Picking the right money-handling strategy for your family – separate finances, a joint account or something in between? – can make a big difference on how well you function and how well you get along.
What is the “right” way to manage finances with a partner or in a family? As financial advisers, we are asked this question all the time. The answer is that there isn’t just one right way – only the way that works best for your situation.
Before you even consider what might be the best approach, you need to first understand each other’s priorities and attitudes about money. This will help you figure out how you are similar and, importantly, how you are different so that you can identify potential problems before they arise. Additionally, you may find that one approach works now, but you would like to have a different arrangement in the future – for example, if both partners are working now, you may choose one approach but would like to change tacks if one parent steps out of the workforce to focus on raising children in the future.
Before you decide whether you want to keep your finances separate or combine them, you need to consider some important factors:
Run both of your credit scores
If one partner has a poor credit score, being married won’t necessarily affect the other spouse’s score. However, if you open joint accounts or apply for credit (such as a mortgage) together, both partners’ credit scores may be considered, and this could make a difference on the approved loan amount or interest rate you are offered.
Check your individual credit scores and share them with each other so that you have an idea of where you stand. If one spouse has a poor credit history stemming from bankruptcy or foreclosure, the couple might not even qualify at all for a joint loan – even if the other spouse has excellent credit.
Be aware of joint debts
Understand whether you have a joint credit card account, add your spouse as an authorized user on your existing individual credit card account, or take out a joint loan for a home or car, each borrower is equally responsible for repaying the debt. The entire amount borrowed and payment history are reported on both spouses’ credit reports and scores. In community property states (Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, Wisconsin and optional in Alaska), both spouses are equally responsible for all assets and debts that are acquired during the marriage – so even if you don’t know your spouse has racked up a large credit card balance while you are married, you would still be on the hook to make sure it got paid in full.
Forge an equal and clear partnership
Be clear with your expectations. Maybe that means that you agree that any purchase above a certain dollar amount needs a joint decision before the money is spent. Perhaps that means you have a monthly “The Business of Us” meeting to discuss your budget, your progress toward joint financial goals and discussions about who is responsible for handling what part of your financial responsibilities.
No matter how uninterested one of you might be in managing your family finances, allowing only one partner to make all the money decisions is a bad idea. You both need to be knowledgeable about how your assets and debts are handled so that if something happens to one of you, the other partner can confidently handle the finances.
To combine or not: Pick your best strategy
There are many factors to consider when deciding how you want to approach handling finances, but in general, there are four main ways to proceed:
- Keep your finances separate. You don’t have any joint accounts, and bills are split by agreed arrangement. The keys to making this approach work are that you communicate regularly and directly on how you will be splitting the bills – a 50/50 split may work when both partners have similar incomes, but a 70/30 split may make more sense if one partner makes significantly more than the other. You can also decide that the electric bill and the cable bill are about the same amount each month, so one of you pays the electric bill in full and your partner takes care of the cable bill. When you keep finances separate, you also need to decide the mechanics of how the payments are made. Do you each want to write a check/online bill pay for your portion, or does one person pay the whole amount and the other reimburses?
- Joint finances. You combine all your income into a joint account and use it for all expenses, whether they are bigger bills, such as rent/mortgage, or smaller things, such as groceries, entertainment and personal expenses, including clothing and haircuts. This method makes understanding your budget easier, because you both can see where all your money is coming in and going out, but you want to make sure you have established what you each think is reasonable to avoid disagreements about money. This scenario is one where a pre-established spending limit above which discussion is required is helpful to avoid possible arguments.
- Establish an “allowance.” If one of you is not earning an income (for example, a stay-at-home parent), the main breadwinner can transfer an agreed-upon amount to the other’s account each week or month to cover household bill management or personal spending money. With this approach, it is important to make sure you are comfortable with this idea – the allowance isn’t a gift or favor, but an understanding that raising children or caring for an aging parent is a job too, even if it is unpaid work. You should regularly discuss whether the allowance amount is enough to cover the agreed-upon expenses, as well.
- Share some funds/expenses, but keep others separate. Totally separate or fully shared not feeling right for your situation? You can do a compromise approach of “yours, mine and ours,” wherein you have a joint account to pay shared expenses but keep your own individual accounts to pay for your personal needs. This method makes it easy to budget for combined expenses while keeping some independence and privacy. You should open an account for payment of shared bills where each partner contributes a specified amount toward those expenses, and the balance goes to your separate accounts. You can decide if you are going to split the amount needed to cover the monthly joint expenses evenly or come up with a contribution amount that is proportional to your incomes.
The bottom line
Deciding how to handle “The Business of Us” is a big decision – but not one that must only be done one way, nor one that can’t be handled differently at different times. The most effective way to handle your finances is the method that works best for your unique circumstances.
The “right” way to manage your finances with a partner or in a family is to discuss the setup with your financial adviser, who can give you advice on what makes the most sense for your personal situation and help manage financial transitions in your life at every stage.
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