Long gone are the days when combining your finances with your partner involved:
1. Getting married
2. Assuming that your husband would control your joint financial fate
Good riddance! With more women bringing home the bacon nowadays, that wouldn’t make sense, anyway. But there’s no one-stop 2012 solution for handling money with your partner, either.
This becomes especially apparent when you move in together or get married.
Today, LearnVest Certified Financial Planner® Sophia Bera weighs in on six different methods for sharing your finances, based on the real lives of six different couples.
Already living together or married? Keep reading to find out if you want to stick with your current system—or if another might work better for you.
1. The “We’re All Equals Here” Approach
What it is: Keeping most of your finances separate, except for one joint account. Both people contribute to that account equally.
Who it’s good for: Couples who are on equal footing when it comes to income and debts, especially ones who are not yet married and haven’t seriously discussed getting married.
The couple: Agatha and Matt are in their late 20s and have been dating for a couple years. Neither has student loans or other debt to pay off, and their salaries are about the same, plus or minus $10,000. They have decided to start looking for a place together to rent, though marriage hasn’t come up yet.
How to do it: Set up a joint checking account for the rent, bills, groceries and other shared expenses–then contribute equal amounts each month. “They should understand that having a joint account gives them both access to the funds,” our financial planner Sophia cautions. “Each has to trust that the other person is going to use the money the way it was intended.”
In the case of Agatha and Matt, they should consider having a separate lease, so one isn’t on the hook if they break up. They should also think about setting up a formalized cohabitation agreement, and share how much each has in emergency savings, in case someone loses their job. Here are more resources if you’re thinking of cohabiting.
2. The “To Each According to His/Her Earnings” Approach
What is is: Similar to the “We’re All Equals Here” Approach, except each member contributes a percentage of income to the shared account, rather than a dollar value.
Who it’s good for: Couples–married and not–who earn unequal incomes, especially where the one earning more would like to have a shared lifestyle (dinners out and vacations) that is more than the lower earner could afford on his or her own.
The couple: Leesa has a thriving architectural business and is earning significantly more than Steve, a graphic designer. They’re about to get married and move in together, and Leesa has her eye on a house on the pricier end of their range. Steve wants to contribute, but half the mortgage is more than his budget can handle. (Find out why we don’t recommend spending more than 50% on essentials like housing expenses and groceries.) They also have very different tastes in food. Leesa prefers organic and gourmet foods. Steve, on the other hand, is happy with burgers from the grill.
How to do it: Our trusty financial planner suggests opening a joint account where each person contributes a percentage of his or her income to pay for essentials–ideally under 50% of each person’s take-home pay. For example, Leesa and Steve might agree to contribute 45% of their take-home income to this shared fund. If Leesa takes home $6,000 a month, that’s $2,700 a month; for Steve, 45% is $1,800. They can use this pot to decide how much they can afford for a mortgage and other shared expenses.
3. The “I’ve Got It” Approach
What it is: One person pays for all expenses.
Who it’s good for: A couple–married or not–in which one makes many times more than the other. Or a couple in which one is going to school, staying home with the kids or otherwise not earning an income.
The couple: Sara and Leslie met two years ago. Sara has been accepted to graduate school and starts next fall, at which point she’ll leave her current job. Leslie has a fairly well-paying job she sees herself keeping for some time. Sara is a little worried that, even with her grants and stipend, she’s going to struggle with a reduced budget, and wants to make it out with as little debt as possible. The two of them have discussed the possibility of marriage or a more formalized partnership, but they’re not quite ready to take that step.
How to do it: If the higher-earning partner can afford it, he or she can take on all the household expenses. But before doing so, talk about all eventualities: If you broke up, would the breadwinner want to be paid back, or would you part ways guilt-free? If and when the other partner returns to the workforce, will she take on more of the household expenses to make up for the years she didn’t contribute? ”It’s important to have open communication about these arrangements because otherwise this can lead to conflict around money,” Sophia says. Once you’ve had that conversation, formalize what you decide in a cohabitation agreement.
