Love, finance & budgeting
It is the month of love and some serious pillow talk and even though this may be your last idea of topics to talk about on your date night, a little financial planning can do a lot for your love life down the line. Hashing out monetary matters can make things a little awkward if not done the right way. Here are a few pointers to help you pull up your smarty pants when following your heart:
1. Get acquainted
An incredible way to draw insight on your relationship before it becomes serious is to see their financial habits as they reflect their values and ethics. This does not mean their poor credit score should be your reason to breakup, but if you notice your new flame does not handle money responsibly, it could be a red flag. On the other hand, if you are the one with these issues, communicate your shortcomings. You and your beau might be able to help each other become smarter about money.
2. Find a middle ground
Support each other if your new fiancé or long-term partner is challenged by a financial setback rather than avoiding the topic or pointing fingers. Sadly, blame is not a concept in the balance sheet. You need to work together to come up with a solid game plan.
3. Get it on paper
There is nothing romantic about legal forms. But it is quite essential to have the correct documents safeguarding you and your assets which is why we sometimes recommend a binding financial agreement ( a pre-nup in layman’s terms !!) to protect you. For those contemplating a second marriage, a way to protect the assets that you bring to the table, especially if you want them to go to your children from a prior marriage is to create a legal trust. This document will spell out how much of your assets will be passed on to your children rather than your new spouse.
4. Do not rush in
Unless you and your spouse actively merge them, debts you had prior to marriage are yours alone. When you get married, take your time to combine your finances. You can help each other out by chipping away at your loans without being totally responsible for it.
5. Consider each other as equals
Do you hear me stay-at-home moms and dads? Who makes what is irrelevant. Your role in family in family finances is not determined on how big your pay check is. An equal say in money management is important.
6. Divide and conquer or unite?
Merging finances is a significant yet delicate transition, but unlike love it isn’t an all-or-nothing proposal. Different couples have different ways to do this. Some combine every account from checking to retirement funds, credit cards, and the household budget while others prefer to keep most of the accounts separate except one or two for household expenses or vacations. There is no right or wrong way to do this as long as there is transparency, fairness and sustainability for both partners. Lets dig a little deeper into the different methods some of the couples we know share their finances with their partners:
I. Proportional Method
This is a method where couples contribute to the household expenses at a rate that is proportional to their income. Just like how our friends Josh and Holly. Their monthly house expense is $3,000 which includes theirs mortgage, utilities, bills and groceries. Josh earns $2,000 monthly which is 33% of the total expense while Holly earns $4,000 which 66% of the household expenditure. So Josh pays 33% of their $3,000 monthly expense which is $1,000 and Holly contributes 66% of the expense which is $2,000. Josh and Holly really enjoy the middle-ground stage of combined finances. They share all the household expenses and have separate accounts for themselves. However, lets take a look at the pros and cons of this method:
- There is no pressure of “keep up” or restructure their budget plans to the earnings of the other partner.
- Holly could feel resentful at some point in contributing more to the expenses only because she earns higher than Josh.
II. Raw Contribution Method
Our friends Danny and Jo contribute the same amount to expenses regardless of the differences in their incomes. Danny and Jo earn $5,000 and $3,500 per month respectively. Their household bills come to $4,000 a month. They both contribute $2,000 and keep the rest off their earnings in separate accounts. Pretty neat. But let’s analyse this method.
- Danny wouldn’t feel resentful for earning higher since he shares the bills equally.
- Jo doesn’t feel she is dependent on Danny.
- Their relationship could become strained if Danny lives more laviously than Jo.
- Some could say (not us!) that this method feels “roommate-like”.
III. Complete Combine
Michael and Kate have combined their bank accounts to pay all the bills, carry only joint debit and credit cards and cooperate on retirement investments. Michael earns $3,700 a month and Kate $2,600. Both their pay checks get debited into their joint account each month which the couple uses to pay all their shared bills. The couple also carries joint debit and credit cards for all their purchases. Kate loves a month salon session which costs around $85 and Michael loves shoes. Lets evaluate this method.
- They work as a single unit.
- If either of their income rises or falls, they can balance each other out.
- Tracking expenses becomes easier.
- Michael could get a little frustrated if Kate spends more since he earns higher.
- Even if one of them is frugal and the other one a spender, this could create an imbalance between them.
When it comes to budgeting practice for a couple there is no perfect solution to it that can apply to them all. The important thing to do is to reflect your options and customise them according to your relationship in a way that it can fit both your collective needs. Ofcourse, regardless of what method you chose, there needs to be a clear discussion about you and your partner on what to do if one of your income falls down to zero (downsizing is no joke in this recession!).
Our advice is that once you pick a method, don’t be too rigid. Tweak it or change it according to your patterns. As a team, you and your partner need to experiment with various strategies to create a balance between your personal finances and shared money. Weigh the pros and cons of each strategy together over wine this weekend and see what comes naturally.
To discuss your finance options in more detail, or if you have any questions at all, we've got experienced consultants who can help. Give us a call on (03) 9193 3436.