Whether you’re already married, currently engaged, or in an otherwise long-term relationship, there are many considerations that every couple should make before combining their finances. After all, money is the number one cause of conflict in relationships, especially when you share expenses but don’t see eye-to-eye on all things finance-related.
If you’re in a long-term relationship and/or living with your significant other, then you’ve likely considered or even started combining finances at some point. This can be enormously tricky for some couples, as it requires a great deal of diligence, transparency, and possibly even discomfort to minimize any issues and interpersonal squabbles along the way.
It’s not easy opening up about deeply private matters like personal financial management, even when the other person is your partner or spouse. However, there are far too many stories of people getting married to someone who was hiding a mountain of debt – likely due to shame or embarrassment, rather than malice or nefarious intentions – so it’s extremely important that you’re both open and honest with each other before combining finances.
This is a monumental step for most couples because it can be risky pooling funds in a joint account or paying for each other’s debts. If you’ve considered combining finances or you’re in the process of sharing financial obligations with your partner or spouse, then here’s what you need to do to maximize your chances of success during this complicated process.
Combining Finances
Combining finances has no finish line; it will always require routine maintenance and transparent discussions between you and your partner or spouse. If you’re more frugal than your partner, it can be frustrating to feel like your hard-earned money is going towards their debt repayments, but if it gets you both to debt-free status sooner, then it’s arguably worth it.
If you’re the partner bringing more debt and perhaps a lower credit score to the table, discussing financial matters – on a regular basis, too – might feel like a dreadful or embarrassing experience. However, the more transparent and willing to compromise both parties are, the more successful your joint financial management strategy will be over time.
Before you get engaged, move in together, or open a joint bank account, here are the five most important things you must do if you’re thinking about combining finances with your partner.
Are You Both on the Same Page About Finances?
Many couples are not in alignment when it comes to managing finances. In many relationships, one person is frugal (or at least decent at managing their finances without racking up too much debt) and the other person is a bit looser with their wallet or perhaps they rarely check their credit score or stick to a budget.
If you and your partner have fairly different approaches to personal financial management, then you should spend several hours (or even days/weeks) discussing finances before you begin combining them. This way, you’ll be able to agree on a pathway forward and navigate some trickier compromises (e.g., spending limits, debt payoff priorities, etc.) before major issues arise once you’ve passed the point of no return (i.e., fully combined your finances).
Consider a Contract
One way to protect yourselves in the worst-case scenarios (breakup, divorce, etc.) is by writing up a contract. This is just as romantic as asking a fiancé to sign a prenuptial agreement before marriage but as sad as this may sound, you shouldn’t let love prevent you from taking basic measures to protect yourself and your finances.
For example, if you agree to dip into your savings to pay off $3,000 of your partner’s credit card debt, then your contract might include a condition that says they must pay off their statement balance at the end of every month so they don’t fall right back into the cycle of debt after you bail them out the first time.
Contracts do not need to be notarized to serve as legitimate legal documents, so don’t overlook this possible conflict-resolving measure when laying the foundation for your joint financial management strategy.
Navigating Individual Debts
Speaking of debt: how much do each of you have? Is any of it tax-deductible (e.g., student loan interest)? Would the partner with little to no debt agree to contribute part of their income and savings to help the other partner get out of debt? Even if one partner has substantially more debt, the interest rate, grace periods and other factors could influence which debt you should jointly pay off first.
For instance, imagine you have $4,500 in credit card debt (21% APR) and no student loans, while your partner has no credit card debt and $15,000 in student loans with a 5.5% interest rate. In this scenario, you two should prioritize paying off your high-interest credit card debt because smaller debts are more feasible to pay off quickly and you’d be paying quite a lot of interest with a high APR.
Another factor to consider with student loans specifically: if you’re unmarried, then both of you could receive a student loan interest tax deduction of up to $2,500 per year ($5,000 total tax deduction). On the other hand, married couples filing jointly have to share the $2,500 tax deduction for student loan interest.
Opening a Joint Account
Once you’ve figured out a joint budget and debt repayment strategy, the next step would be opening a joint bank account. You could still maintain your own personal accounts with “allowances” to spend on whatever you want, while the joint account would be reserved for shared expenses like rent/mortgage payments (if you live together), utilities, groceries, daycare, etc.
Alternatively, you could close your personal accounts and divert both of your incomes to one shared account. This simplifies the financial management process somewhat, but this option also requires a great deal of trust. There have been stories circulating on personal finance blogs and podcasts about spouses draining their joint accounts for various reasons (e.g., readying for divorce, gambling addictions, etc.). While it’s highly unlikely that this would happen to you, it’s nevertheless important that you schedule regular finance meetings with each other to ensure both parties are always aware of their financial situation.
Understand Each Other’s Money Management Styles
If one of you grew up in a low/middle-income household and the other grew up in a wealthy household, then you may have very different views about money. Even for couples who grew up in homes with similar income levels may be surprised to discover how many different perspectives they have when it comes to the subject of money management.
Rather than pushing off tough conversations in the name of love, demonstrate your commitment to your partner by asking them direct questions about how they manage money. Since money is an awkward subject to talk about, some people get defensive about their spending habits and exaggerate how much they actually save.
If this happens, don’t get irritated or upset with your partner – instead, focus on areas where you can compromise and improve together. That way neither party ever feels personally attacked about their financial management style.
Evaluate Your Debt Situation
It sucks, but you have to talk about your debt obligations. There are way too many stories circulating around the Internet about people getting married without realizing their now-spouse was hiding an enormous mountain of debt. Without having a direct conversation about money before you combine finances, you might not realize they could be hiding a bad credit score from you as well.
