Next to annoying habits, money is a major cause of arguments among couples. In fact, the Institute for Divorce Financial Analysis revealed that money issues account for at least 20% of all divorce cases and that money is one of the top three reasons why couples break up.
Long-term relationships such as marriage come with expectations of commitment and sharing, which tends to include properties and money. But saying that money should never get in the way of a relationship is easier said than done.
It's a common expectation for couples to share their finances with each other, but how exactly can you do this with as little stress and headache as possible? Is there a smart or better way of sharing money with your significant other?
It's all about the money
Adriane Berg, writer of Financial Planning for Couples, says that one of the biggest mistakes couples make when it comes to money issues is not doing anything about them. Not addressing issues like debt or savings indicates that neither party is concerned enough about how their money is growing or about the future and making plans for it. And in a long-term relationship like marriage, not planning for the future is simply unimaginable.
Some marriage counselors say that in most instances, the major issue isn’t that couples don’t want to share their finances as much as it's about deciding what to share, how much to share, and most importantly, how to share it.
In some cultures, men turn over their monthly salaries to their wives who then do the budgeting and deposit a certain amount in a joint savings account. Meanwhile, other couples choose to share only particular household expenses, like the monthly mortgage or rent or utilities and food, while spending the rest of their money separately on personal items or investment goals. Couples with more than enough money for savings often have joint accounts in addition to their own separate individual accounts.
Regardless of which way you will choose to go, the first step to sharing your finances is for both individuals to talk it out. This discussion should help decides whether to share or not, what to share, how much to share, and how to share it. The result should be a mutual decision made willingly by both parties.
There should also be a clear understanding between the two that they are equal partners. This means that no one solely controls the shared finances. As equal partners, both parties should also have a clear understanding of how the joint finances will be used or spent, what they can and cannot afford, and what to do with the funds if anything should happen to either one of you.
Emily Bouchard, a money coach at Wealth Legacy Group, also advises that part of this initial stage of deciding whether to split finances is to learn about each other's spending habits. If one half of the couple is frugal but the other is a big spender, then these differences in spending habits can become a source of conflict. Discovering and addressing spending habits and making a plan to clarify how money will be spent in the future are major decision points to be addressed before committing to shared finances.
Smart ways to share finances
Once these prerequisites have been established, then both you and your partner can get into the nitty-gritty details of what and how to share.
Split down the middle
Or simplicity's sake, some couples opt to split their money down the middle. Meaning that, regardless of how much each person is earning, they will each split their individual money in half, with one of the halves going into the joint account or being used for joint expenditures or purchases.
This is the easiest and most convenient arrangement, although it’s not necessarily the fairest. If one of you is earning considerably less than the other, then it might be difficult to split an already low individual income into two with one-half of it going into a joint account. The balance of power may become skewed because it may seem like whoever is earning a higher income and is contributing more has a greater claim over the shared account or expenses.
This kind of arrangement usually works best for couples whose individual income brackets fall within a similar range or whose monthly income isn’t highly variable.
Split according to income
A fairer, more equal arrangement for couples with a huge difference in monthly income may be to decide to split shared expenses in proportion to their monthly earning. In an article for The Penny Hoarder, James Pollard explains that individual contributions can be more in line with how much each person is earning. For example, if Person A earns $100,000 a year and Person B makes $50,000, the couple may agree that since Person A earns more, their contribution towards the joint expense or account might be $30,000 per year to Person B's $10,000.
To balance things out, the couple can also agree that the person contributing less monetarily can pitch in in other ways. Person B can volunteer to do the daily cooking so the household can cut down on take-out food or mow the lawn occasionally so there’s no need to pay for someone else to do this. The important thing is to talk things out and come to a mutually satisfying agreement to avoid conflict or hard feelings.
Consider having at least one joint account
It's perfectly understandable that some couples still prefer to hold their own individual savings accounts instead of sharing. But there are also perks to having a joint account as a couple, especially if you’re married. A joint savings account means you have a bigger sum of money in your credit history, which could get you a higher interest rate on your savings, lower fees for withdrawals, and even free checking. With a joint account, the couple can also save enough money for major life purchases.
A joint account requires trust and fairness as both of you will be responsible for any debts or overdrafts made on the account that is under both of your names. It's important to agree on the individual contributions, the purpose for your savings, and on a spending limit for the funds in the account.
This is essentially a mine-yours-ours arrangement. The couple agrees to keep their own individual accounts but also open an "ours" account where the bulk of their monthly income is deposited into. The account is used to pay for major purchases and expenditures like house or car payments, furniture, home repairs, travel, etc.
