Question. Hi, my fiancé and I are getting married this summer, and I’m looking for some advice on the best way to setup our household finances. Until now, we’ve maintained separate finances and bank accounts. However, we’ve just recently purchased a house, so in addition to the mortgage, we’re going to have a lot more shared expenses. I should also mention that I’m more of a saver than my fiancé, and my income is significantly higher than his. How should we set this up? Should we combine everything, or still keep it separate?
Answer. As a kid, I was a paper boy, which is to say, I had a newspaper route. Of course, this was long before online subscriptions, internet banking and e-transfers. And the only thing I hated worse that delivering papers on Saturday morning, was doing collections on Sunday evening. Every Sunday evening, I would have to go around my neighborhood and knock on the doors of every one of my 54 customers, and ask them for $3.50. It was brutal.
That experience, however, did give me an inside look at how different families managed their household finances. And one thing that always fascinated me, was how very different it was, from one house to the next. In some houses, I’d hear one spouse ask the other, “Dear, do you have $3.50 to loan me until I get paid?” As a 10-year old child, that always struck me as bizarre, since in my house, I only ever knew of “my parents” money, and had never heard one of my parents ask the other for a loan. In other houses, I’d hear things like “Can you pay it this time, and I’ll get it next time?” And of course, in too many houses, the response would simply be “We don’t have it now, can you come back again next week?”
Different Strokes for Different Folks
For newlyweds and couples who live together, shared expenses are often many – rent or mortgage payments, bills and utilities, groceries, furniture, property upkeep and maintenance, vacations, costs of raising kids, etc. That’s all well and good if both partners are on the same page, but what happens if one partner wants a vacation and the other wants a big screen TV? Or if one thinks $10,000 is enough to spend on a used car and the other insists on spending $25,000 on a new car? These items, and many more, present the unfortunate potential for endless bickering and disagreement in many relationships.
So what works, and what doesn’t? As I found out on my paper route, when it comes to managing household finances, there is no one-size-fits-all solution. Indeed, what works well for one couple, might be disastrous for another. However, a key characteristic of many successful solutions involves sharing some expenses, while keeping others separate. Let’s take a look at a few ways this can be accomplished.
Each partner contributes an equal dollar amount.
In this scenario, each partner contributes an equal dollar amount to a shared account on a monthly basis. From that account, all joint expenses are paid – mortgage or rent, bills, groceries, etc.
Note, however, that this strategy can sometimes cause friction when one partner makes significantly more than the other. For example, assume a couple has roughly $4,000 per month of joint expenses, and so the agreement is that each partner is to contribute $2,000 per month to the joint account. If one partner makes only $2,500 per month, while the other makes $10,000, this type of agreement might not be optimal.
Each partner contributes an equal percentage of income.
Same idea as above, however, instead of contributing an equal dollar amount, each partner contributes an equal percentage of income. So in the example where one partner makes $2,500 per month and the other makes $10,000, let’s assume they both agree to contribute half of their incomes to a shared account, and retain half for individual spending. This strategy would then see the lower income partner contributing $1,250 per month to shared expenses, while the other partner contributes $5,000.
From one perspective, this strategy can be seen as more equitable. And yet from another perspective, it may be seen as less fair, in that one partner is shouldering the large majority of shared expenses. Again, this is up to each couple to determine what they deem as fair, and what works for their relationship.
Each partner retains an equal amount.
As a slight variation on either of the previous two strategies, the idea here is that each partner retains, rather than contributes a specific amount – either dollar amount, or percentage.
For example, each partner could agree to retain $1,000 per month for individual personal spending, and contribute the rest of their income to a joint account for shared expenses. Or similarly, each partner could agree to retain 20% of their monthly income, and contribute the rest to household expenses.
Regardless of the method chosen, the key is at any amount not required for contribution to the joint account is each partner’s own individual money, which can be spend as he or she sees fit. And here’s the important part – without guilt or friction from the other partner. This often provides a good balance between sharing household responsibilities, and yet maintaining some level of individual control over one’s own income and purchases.
Financial stress can come from many different sources: Unaffordable mortgage payments, cost of raising children, job loss, etc. However, one of the most common, and perhaps most often overlooked, sources of stress in relationships comes from a difference in financial values – for example, when one partner is a “saver” and the other is a “spender.”
This is definitely not one of those issues that will “work itself out.” Left unattended, financial problems can fester and threaten to derail your entire relationship. In fact, according to the Institute for Divorce Financial Analysts, money issues are one of the top three causes of relationship breakdown. Given that reality, you’re doing the right thing by addressing your concerns up front and early in your relationship.
If you have any other questions about household savings and financial planning, or about any of our other products and services at ModernAdvisor, just ask us.