Tuesday, August 23, 2016

How To Join Finances



That place where there's only one set of footprints? That's that time you had mono and I paid the electricity bill for a month. 

So you've decided it's time for you and your partner to join your finances. There are several different methods available to you. I know couples who use each of these methods; it really comes down to your circumstances and preferences. I'll review the pros and cons of each.

Semi-Joined: Three Account Method


In this method, each partner maintains their own bank account(s). Just like pre-relationship, all income is deposited to the earner's individual personal account. The partners also maintain a joint account which they use to pay shared expenses: rent, utilities, and so on. The partners agree on an amount that they each contribute to the joint account to cover these expenses. This might mean that each partner contributes an equal amount, or they may contribute uneven amounts to reflect different life circumstances (differing incomes, financial commitments, etc.) After contributing the agreed-upon amount to the joint account, each partner is free to spend the remainder in their personal account however they wish.

PROS
  • Scales up and down well; just contribute more or less of your money to the joint account, and define more or fewer expenses as shared responsibilities. This allows partners to ease into joined finances in a way that is still relatively easy to disassemble. For this reason, it's the setup I recommend to start with, even if you plan to eventually move onto fully joined finances. It may also work great as a permanent solution.
  • Creates clear lines of responsibility. Joint-account decisions are made by committee; all other financial tasks are performed individually.
  • Allows partners to shield each other from certain financial complications, such as  debt or other obligations from a prior life situation (alimony/child support, etc).  
  • Partners don't see each other's personal spending, so they can't judge. This also makes it possible to get surprise presents for each other!!!
  • Maintains a feeling of independence. Your money is still your money. You just choose to contribute some of it to shared expenses.

CONS
  • Gets weird with uneven incomes. This system doesn't work at all for families where one partner doesn't bring in any income (e.g. stay-at-home parents). I think it mainly works best if both partners are bringing in about equal amounts of money (or, at least, the lower earner is still earning plenty to live on.) It is possible to do this method with unequal incomes, but the reality is that the person who makes more will have more spending money. Some couples think this is fair, but it makes me feel a little weird.
  • Can cause problems in an emergency, for example if one partner is hospitalized, it may be difficult for the other to pay the bills without access to their accounts. (For that reason, I recommend that at least some portion of the family's emergency funds be placed in a joint account.)
  • Easier to commit "financial infidelity." With separate finances, you may be unaware of very relevant financial information that can affect both of you, especially if you marry or switch to fully joined finances. Could your partner be hiding a spending problem? Debts you know nothing about? BLACKMAIL???

POP QUIZ, HOTSHOT!

Suppose Alex makes $1,200 per month and Billie makes $2,400 per month. Their joint expenses amount to $2,000 per month. How would you choose to divide responsibility for those expenses?

  1. Each partner contributes the same dollar amount to the joint account. That means they're each contributing $1000; which is 83% of Alex's monthly income, but only 42% of Billie's. Alex has $200 per month left over after contributing the joint, while Billie has $1400.
  2. Each partner contributes to joint account proportional to their income. Since their income ratios are 1:2, Alex contributes ⅓ of the monthly expenses ($666.66) and Billie contributes ⅔ ($1333.34). That means they're now each contributing 56% of their income to the joint expenses, and they each have 44% left over after their contributions ($533.34 for Alex, $1066.66 for Billie).
  3. All moneys are contributed to the joint account, and the spoils are divided evenly. Alex and Billie make $3,600 per month together and only need $2000 for their bills -- that's pretty good, they're able to live on only 55% of their joint income. That leaves 44% ($1600) left over, which can be divided evenly between them, with each taking 22% ($800).
  4. All moneys are contributed to the joint account, and there are no spoils. The $1600 which is not needed for bills is invested in their shared future!

RESULTS:

If you said A, you are for scrupulous fairness and rewarding higher earners. Nothing wrong with that--but would your answer change if one of you took a financial hit for the family? What if one of your left work to care for a child? What if one of you got a dream job in a part of the country where the other couldn't find a job?