Set up individual retirement accounts
Interestingly, while financial experts advise couples of the benefits of a joint account for major purchases, it seems that a joint retirement account is not the smartest move. Instead, as far as a retirement nest egg is concerned, experts advise you to take advantage of an individual 401(k) plan offered by your employer or simply to sett up an individual retirement account. Judy Phillips of the Harris Bank's Investor Center says that both of these options offer the best benefits for couples. The greatest advantage is that there will be fewer tax deductions for every year of contribution as well as the possibility of gaining tax-free earnings on both accounts.
Other pointers for smart sharing
In addition to the basic mechanisms outlined above, there are other things couples should to pay attention to while setting up their shared finances. For example, while divorce is hopefully the farthest thing from your mind, it is also a reality that should be taken into consideration.
A divorce means having to split up joint assets and money, and being organized will make things easier if the worst should happen. If you have kids, then it’s also a great way to set up your money so there are no questions about diving inheritances down the road. Either way, setting your finances up in an organized fashion is always a good thing.
Here are some tips to help you organize your joint finances better:
Put things into writing
This may seem like too much for what can simply be a verbal agreement between two adults who trust each other, but putting things into writing is also a way of protecting both parties’ interests. It ensures that both of you have clear expectations and understandings of the agreement, and it signifies your willingness to agree to the terms.
Figure debts and individual loans into the arrangement
One party's school loans or old debts accrued prior to entering into the relationship should not be a deal-breaker, but it's also crucial for both parties to be open and upfront about these things. Couples may decide that such loans are to be settled as an individual, not as a couple, meaning that the payment of these loans must be made by the person who owes them.
However, since this may impact the debtor’s ability to contribute to joint finances, some form of arrangement must be made. For example, the couple may agree that the person paying off the loan can contribute a smaller amount to the joint fund but can pitch in in other non-financial ways until the loan is paid off.
Get down to the tiny details
It's easy to imagine setting up a joint account for major purchases like a house, car, travel, your child's schooling, or an emergency fund. But how about the day-to-day expenses such as utilities, gas, or grocery? These are shared expenses and it’s important to clarify how they'll be paid.
There are also those instances when one member of the couple's family might need help—a sister can't make her rent, your spouse's father needs help paying a medical bill, or a brother-in-law is still in school and needs some financial help. These are incidental expenses and both parties should agree whether these should be covered by funds in individual accounts, your joint savings account, or whether there should be a separate emergency account both of you can dip into for such circumstances.
Consider earning extra
In a relationship where only one person is an income-earner or where one partner earns considerably less than the other, there will be instances wherein the lower-earning party will feel guilty about not contributing enough. The partner who is earning more may also feel resentful, especially if they think that the money in the joint account is not being spent properly.
Ann-Margaret Carrozza, a lawyer who specializes in personal finance, suggests that it can help if the person who’s earning less can explore other income streams to bring in additional money. It doesn’t have to be a big income, but making this effort can help alleviate feelings of guilt or inadequacy and shift the balance of power. The partner who earns more will also appreciate the extra effort.
Give each other some leeway
While openness and communication are crucial, having to explain or defend purchases, especially discretionary ones, can be tiring and restrictive. This can be a particularly sensitive issue if a couple doesn’t have separate budgets that they can use for spending on things like clothing, technology, or other purchases.
Michelle Higgins of California Financial Advisors suggests setting up "fun money" budget. The couple can agree to deposit a small amount—an extra bit of money once all the major items in the budget have been taken cared of—into this fund, and this can be used for "small" or "trivial" purchases that neither partner needs to report to each other. This fun money is for both of you to enjoy without feeling guilty about. Again, what constitutes these "small," "trivial," and "fun" expenses should be discussed and agreed upon beforehand. You can also set a spending limit and spending frequency, which will help avoid accidental or habitual overspending.
Sharing finances is almost as serious a commitment as marriage itself. It's an intentional joining of forces and financial power with another person. And whether or not you consider money to be a relationship-breaker, it's absolutely essential to consider the pros and cons of how/what/how much to share when it comes to your assets.
Any marriage counselor would advise testing the waters first before going all the way—and this is no different with your money. This means that both partners can first try sharing the responsibility for one or two major bills first to see how it goes. Or, you can start with a joint savings account with both of you agreeing to contribute only a very small amount to see how manageable it is. After a couple of months, you can both decide how to go forward with making larger contributions.
In the end, what matters most in the decisions to share or split finances or savings is that it's a mutual and agreeable decision for both parties. A mutual understanding and open communication is key to ensuring financial stability and easy management.
Know anyone who's considering sharing finances with their significant other? Pass on this article and give them a leg up in making this major decision.