In this particular case, Sara should consider a part-time job, freelance work or assistantship position at the university so she can contribute to groceries and some utilities while she’s not working.
4. The “Pick Your Bill” Approach
What it is: Each person picks certain bills and expenses to pay for. These may not necessarily be equal.
Who it’s good for: Couples earning different amounts, especially when they aren’t married, or one is paying for a mortgage. Perfect for couples who don’t want to combine finances at all.
The couple: Mike has asked Ruth to move in with him in the condo he bought last year. He’s paying down his 30-year mortgage, in addition to several hundred dollars a month in housing association fees, cable, and utilities. Ruth has a lower salary than Mike, but she loves to cook, and is always happy to whip up dinner for the two of them. She’s not too psyched about paying for cable, however, since she never watches TV.
How to do it: Pick a bill. Maybe Ruth pays for the association fees, gas bill (because she’ll contribute to a higher bill using the oven a lot) and electricity, while Mike pays for cable and homeowner’s insurance. Mike should also take care of the mortgage, as we never recommend that you help pay down a mortgage for a home that someone else owns. (Ruth might consider paying him rent, however.) Ruth might take on more of the grocery expenses and Mike might pay for dinner more when they eat out. “The most important thing is that they talk about it and figure out a plan that works well for both of them, then put it in a cohabitation agreement,” says our intrepid financial planner.
5. The “What’s Mine Is Yours” Approach
What it is: Combining finances completely.
Who it’s good for: Married couples who don’t enter the marriage with significant separate assets.
The couple: Mary Beth and John are just out of college and are getting married in a few months. Mary Beth has student loans to pay off, but neither of them has much in the way of assets at all. John’s not worried by M.B.’s loans (though some people may consider that a nonstarter) and he’s told her he’s committed to helping her pay them off so they can start saving up for a house together, then eventually a family.
How to do it: Option 1 is to have a joint account where you deposit all your income and from which you pay all your bills and set aside savings. Option 2 is to have one joint account for shared expenses and savings goals, plus a separate checking account for each of you, with ’fun money’ that you can spend however you want. Either way works.
If you have debts to pay down, decide together how much you will dedicate to paying off loans, and how much you will put aside and save for a down payment or other financial goals each month. Have monthly meetings to talk about your spending and your progress on savings goals.
6. The “Act as If” Approach
What it is: Even though both partners are working, they live on one income and save the rest.
Who it’s good for: Couples in which one has an inconsistent income, or couples planning to live on a single income in the future.
The couple: Irene and Anthony have been married for about a year. They don’t have any children yet, but they have discussed the possibility of one of them staying home with the kids when they do. Right now, Irene has a steady salary and Anthony has a variable income from his freelance work. They don’t have any large debts, but their emergency fund isn’t where they want it to be and they want to save up for a house.
How to do it: Set up your shared budget according to just one partner’s income, which means limiting essential expenses like rent, utilities and groceries to less than 50% of that person’s income. Use that one income for everything, from lifestyle choices like dining out and shopping to financial priorities like paying off debt and saving for retirement. Then, send all income from the other partner straight to another savings account.
“This is one of the best things that a couple can do for their finances because it forces them to keep their essential expenses low and ramp up savings for emergencies and retirement,” says our financial planner. “Sometimes, this isn’t possible at first, but it’s a great motivator to see what it would take to get you there.”
For Irene and Anthony, this would mean living off Irene’s salary and setting aside Anthony’s income for their emergency fund and the down payment on a home. That’ll help them hit their goals sooner, and it’s like a dry run to see how feasible it would be for one of them to stay home with future children.
One Last Note:
If you’re at all nervous about combining finances with your partner, it might help to look out for these eight financial red flags. But who knows? Moving in together could inspire you to revamp your finances completely. Moving in with her boyfriend changed this writer’s whole approach to money.