When a couple makes the decision to bring their lives together, it’s inevitable that their financial lives will become intertwined. Even though the sentiment that “love conquers all” tends to overshadow financial concerns early in the relationship, the reality is that how each partner handles money could have a significant impact on your collective financial future.
This is a more significant issue today than it might have been in the past. It’s more common for couples to choose to marry or live together at a later age than was typical for previous generations. Or couples may be coming together after one or both partners went through a divorce. In situations like these, both individuals are often bringing more financial assets and their own financial priorities into the relationship.
Here are key topics that every couple should discuss before merging their finances:
Income and expenses
One of the biggest decisions you should agree on is how much of your income will be directed to individual accounts or to a joint account. Individuals who are used to managing their money may want to maintain their account, or have a separate account for discretionary spending. If this is your preference, have a plan for who is responsible for each expense. Opening a joint account that both parties contribute to is a common way to pay for shared expenses, such as rent or mortgage payments, utilities, food. If you decide only to have a joint account, discuss how you’ll handle discretionary spending. Many couples agree to discuss any purchase made above an agreed-upon amount, so both partners feel involved in the decision.
If one or both of you is bringing debt to the relationship, such as student loans or credit card debt, it is important to agree how those will be paid off. Will both of you contribute to loan payments, or will the person who brought those debts to the relationship take sole responsibility? Reducing and eventually eliminating these debts should be a priority for the long-term financial stability of the household.
An important consideration for any couple is having a sufficient cash reserve in place to meet emergency needs or to provide funding if special opportunities arise. A general rule of thumb is to have six-to-nine months of income set aside in a cash account that is easily accessible when the money is needed. If both individuals earn income, both should contribute to this joint household account. Clearly communicate what type of expenses warrant dipping into this fund in order to avoid a potentially stressful situation.
Before you merge your finances, talk about your financial goals and dreams. Consider putting together a plan that prioritizes each goal and factors in the ideal timeframe for achieving each goal. As part of this discussion, talk about your spending habits, your approach to saving and how you will resolve disagreements about money. Be upfront about any issues you might have had with money in the past and how that might affect your lives going forward. Putting it all on the table at the outset can help avoid problems related to money matters in the future.
William “Drew” Watson CFP® is a Financial Advisor and Private Wealth Advisor with Ameriprise Financial Services, Inc. in Owensboro, KY. He specializes in fee-based financial planning and asset management strategies and has been in practice for 20 years. To contact us by phone, please call 270-684-8424, or mail to 111 West 3rd St., Owensboro, KY 42303. You may also visit our website at www.williamawatson.com.