. Discuss how you expect large expenses to play out in the future as it unfolds.

For a more precise time to talk about things like income and retirement savings, try April 15th. I only slightly kid here. April 15th is when taxes are due, so the topic is fairly natural then. If you’ve started talking about the future, it is appropriate to start discussing how to pay for that future.

Managing money as a couple starts with looking to see where your goals and values agree and where they don’t. When you share finances, it is important that your large, long-term priorities align. This is probably reasonably important as a couple, but you’re not here for relationship coaching. When it comes to meeting large long-term financial goals, you need all the help you can get and your partner will be just as important as you in meeting them.

What are our shared goals and values?

If finances have come up in your relationship, other goals and values probably have as well. Do you love to travel? That costs money. Do you have your eye on a house in the suburbs and 2.8 children going to your alma mater? You’re going to have to pay for that somehow. Do you want to live in a van, travel the world and live a minimalist lifestyle? That is probably inexpensive, but definitely will involve financial decisions. As a couple, figure out what you value enough to spend your hard earned money on. What do you value enough of your partner’s goals to spend your money on. What do you want to spend their money on?

A saver can get along with a spender, but you need to be clear about your limits. A saver may not want to subsidize the spender too much, but as a couple you will be spending on each other to some extent. As a couple with shared goals and expenses, you will need to compromise if your habits are wildly different.

No matter how little you think you know about finance or how much you trust your partner to handle it, it is very important that each partner keep informed of the couple’s finances and also have your own money. Retirement accounts are an important part of having your own money, but also a savings or taxable investment account that is your own is important for the unknown. This is not about keeping money hidden from your partner, but about ensuring that you can stand on your own if an expense comes up.

Whoever handles more of the day-to-day financial responsibility should also be responsible for keeping their partner informed of the couple’s financial situation. Far too often I have seen recently widowed or separated partners overwhelmed with the mass of new information. I have seen people get taken advantage of or simply make sub-optimal choices because they didn’t know what all they had and could do with their finances.  Each partner should know what regular expenses you share, how much they are and how they are paid. Each partner should know what assets and debts the couple and the other partner has. While you may not have access to each other’s accounts, it is important to know what the account is for and what will happen to it if the other partner dies.

So, where exactly does this money go?

The technical aspects of how your money will flow through accounts and who will own what should arise out of how your value and goals align. There are three basic options for how you handle joint finances: either each person has their own taxable accounts and their own money and every expense is handled according to some rule or ad hoc agreement, the couple shares everything in a jointly owned account or somewhere in between. Note that retirement accounts are always in each individual’s name.

Firstly, every couple needs to understand their shared expenses and agree on a clear and fair plan for paying them.
  • The technical workings of this will depend on what makes sense to you, but one way would be to have a joint checking account that you each contribute to. Each partner contributes his or her share on a regular basis. Another method is just assigning different expenses to each other. If this is the route you take, keep in mind that expenses can change so it is fair to take a look at these on a regular basis to make sure each partner is happy with what they are paying.
  • With regular expenses it is very important that communication be open, honest and frequent. Since most expenses occur on a monthly basis, take the time to go over expenses and contributions at least that often. This is a good time to make sure that you are still on budget and talk about any financial issues that have come up.
  • There is no right or wrong way to determine a fair contribution. If one partner makes substantially all of the money, it may make sense for them to contribute most or all of the money for expenses. If incomes are roughly equal, an even split makes sense. Determine what works for you. In general, the split matters less the higher your income is above your joint expenses. For example, if your joint expenses are $2,000 per month and each partner makes $1,000 per month there are not many ways to make that split, but for the same level of expense and each partner making $10,000 per month, neither may care that much how much they have to contribute. For meaningful, but unequal incomes, a fair method may be to do a rough ratio. If one partner makes $10,000 per month and the other makes $4,500 per month, the partner with the lower income could contribute one third and the partner with the larger income could contribute two thirds of their joint expenses. It doesn’t have to be difficult or terribly precise so long as each partner is understanding and happy with the outcome.

