When it comes to personal finance, we all do things a little differently. After a few years, our money habits can become more like money rules, and staying open minded to new ways of handling our finances can be tough. Even the more flexible among us can still struggle with financial changes.
Still, though managing personal finances may be personal, it is not always an individual pursuit. Often times, marriage or other circumstances can create a situation where there are two people in the financial driver’s seat. So what, then is a person to do when faced with the prospect of combining their finances with another person’s?
1. Know where you stand financially
Before you look at combining your finances with someone else, you need to have a clear understanding of your own personal finance picture. How else will you be able to have a meaningful conversation about your new financial life together, if you don’t know what’s going on with your money? The amount of information your new partner will want largely depends on their personality.
Here are a few questions you might want to ask yourself before you have the money talk:
- Do you have credit card debt?
- Are your debts on one card or ten?
- How about student loans, auto loans, or a mortgage?
- Do you pay them on time?
What about savings and retirement planning? Are you sitting on a large stash and counting the days until financial independence. Are you drowning in consumer debt and wondering when you can file for bankruptcy (maybe even “again”)? Or is it something in between?
2. Why do you want to combine finances?
While this may seem like a silly question, many people don’t really take the time to think this part through. They jump straight into the how of combining finances, without ever considering the why. Articulating the reasons you want to combine finances may not end up changing your decision. But it can help you get in the right frame of mind and may ease the process along.
Are you combining finances because you think you must? Maybe you’re doing it because that’s how your parents did it. Perhaps you’re considering it at your partner’s (or someone else’s) insistence.
3. Benefits and drawbacks
Maybe you’re not even sure you want to combine finances. There are certainly some pros and cons to both sides of the argument.
The biggest pro to the joined finances argument is probably convenience. Combining money generally means having at least one joint bank account. Having a joint account means that either or both of you have access to all the money in the account, all the time.
This can make things like paying for groceries and other household expenses nice and easy. You no longer have to discuss who’s going to pay, or how to split the bill.
The potential benefit of having a joint account is that both partners have equal access to the money. The potential downside of having a joint account is that both partners have equal access to the money.
4. Are you both comfortable with each other’s financial situation?
Often times, revealing the details of your financial life to another person can make you feel vulnerable. This can make the money conversations difficult at first.
Opening up your books to your partner and taking stock of each other’s finances is only part of the equation. Once you have both laid all your cards on the table, you need to decide whether you are comfortable with each other’s financial situations.
Maybe your partner still has six figures of student loan debt, and you have a million dollars in retirement accounts. Or perhaps you’re both debt-free, but have no savings. What about your financial and life goals?
It is important to make sure you can both get on board with each other’s plans. Life will look a lot different for two individuals working full-time and aiming to retire early, than it will for two people with summers off who are looking to take month-long adventures every year. Even if you don’t both have the exact same goals, it is important to make sure those plans are compatible.
It doesn’t really matter what individual pieces you both bring to the table. In the end, you both just need to be comfortable with the new picture that takes shape, when you start to put those pieces together.
5. Are your money-handling styles compatible?
Maybe you’re worried because one of you a saver and the other a spender. (This is actually much more common that you might think.) Maybe one of you is a “Type A” personality and the other isn’t really sure what day it is.
As the saying goes, personal finance is very personal. So, as you might expect, we all have our own habits and techniques for handling money. In this regard, there are a lot of things to consider.
Do you both budget every penny? Maybe you just check your account statements for a few minutes each month. Likely, it’s something in between.
Learn More: A Simple Approach to Budgeting
Having different money styles is actually very normal, and is generally not a cause for concern. The real sticking point will be whether your two styles can coexist in a way that works for both of you.
6. How will you divide up the jobs?
So, you’ve decided that you are both comfortable with each other’s financial pictures. You’ve identified each other’s money handling styles, and still decided you’re going to do the whole “two become one” thing. You’re done… right?
Nope. This is where the how comes in. All those big and little details still need to be figured out.
