Whether you are newlyweds, soon to be wed, or a seasoned married couple, money is important to a balanced and happy marriage. While blending finances, it is important to remember that the process requires true teamwork and will help to build a strong partnership. Money is a common cause of conflict among couples, so we chose to address this topic as we head into wedding season.
Because opposites sometimes attract, combining conflicting money-management styles is among the greatest challenges married couples face. Early and frequent communication is critical, and should include discussing debts, income, credit history, investments and goals. The first conversation could be an uncomfortable one. Maybe one of you has a low credit score or credit card debt. Perhaps you have significant differences in your approach to spending and saving. Using honest dialogue, set the ground rules and build the trust you need to put your money to work.
Gone are the days where a “one-size-fits-all” approach works. Each couple should decide on a financial strategy that works for them. The following methods are a few approaches that differ from the standard joint and separate account suggestions.
The Equalizing Approach
What it is: Keeping most of your finances separate, except for one joint account to which both partners contribute equally. This approach is good for couples who are on equal footing when it comes to income and debts, especially those not yet married and who have not seriously discussed getting married. The process includes setting up a joint checking account for the rent, bills, groceries and other shared expenses. Each partner then contributes equal amounts each month. The key is that each partner has to trust that the other is going to use the money in the manner it was intended.
The Percentage Approach
What it is: The percentage approach is similar to the equalizing approach, except that each member contributes a percentage of income to the shared account, rather than a dollar value. This approach is a good fit for couples (married or not) who earn unequal incomes, especially where the one earning more would like to have a shared lifestyle that requires more income than the lower earner could afford on their own. The approach can be accomplished by opening a joint account into which 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, each partner might agree to contribute 45% of their take-home income to this shared fund. If Mary takes home $7,000 a month, that’s $3,150 a month; for Mike, 45% is $2,000. They can use the funds to decide how much they can afford for a mortgage and other shared expenses.
The Bill Splitting Approach
What it is: Each person picks certain bills and expenses to pay for. The expenses may not necessarily be equal. This strategy works for couples earning different amounts, especially when they are not married, or one is paying for a mortgage. The bill splitting approach also works well for couples who do not want to combine finances at all. The process starts with deciding which bills each partner will pay and continues with an updated evaluation when new expenses arise.
The Complete Blending Approach
What it is: This process requires combining finances completely. It is a good fit for married couples who do not enter the marriage with significant separate assets. The arrangement can be set up in several ways, but one option is to have a joint account into which you deposit all income and from which you pay all bills and set aside savings. A second option is to have one joint account for shared expenses and savings goals, plus a separate account for each partner, which allows for independent spending. 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 frequent meetings to discuss spending and progress on savings goals.
The Single Income Approach
What it is: Even though both partners are working, they live on one income and save the rest. This works well in situations where one partner has an inconsistent income or for couples planning to live on a single income in the future. Set up your shared budget according to just one partner’s income, which means limiting essential expenses like rent, utilities and groceries to one single income. Use that income for everything, from lifestyle choices like dining out and shopping to financial priorities like paying off debt and saving for retirement. Send all income from the other partner straight to another savings account. This approach forces couples to keep their essential expenses low and ramp up savings for emergencies and retirement.
As complex as it may seem, coming to the perfect account-management setup is not a pass-fail task. If one strategy does not work, note the positives and negatives and move on to a different approach. Just remember that life is full of financial curveballs, whether it is a new job, a growing family, or an empty nest. Each event may require you to revisit the joint financial plan as a team.
Andrea L. Blackwelder, CFP®, ChFC and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with Wisdom Wealth Strategies.