What is the “right” way to manage finances as a couple or as a family? As financial advisers, we get asked this question all the time. The answer is, there isn’t just one right method – only the one that’s best for your situation.
Before even considering what might be the best approach, you must first understand each other’s priorities and attitudes towards money. This will help you understand how you are similar and, most importantly, how you are different so that you can identify potential issues before they arise. Also, you might 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 can choose an approach but would like to change tactics if the one parent leaves the workforce to focus on raising children in the future.
Before deciding whether you want to separate your finances or combine them, there are some important factors to consider:
If one partner has a bad credit rating, being married won’t necessarily affect the other spouse’s rating. However, if you open joint accounts or apply for credit (such as a mortgage) together, the credit scores of both partners may be taken into account, which could make a difference to the loan amount approved or the rate. of interest that is offered to you.
Check your individual credit scores and share them with each other so you get a feel for where you stand. If one of the spouses has a bad credit history due to bankruptcy or foreclosure, the couple might not even be eligible for a joint loan, even if the other spouse has excellent credit.
Whether you have a joint credit card account, add your spouse as an authorized user to your existing individual credit card account, or take out a joint loan for a home or car, every borrower is equally responsible. debt repayment. The total amount borrowed and payment history are recorded in the credit reports and credit scores of both spouses. In communal 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 acquired during the marriage – therefore even if you didn’t know that your spouse accumulated a large credit card balance while you were married, you would still have to make sure that it was paid in full.
Be clear with your expectations. Maybe this means that you accept that any purchase over a certain amount requires a joint decision before the money is spent. Maybe that means you have a monthly “The Business of Us” meeting to discuss your budget, your progress towards common financial goals, and discussions about who is responsible for managing which part of your financial responsibilities.
No matter how much either of you care about managing your family’s finances, allowing one partner to make all the financial decisions is a bad idea. You both need to know how your assets and debts are managed so that if something happens to one of you, the other partner can handle the finances with confidence.
There are many factors that need to be taken into account when deciding how you want to approach financial management, but in general there are four main ways to do it:
- Keep your finances separate. You do not have a joint account and the invoices are distributed according to an agreed arrangement. The keys to making this approach work are that you communicate regularly and directly about how you will split 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 does significantly more than the other. You can also decide that the electric bill and the cable bill are roughly 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 the finances separate, you also need to decide how the payments are made. Do you each want to write a check / invoice online to pay your share, or does one person pay the full amount and the other pay back?
- Joint finances. You combine all of your income in a joint account and use it for all expenses, whether it’s bigger bills like rent / mortgage, or small things like groceries, groceries, entertainment and personal expenses, including clothes and hairstyles. This method makes it easier to understand your budget because you can both see where all of your money is going in and out, but you want to make sure you have established what everyone thinks is reasonable to avoid disagreements over money. This scenario is one where a pre-established spending limit above which discussion is necessary is useful to avoid possible arguments.
- Establish an “allowance”. If one of you is not earning an income (for example, a stay-at-home parent), the primary breadwinner can transfer an agreed amount to the other’s account each week or month to cover managing the household bills. household or pocket money. With this approach, it is important to make sure that you are comfortable with the idea – the allowance is not a gift or a favor, but an understanding of raising children or caring for a parent. aging is also a job, even if it is unpaid work. You should also discuss regularly whether the amount of the allowance is sufficient to cover the agreed expenses.
- Share some funds / expenses, but keep others separate. Completely separate or fully shared, don’t you feel good about your situation? You can take a “yours, mine and ours” compromise approach, in which you have a joint account to pay for shared expenses, but keep your own individual accounts to pay for your personal needs. This method facilitates the budgeting of the combined expenses while maintaining a certain independence and confidentiality. You must open an account for the payment of shared bills where each partner contributes a specified amount to these expenses, and the balance goes to your separate accounts. You can decide if you are going to divide the amount needed to cover the monthly common expenses equally or propose a contribution amount proportional to your income.
Deciding how to run “the business that concerns us” is an important decision – but not a decision that should only be made one way, nor a decision that cannot be managed differently at different times. The most effective way to manage your finances is the method that works best for your particular situation.
The “right” way to manage your finances as a couple or as a family is to discuss the setup with your financial advisor, who can advise you on what is best for your personal situation and help you manage the financial transitions in your life. at each step.