If you said B, you believe that a higher earner should shoulder more financial responsibility for the family--while also enjoying more of the spending money! Nothing wrong with that, but there is a pitfall to be aware of: with proportional contributions, it's easy to get into a situation where the lower earner ends up committing to a lifestyle she cannot afford. What if Alex and Billie's expenses were $3,000 instead of $2,000? Together, they can still afford it; with proportional contributions, Alex contributes $1,000 ($200 left over) and Billie contributes $2,000 ($400 left over). Suppose they break up and Alex is now in an apartment that costs $3,000 a month to run. Even with a roommate, that's not going to happen on a $1,200 per month income. Say what you like about scenario A, at least it forces the couple to keep their expenses low (to the level where the lower earner can at least afford half).

If you said C, you have basically invented joint finances. Nothing wrong with that--as long as you never, never break up. See the next section!

if you said D, you are a firm believer in joint finances and nobody having any fun. I kind of feel like there's a little wrong with that. Saving is great, but it's important to make sure that everyone feels free to play around with at least a little money, no questions asked, whether that's in a joint account or elsewhere. See the next section!

Fully Joined: One (Main) Account Method


All income is pooled in the joint account, from which all expenses are paid. This includes joint bills and personal expenses for each member of the family.

This method may still involve additional accounts (e.g. each partner may still maintain a separate account which is funded by an "allowance" out of the main account), but the joint account is the primary income and expense account for both partners.

This requires a mindset shift: instead of "your money" and "my money," all money is by default "our money."

PROS
  • Works beautifully with uneven incomes. All money is pooled before it's redistributed, so it's irrelvant if you each make $50,000, or if one of you makes $100,000 and the other isn't working; the result is the same. That can make this a more reasonable and livable lifetime money management method for many families. Throughout their long lives together, most couples go through various periods where one or another is unemployed or underemployed, whether that's due to raising children, job loss, illness, moving for the other person's career, etc. This method takes these see-sawing fortunes in stride, whereas income-curbing life events can throw a monkey wrench in separate finances.
  • Easier to save for joint goals. Family saving, like family spending, happens in the joint account. It's easier in this scenario to have an "everything left over goes to savings goals" mindset, instead of an "everything left over goes to candy and gum" mindset.

CONS
  • Can't unring that bell. Fully joining your finances is a huge plunge, and it's very difficult to undo. Warning, handle with care, surface hot, only do this if you and your partner are absolutely Together Forever.
  • Easier for one person to become financial captain. Very often, when finances are this intertwined, one person slips into the role of "finance person" and keeps the books. This isn't necessarily a problem if the finance person enjoys the chore and the other partner dislikes it. However, it can become all too easy for the finance person to make decisions without getting their partner's input, or for the non-finance person to be totally effed if the finance person becomes ill, dies, or leaves. Even if one person is the clear financial captain, it's in everyone's best interest for the non-finance person to keep an oar in.
  • Can feel paternalistic, especially if you're not the financial captain. It can feel like you're being given an "allowance" and having all your spending watched. This can make independent people chafe.
  • The consequences of "financial infidelity" (or outright theft) are swift and unforgiving. Nobody wants to believe they'd ever get involved with a swindler, but the truth is that living your life out of an account that another person has access to opens you up to the possibility of being royally screwed over.
  • Hard to surprise each other. My wife and I use the same checking account and charge card, so we really can't buy each other surprises. Each Christmas I know where she got my present and how much she spent. This is a minor bummer. Maintaining individual accounts for your "free spend" money could resolve this, but in our case consider it too much trouble.

If you are on the fence about joining finances, I suggest you take some time to think about it. Don't leap into it! If you have any hesitation, there's no shame in waiting a bit to see how things go. The worst case scenario is that you deal with inefficiencies and slightly mundane tasks (paying each other back for things) for a bit longer.

If you decide to go for it, I'd recommend starting with semi-joined method; it will give you a chance to see how you both handle the joint account while still maintaining your individual accounts to fall back on. If you like it, stick with it! The three-account method is an absolutely workable long-term solution for many couples.

If, however, you are getting tired of the hassle of dealing with multiple accounts when you already think of all your money as "ours," if you've gotten to the point where you're paying practically everything out of the joint, and especially if you're facing a life situation where one partner will be sacrificing income for the good of the family unit, making the plunge to fully joined finances can be a huge simplifier.

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