Much like figuring out where you’ll eventually settle or if children or pets are in your future, determining if, how, or when you’ll merge your finances is something that newer couples need to address.
While some people avoid this topic, it should be discussed sooner than later. To help facilitate this, here’s a list of some questions and considerations to get you started.
1. Have you started discussing this topic yet?
If you have, that’s great! You’re that much closer to having a plan. If not, start talking about it as soon as you can because the process may take a while. This does not mean, however, that you have to combine right away, but having at least an idea of the topic can get the ball rolling.
2. How will you have these discussions?
Financial conversations can be an emotional experience. Make sure you both pack your patience and try not to get defensive. Remember, being together can take work, and this is no different. This is also not going to happen overnight. Think of it as more of a series of continual conversations about finances, and not a visit with a tax advisor before April 15th.
Contact Scarborough Capital Management and find out what you can be doing now to better your future.
3. When will you set up a joint budget?
Some may have already moved in together and have been sharing rent, food, and other smaller expenses. If this is you, then setting up a joint budget may just be an expansion of what you’ve been doing previously.
But if not, will it be before engagement? Before marriage? After marriage? Never? (Yes, this is an option. It may not be right for you to do so based on your situation.) But let’s say right about now is a good time...
4. What are your savings goals?
Even couples that have very similar interests may have slightly different ideas when it comes to what each is saving for. This is a great opportunity to get these thoughts out on the table and explain why you each want what you want.
5. How is your credit?
For some, this may be an easy question to answer. For others, it might induce some very real angst. Now is the time though to get this information out so you can both approach it proactively. Communicate about these issues so you can work on them together.
6. What accounts do you currently have?
Bank, credit card, savings, retirement, and the like. Make sure all of these are listed and you discuss what’s going on with each.
7. Does one person already have a written budget?
This can be a time saver if someone is already documenting his or her expenses. If so, you simply have to add the other person in. If not, start by writing down expenses and income for each. At this point, don’t worry about setting up elaborate spreadsheets or plugging numbers into financial software. Just make a list.
8. Do you want to share expenses down the middle?
Here is where we can begin to look at creating the actual budget. One option is to figure out how much your total expenses are, divide by two, and have each person pay that.
This can be a touchy subject though if the income levels of each are significantly different. In that case, approaching this through percentages could work. For example, let’s say that Jen makes $3,000 net per month and John makes $2,500 net per month. That means Jen makes about 55% of the income and John makes about 45% of the income. To split expenses this way, they’d pay the same in expenses as they earn in income percentage.
This may be a very equitable way for some to handle expenses, but it may not work for all. If, for example, one person has large student loan payments and a mortgage but the other is still renting and debt-free, this couple may decide to keep these expenses separate. In this case, each person pays for a predetermined expense, and not simply split them percentage-wise.
And if you make more and believe you might be getting the short end of the stick, consider this: your significant other may get a raise, or you may have to take a pay cut or even suffer job loss. With roles reversed you may look at this differently.
9. Is one person more “financially organized” than the other?
Do you pay your bills on time, every time, and have to remind your partner to do so? Or are you the one who never looks at their checking account? What about managing investment and retirement accounts?
There are two ways to handle this. Share the responsibilities in whatever way makes sense to each person’s strengths and interests, or have one person handle everything. There are certainly pros and cons to each, and now is the time to discuss if you want to be the one that has all of the work, or is possibly out of the loop on day-to-day finances.
10. Do you want to combine debt?
Does either person have debt? What I mean by debt here is any type of large student loan amount, mortgage, credit card, or other payment that requires a significant monthly payment. By combining debt, both parties agree to share this burden even though only one may be directly benefitting from the money spent. This is something that should be considered very carefully because if the relationship ends, the person without the debt will have a very hard time trying to recover the money spent.
11. How many checking accounts should you have?
Some people like to have one account that all of their income goes into and expenses come out of. This model makes tracking easier, however, it may lump too much together that you actually want to keep separate, like “no questions asked” money. If one person can be more financially organized, one account is fine, however, if both of you need this buffer, then opting for two may be a better solution.
12. How much “no questions asked” money should each person have?
Would you rather have a flat rate, or a percentage based on your income level? If you’re allocating expenses based on income, doing the same here could be a good way to make sure that one person doesn’t get stuck with more of the bills in relation to their “play” money.
13. What’s a financial limit you can spend without needing to consult the other person?
While “no questions asked” money is there if you want to treat yourself to new clothes or a fancy gadget, this question deals more with stuff that we just have to buy sometimes. Let’s say that your car needs repairs that are going to cost $700. Should you just go ahead and get the repairs? Maybe, or maybe not. Over a certain threshold, it may make sense to discuss these types of purchases, since the other person may have a better feel for long-term spending.
14. How will attending other people’s weddings be handled?
Wait, what? Yes, you need to be discussing this. If both of you have a lot, or if one person has significantly more friends than the other that will be tying the knot then a plan should be developed on which weddings you should both go to, and which may be just one or neither attend. Also, how much
will you be spending on gifts, hotels, clothing, and hair all come into play? Discuss this so your vacation money doesn’t turn into hotel money for the second cousin’s wedding neither of you wanted to travel to.
As you can see, there are lots of considerations when two people decide to merge their finances. This doesn’t need to be as nerve-wracking as many make it out to be though. With enough time, patience, and understanding, joining finances with a significant other can be one of the building blocks that help your relationship along the way. Contact Scarborough Capital Management to see how we can help.
The opinions voiced on this blog are for general informational purposes only and are not intended to provide or be a substitute for specific professional financial, tax or legal advice or recommendations for any individuals.
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