Life is full of sticky issues and none stickier than the issue of if, when, and how to combine finances with a romantic partner.
In the early days of a relationship, when everything is shiny and new, it might seem like the most logical thing in the world to combine finances with the girl or guy of your dreams. But keep in mind that the odds of the relationship panning out may not be in your favor. Divorce statistics are always hotly debated, but the CDC puts the marriage rate at 6.8 per 1,000 of total population, with the divorce rate at 3.4, based on 2009 data. You don’t have to be Zsa Zsa Gabor to realize that these are not terrific odds.
There are many factors to weigh when deciding to combine finances, including the incomes, assets, debts, credit ratings, obligations, ages and general reliability of both parties. For example, an older couple with two stable incomes and established credit histories might benefit less from combining finances than a younger couple with one stay-at-home spouse. Likewise, couples with one spouse whose income varies greatly from month to month (such as real estate agents, freelancers, or contractors) might find that putting everything in one pot helps smooth out the financial peaks and valleys.
The decision to combine finances should never be taken lightly because the effects of such an arrangement can have long-lasting repercussions. Credit card bills racked up by a profligate spender can harpoon the financial health of a more prudent partner, sometimes long after the relationship has evaporated.
Recently, young friends of mine who both have stable jobs decided to purchase a house together. They were not married or engaged, and so my gut gave a little lurch when I heard the news. I was worried that if something derailed their relationship, they would be encumbered with a property they could not afford individually and the legal entanglement of a shared mortgage. Fast-forward a few months and they are now engaged and moving forward with their life plans. Was it hasty of them to commit to a house purchase before the relationship was on terra firma? Or was this simply a case of outmoded thinking on my part? Several older, non-married friends of mine share mortgages and I don’t bat an eyelash. So perhaps it was only the relative youth of this couple that caused my twinge of fear.
Another couple of my acquaintance married later in life when both had established careers and substantial assets. They worked out a pre-nuptial agreement and decided to opt for the yours-mine-and-ours financial model for expenses. Both retain their existing accounts but contribute on a monthly basis to a shared account used for joint expenses such as utilities, food bills, housing costs, vacations and the like. This arrangement is practical for many households with dual incomes. The contributions to the joint account don’t have to match dollar for dollar; each couple can arrive at a ratio that is workable depending on income and other obligations such as child support. In theory, the amount not contributed to the joint account would be used for each partner’s retirement fund, short-term savings and spending money.
Taking the Plunge
The process of combining finances can be a vexing issue and a very personal one. The most important factors are trust and openness. A frank discussion about financial goals and practices, accountability, and responsibility will help you determine the right time and manner to combine finances. If both partners share the same goals and outlook and are responsible enough to adhere to the program, then combining finances can be completely painless. If there are stark differences of opinion or bad habits to be overcome, a staged approach might be more prudent. For example, start small with a joint account that covers only the items that are truly shared such as housing, food, property taxes and insurance, and utilities. Over time, other assets can be combined once a pattern of compliance and trust is established.
For me, the process of combining finances happened organically over several years. In the beginning, I retained by own accounts and transferred chunks of money to my husband’s brokerage account periodically for our investment portfolio. I continued to max out my SEP-IRA annually. After our children were born and we moved to Costa Rica (where it was not legal for me to work due to our residency status), we simply combined all of our assets into one pot without fanfare. Luckily, my husband is a tight-wad and we share similar long-term financial goals, so I did so without hesitation.
When preparing to combine finances, start with a realistic look at your income and expenditures using an online budgeting tool like Kiplinger’s worksheet or a budget-planning app like Mint. This will help you discover areas where your actual expenditures are outpacing your projected expenditures and let you trim accordingly. Crunching the numbers will give you and your partner cold, hard facts to work with rather than vague suspicions like “he spends too much on eating out” or “she spends too much on shoes.” When you are armed with data, combining finances will be less a leap of faith and more an orderly process designed to help you achieve your financial goals as a team.
Combining finances with a loved one is an issue with no “right” answer, so if you have any insights gained from personal experience, please share them here.