If you’ve read part 1 in this series, then you already know that the most important thing to do before merging finances with your partner is to have an open and honest discussion about your income, spending habits, outstanding debt, etc. It’s impossible to have a substantive conversation without being clear about your partner’s (and your own) financial situation. Once you’ve done that comes the next stage – deciding whether merging your finances is the right decision for you as a couple.
Like most big topics, these are ideas that need to be socialized (i.e. discussed more than once, without deciding immediately). Here are a number of items you’ll want to cover:
How do each of you feel about combining finances?
Often people come to these discussions with a general sense about how they want to handle finances as a couple. Some people believe that merging finances once married is simplest and most appropriate. Others feel like they don’t want to lose their financial independence and want to keep some of their accounts separate. Knowing where you are today is an important starting point. Your perspective may be colored by:
Income parity or disparity between you and your partner
Your future plans for childcare – if one partner plans to stay home with children
Outstanding debt
Spending habits
Do you plan to combine most or just a few of your accounts?
The topic of combining finances won’t be all-or-nothing. In fact, retirement accounts such as 401(k)’s and IRA’s can’t be merged because rules related to withdrawals and taxation are tied to the age of the account owner.
Some couples decide that they want to combine most of their accounts, but keep the remainder separate. If you do go this route, make sure you discuss how much of your money you want to keep separate, as well as which purchases will be “joint” vs. which will come from your individual accounts. (This last point is particularly important if you have or are planning to have children. Make sure you discuss how you plan on divvying up the financial responsibilities of caring for your children.)
How much is “too much” to spend without consulting the other partner?
If you and your partner don’t see eye-to-eye about spending, then it may make sense to keep some discretionary money separate. In this way, you can use joint accounts for the bulk of living expenses (rent, utilities, etc.) and set aside individual accounts for personal spending.
Do you plan on keeping a budget?
Similarly, it’s important to discuss whether you plan to stick to a budget as a couple, and how you’ll arrive at that budget. If one person feels strongly about managing to a budget while the other prefers a more laissez-faire approach, then fully combining finances may prove difficult.
Do you plan on paying off your credit card bills in full each month?
You’ll want to make sure that you and your partner are aligned on how you want to spend. Do you put all expenses on credit cards? Do you pay from a debit card or cash? Will you pay off your credit cards in full each month? If not, what’s an acceptable level of credit card debt to take on? All of these are important inputs as you seek to understand whether it makes sense to merge your accounts.
An important side note for unmarried couples
It’s crucial to remember that there are some big differences when it comes to merging finances depending on whether you are married or unmarried. For example, there are defined legal guidelines to help married couples separate their money if they end up getting divorced. In contrast, unmarried couples don’t have the same system to rely on. So, if your partner spends all the money in your joint account and breaks up with you, there’s unfortunately not much you can do. Many couples decide to merge their finances, but it’s ultimately up to each couple to decide what works best for them. The most important part is transparency and open communication.
In part 3, we will discuss options for merging (or not) your money. If you’d like to get an outside opinion about your financial situation as a couple before (or after) you merge, contact Paceline for a complimentary consultation.
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This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.