What is the “right” way to manage finances with a partner or in a family? As financial advisors, we are constantly asked this question. The answer is that there isn’t just one right way to go – just the one that works best for your situation.
Before even considering what might be the best approach, it is first necessary to understand each other’s priorities and attitudes towards money. This is a great way to find out how similar, and most importantly, how different you are so that you can identify potential problems before they arise. Additionally, you may find that one approach works now, but you want to make a different arrangement in the future. For example, if both partners are working now, you can take one approach, but want to change the tacks if one parent leaves the workforce to focus on parenting in the future.
Before deciding whether to keep your finances separate or combine them, there are a few important factors to consider:
Run both credit scores
If one partner has bad credit, getting married doesn’t necessarily affect the other spouse’s credit. However, if you open a joint account together or apply for a loan (e.g. a mortgage), the credit scores of both partners can be taken into account. This can have an impact on the loan amount approved or the interest rate that is offered to you.
Check your individual credit scores and share them with each other so you have an idea of where you are. If one spouse has poor credit due to bankruptcy or foreclosure, the couple may not be eligible for a joint loan at all – even if the other spouse has excellent credit.
Be aware of common debts
Understand whether you are sharing a credit card account, adding your spouse as an authorized user to your existing individual credit card account, or taking out a joint loan for a home or car. Each borrower is equally responsible for paying back the debt. The total amount borrowed and payment history are reported on both spouses’ credit reports and scores. In jointly owned states (Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, Wisconsin, and optionally Alaska), both spouses are equally responsible for all assets and debts acquired during the marriage – even if you do I don’t know that your spouse used up a large credit card balance during your marriage. You would still be on the hook to make sure it was paid for in full.
Form an equal and clear partnership
Be clear about your expectations. Perhaps this means you agree that any purchase over a certain dollar amount requires a joint decision before the money is spent. Perhaps this means holding a monthly The Business of Us meeting to review your budget, your progress towards achieving common financial goals, and discussions about who is responsible for handling which part of your financial responsibility.
No matter how uninterested either of you may be in managing your family finances, allowing only one partner to make all the money decisions is a bad idea. You both need to know how to handle your assets and debts so that the other partner can safely handle the finances if something happens to either of you.
Combine or not, choose your best strategy
There are many factors to consider when deciding how to handle finances. In general, however, there are four main methods:
- Keep your finances separate. They do not have common accounts and bills are split according to an agreement. The key to the success of this approach is making sure you communicate regularly and directly about how you are going to split the bills. A split of 50/50 can work when both partners have similar incomes, but a split of 70/30 can be more useful when one partner is doing significantly more than the other. You can also choose to have the electricity bill and the cable bill roughly the same each month, so one of you pays the electricity bill in full and your partner takes care of the cable bill. In keeping the finances separate, you also need to decide how the payments will be made. Would you like to write a check / online invoice for your part at a time, or will one person pay the full amount and the other refund?
- Joint finances. You combine all of your income into one common account and use it for all expenses, whether it’s larger bills like rent / mortgage or smaller things like groceries, entertainment and personal expenses like clothes and haircuts. This method makes it easier to understand your budget because you can both see where all of your money is going in and out. However, you want to make sure that you have established what you think is appropriate in order to avoid disagreements about money. In this scenario, having a pre-determined spending limit that requires discussion is helpful in avoiding arguments.
- Set up an “allowance”. If either of you is not earning an income (e.g. a parent staying at home), the main breadwinner can transfer an agreed amount to the other’s account every week or month to cover household bills or personal expenses. With this approach, it’s important to make sure you are familiar with the idea – the allowance is not a gift or a favor, but an understanding that raising children or caring for an aging parent is also a chore, even if it is unpaid Work is about. You should regularly discuss whether the amount of the allowance is sufficient to cover the agreed costs.
- Share some resources / expenses but keep others separate. Totally separate or completely divided, don’t you feel right about your situation? You can take a trade-off approach to “yours, mine, and ours” where you have one account to pay for shared expenses but keep your own individual accounts to meet your personal needs. This method makes it easy to budget combined expenses while maintaining independence and privacy. You should open an account for the payment of split bills, where each partner contributes a certain amount to these expenses, and the balance is transferred to your separate accounts. You can choose to split the amount needed to cover monthly shared expenses evenly or to create a contribution amount proportional to your income.
The final result
The decision how to deal with “The Business of Us” is a big decision – but not one that only has to be made in one direction or that cannot be handled differently at different times. The most effective way to manage your finances is the method that best suits your particular circumstances.
The “right” way to manage your finances with a partner or in a family is to discuss the facility with your financial advisor, who can advise you on what makes most sense for your personal situation and you on how to manage it Any stage can support financial transitions in your life.
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This article is written by our contributing advisor and presents the views of our contributing advisor, not the Kiplinger editorial team. You can check the consultant records with the SEC or with FINRA.
Managing Director of Client Experience, Mercer Advisors
Kara Duckworth is the managing director of Client Experience at Mercer consultant and also leads the company’s InvestHERs program, which focuses on providing financial planning to meet the specific needs of women. She is a CERTIFIED FINANCIAL PLANNER and Certified Divorce Financial Analyst®. She is a frequent speaker on financial planning topics and has been quoted in numerous industry publications.