Keep in mind, retirement accounts are only owned by a single person, so each of you should max these out to the extent that you can. These accounts will depend partly on what is available at work so you may not have a lot of control over it. In the case of drastically different incomes, it may make sense for the spouse with the higher income to contribute to shoulder more regular expenses to allow the other partner to contribute more to their retirement plan. Outside of work retirement plans, you should max out personal retirement accounts if possible. This is an important part of the money that is individually owned.

If your financial values are quite different, it will become more important for you to have your own money. It is difficult to have two people sharing an account if they view it completely differently! In this case, money that you save beyond regular expenses, shared goals and retirement accounts should be kept in individually owned accounts. This can be savings or investments. With different values, each partner can treat their money differently; one may chose to spend and the other to save.

But, but what if...?

Following a careful budget for joint expenses, couples should have an emergency fund for joint expenses. The size of this will depend on what an emergency would mean to you. Ideally, it would be able to cover insurance deductibles and the loss of at least one of your incomes for a few months. Keep this money in a jointly held account somewhat separate from your checking account.

Do you need insurance? The way I approach life insurance needs for a couple is by asking this “If one partner died, would the other partner be in significant financial distress?” The answer will be clearly yes if there is a huge income disparity and a lot of debts in the relationship. The answer may lean to no if incomes are roughly equal, expenses are manageable by one spouse and there are plenty of assets to help out in a pinch. If you do need insurance, consider cheap term life insurance and avoid expensive whole or universal life policies.

Again, it is important that each of you have your own money. While you may think this is just for separation or death, this is not the case! If you generally share expenses, but one of you needs an $800 car repair, how would you handle it? If you have your own savings and a clear plan for sharing income, this should not be a problem. If one of you spends heavily on nights out with friends, or only one of you wants to go to your alumni weekend and football game, you need to be prepared to cover that expense on your own.

How does this all come together?

There is no one perfect way to manage your personal finances and there are plenty more ways to manage finances as a couple. The important thing is that you find a method that works for you. If something isn’t working right, have an open and honest conversation about it. Just because you decide to keep some things separate does not mean you have to keep them hidden.

If your financial values are very well aligned it may make sense to simplify things with a joint account for the bulk of the rest of your money. The more aligned goals are, the more you can share actual ownership of money.

Decide on what is personal and private. Understand that it is OK for either partner to have money that they have unfettered access to. This does not mean you must keep your spending private – just that you have an account you can spend from without your partner’s permission or judgment. Honesty and transparency are often good for relationships, but again, this article is about money. It is probably easiest if personal spending is done from an account that is held in one name only.

Establish clear rules about personal and private spending. As a couple, you are a team and the decisions one partner makes do affect the other. You may want to keep tabs on each others spending so that it doesn’t get out of hand, but don’t be judgmental of specifics as long as your partner can afford it. Every relationship has boundaries, and that certainly extends to your money!

Make a plan for your long-term goals. Ideally, these will be quite similar for you. If one of you plans on buying a house and having kids it might be a little troublesome if the other partner is not on board. Financially, you will need to work this out.

Writing everything down helps. You will have some goals that are individual goals or values and some that are shared, or unique to you as a couple.  Buying a house and sending children to college are huge expenses and are things that really ought to be shared values. As shared values, they will probably be shared expenses. Both partners should know how to pay the mortgage and know what account is for college savings.

However you decide to manage money together, open communication is important. You both need to be clear about what your income and expenses are now and how you expect those to change in the future. It is also important that you understand how each other views the money they have and prioritizes spending. While you don’t have to contribute every financial goal your partner may have, it is important that you share what they are so you can support each other along the way. If you have any debts that may affect your partner, let them know and have a clear discussion about how you plan to deal with it. Lastly, financial management is an ongoing thing, have a regular date set up to review your situation and talk about major changes as they arise.

As a couple, you need to figure out your goals and values, decide on an approach to your finances, and keep each other informed along your journey.