When it comes to bills, which of you will write the checks and lick the stamps? (Or, for those living in modern times, which of you will monitor the electronic bill payments?) How about keeping track of the daily personal and household expenses? Will you even track them? What if you both absolutely love creating and updating spreadsheets!?
Read About Setting Up a Cash Flow Calendar
7. Which accounts will you keep?
I call this the “do we really need two toasters” problem. When combining households, most people combine their belongings as well. It is not uncommon to end up is a situation where, after the dust settles, you have a lot of redundancy in the things you own. Do you keep your toaster or your partner’s toaster? Or do you throw them both out and buy a new toaster that you pick out together?
Combining finances often results in the same type of situation. Which means you also have a lot of choices to make. In short, how will you figure out which accounts to keep, which to close, and whether to open any new accounts?
As you might expect there a a few schools of thought on combining bank accounts.
Ours: Some people feel that having only one joint checking and one joint savings account for the household is the only “right” way to combine finances. Some of the advantages to a system like this is the simplicity and the equality. If you have one account, there is no question where the money goes when it comes into the household, and both partners have equal access to use that money.
Mine: Others prefer to go the opposite route and keep all bank accounts separate. In this system, responsibilities for household expenses are divvied up in some manner, leaving each partner responsible for their own share of expenses and free to manage their own accounts. In marriage situations, this is more commonly seen in second (or third) marriages, or unions where one or both partners are older and more set in their ways financially. This system is not without its drawbacks however. Unlike the shared account system above the separate nature of this system can create financial hurdles in the event one partner needs access to the other partner’s accounts, especially in times of job loss or serious health issues.
Yours, Mine, and Ours: Yet another way to tackle this issue is to use a hybrid system. Here, each partner has a separate account into which their income is deposited, and a the household has a joint account with both partners named on the account. Each partner then transfers money from their personal accounts into the household account, and all household expenses are paid from the joint account. This leaves each partner with an intact sense of autonomy and control over their finances, while allowing for more convenient management of the day to day household expenses.
Generally speaking, the same systems that can be used for bank accounts can also be used for credit cards. That being said, decisions regarding credit cards should be made with care as credit, because opening them and/or closing them can impact your credit.
If keeping your credit scores intact is one of your goals, consider both partners keeping all their cards open. That is because closing accounts can negatively impact your credit score, as it reduces your available credit (which can affect your utilization ratios) and your average age of accounts.
If you also want to have the simplicity of the one account method, there are a few ways to handle that. The obvious solution might be to open up a new credit card account as joint cardholders. In that scenario, you would both be legally responsible for all debt accumulated on the new card, and it would show up on both partners’ credit reports.
The other way is to pick one card held by either partner (maybe the one with the best cash back, best airline mile earning potential, or lowest interest rate) and add the other partner as an authorized user on the card. Unlike a joint owner, typically an authorized user has permission to spend on the card but is ultimately not responsible for paying it back. (Keep in mind that in a marriage situation, state community property laws can affect this significantly.) By adding an authorized user, you avoid the temporary hit to your credit that comes with an application for a new card, and you keep the number of accounts you have (and have to keep track of) from growing.
8. How will you track your finances?
Whether you keep one account or many, you will need some system for knowing where your money is and what it is doing. Thankfully, nearly all of the tools available for tracking you cash can be used for households just as well as one person.
For online tools such as Mint or Personal Capital, joint account tracking could be as easy linking both partner’s accounts and making sure you both have the password. Since these sites use read only credentials, both partner’s will be able to track all the accounts, but not make any money moves directly from the websites.
For more hands on tracking systems such as You Need A Budget (YNAB), the mobile app can make joint account management and tracking super easy. With YNAB in particular, both partners can download the app on their phones then input and monitor transactions on the fly in real time!
9. Nothing is set in stone
Maybe you decide all these things up front, or maybe they just sort of happen. Regardless, every financial partnership has some amount of delegating and co-managing. It’s just a matter of finding the balance.
That being said, it can be wise to reevaluate things from time to time just to make sure you are both comfortable with the way things are going. If not, you can use the power of teamwork to come up with a new plan!
When do you think is the right time for couples to combine finances, if ever? Was the process a rough one for you?