It’s important to note here that people don’t hide their debts and credit scores from their loved ones to be intentionally dishonest. Oftentimes, this comes from a deep sense of personal guilt and shame, which is why it’s so crucial to take a mindful, patient approach to financial discussions with your partner.
To get a realistic glimpse at your current debt situations, promise no judgment and layout all of your individual debt responsibilities. This way, you’ll be much better prepared to tackle the highest interest debts first and successfully pay off other loans and credit cards if/when you decide to combine your finances.
Create a Joint Budget
Once you are fully aware of each other’s individual financial situations, now it’s time to figure out how combining finances could change your budget.
If you already live together, then this process will likely be much easier because you already have a system for paying rent, utilities, and other shared expenses. When you combine finances, however, that’s when you need to decide how you’ll tackle each other’s debts.
Will you do 50/50 or prioritize the highest interest debts first? How you’ll cover previously personal expenses like food and clothing, and how you’ll grow your collective emergency savings fund?
Since budgeting can be stressful, don’t forget to add fun money to your budget, so you can enjoy spending time with each other during this adjustment period.
Divvy Up Your Individual Income
In addition to creating a budget, you’ll need to decide who contributes to how much money to what expenses. There are a few approaches you can take here.
Create a shared expenses pool that each of you contributes 50% to. Anything leftover will go towards your personal expenses, debts, and investment accounts.
If one of you makes substantially less than the other person, create a shared expenses pool that you contribute to on the basis of your income. For example, the partner making $80,000 annually pays for 2/3 of the shared expenses, while the partner making $40,000 pays for 1/3 of the shared expenses.
Pool everything together, prioritize highest-interest debts, regardless of who holds the debt, and set aside X amount for each person to spend on personal hobbies, clothing, and other individual expenses.
Plan for Your Future Together
Regardless of how you divide up your income to meet your budgetary needs, you’ll definitely want to plan and save for your future together. This may involve a wedding fund, saving to have a baby, saving up for a down payment on a home, investing in retirement accounts, and so on.
Even if one partner makes significantly more than the other, you’ll be much more successful as a couple if you both commit to saving for your most important life goals together.
How Do You Split Expenses With Your Spouse or Partner?
If you live with your spouse, boyfriend, or girlfriend and you haven’t figured out a solid system for managing your individual and shared expenses, then there are several things to consider when it comes to budget items like rent, utilities, Netflix, and even furniture. It’s often a struggle to split expenses when you’re in a relationship.
Some couples divide up expenses equally. Some couples divide expenses based on each other’s income levels, and others let one person pay for the couple’s collective expenses.
How to Split Expenses With Your Spouse
There is no “correct” way to divvy up your expenses, but if you’re dealing with someone with different views on money than you or you simply want to organize your expenses for less conflict and more financial stability, then here are a few options to consider:
Debt-to-Income Ratio
Rather than looking solely at each other’s income levels to determine who pays how much for what, your first move might be to calculate who is paying off more debt in relation to their income. Eliminating debt may be a personal responsibility for one or both parties in a relationship, but allowing the person with more debt to pay off more of their balances could lead to greater long-term financial stability for the couple.
Don’t assume the person with the largest debt burden should prioritize their debt repayments, however. If one person has high-interest debt on a small balance (such as credit card debt) and the other person has a bigger debt load but low interest (such as an auto loan or even fixed-rate student loans), then you might want to pay off the highest interest accruing debts before focusing on the mountain of low-interest debt the other person has.
Assuming you don’t pool your incomes together into a joint bank account, this approach can help you decide how to most efficiently allocate your financial resources to minimize the negative consequences of debt while covering the bills in a fair way that works for the relationship.
Disproportionate Usage
Does one of you watch Netflix all the time while the other person barely watches TV? Is one partner more prone to taking hour-long showers while the other spends just a couple minutes freshening up? If there’s a clear division between one person using something significantly more often than the other, then perhaps dividing the expense beyond the typical 50/50 range would be useful.
This might entail paying a less-expensive utility bill in exchange for paying for other utility bills or dividing expenses into percentages based on usage (this might be complicated, but it still works for some couples).
Ebbs and Flows in Income
If one person works while the other person is going to school to finish their degree, then is fairness even possible? In some cases, the breadwinner might trade off money for the other partner’s willingness to do more chores around the house, but this agreement should be carefully discussed by you and your partner.
Sometimes the projected income increase that could follow as a result of obtaining an advanced degree could be enough of a justification for the current partner who’s working to financially support both parties – again, it depends on you and your partner’s personal preferences to work out an arrangement.
This can be difficult if your partner is reluctant to discuss money, but unless you two both have solid, well-paying jobs that cover your combined expenses (and then some), then finances can be a tricky arrangement that requires patience and organization to work through.
Financial Stability Over Fairness
More likely than not, you and your partner won’t earn the exact same salaries and carry an equal level of expenses. Disparities in income levels, debt loads, and even financial management strategies will differ from each other at varying points in your relationship, and it could lead to interpersonal conflicts over money if you’re not prepared to handle the rocky financial moments.
Even if you or your spouse (or live-in girlfriend or boyfriend) are terrible with money, avoiding the problem altogether or leaving one person to manage all the income and outflowing expenses without any input from the other is not ideal unless you specifically plan it that way.
By acknowledging from the get-go that your financial situation will probably never be truly equal, you can move forward and proactively organize your budgets, shared accounts, and debt repayment plans in ways that will emphasize financial stability for the relationship over purely what’s fair or not.
Although combining finances is never an easy process, you’ll be much better off during the transition period and in the long run if you take the time to patiently discuss your own approach to money, as well as your financial goals for yourself and the relationship. By having these awkward conversations now, you’re much more likely to achieve your goals together by learning how to compromise and encourage each other every step of the way.
