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.
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.
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 lay out 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 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.
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.