According to a recent study by Credit Karma, about half of millennials who are married say that they merged their finances prior to tying the knot. Regardless of when couples decide to merge their finances, the decision involves a number of important questions and considerations. There are many different methods of combining finances, and it is important to have honest conversations about income, savings, debt, and spending habits prior to the merge. Couples must decide together how best to merge their finances and share their expenses. Below is an outline of some of the most common ways to do this.
One person covers all expenses.
This scenario is ideal for couples in which one person makes many times more than the other, which may be the case if one person is going to school, staying home with the kids, or otherwise not earning a reliable income. When choosing this option, it is important to think about what would happen if the relationship disintegrates. Sometimes, the breadwinner expects to be paid back. When one person is in school, another question to consider is what will the finances look like after graduation? Sometimes, the student will take on more financial responsibility down the line to pay back the favor.
Failing to have these conversations can lead to hostility, frustration, and disappointment. Couples may even want to create a cohabitation agreement that lays out each person’s expectations, so that no one feels taken advantage of down the line. Sometimes, it’s smart for one person to cover all the expenses if he or she makes considerably more. In this case, the other person’s income can be designated as savings.
The couple approaches bills as equals.
Many couples choose to approach expenses as equals, meaning that their finances are kept relatively separate, except for one joint account to which both contribute equally. All bills are paid from this account, so each person covers half of the bills. This approach is ideal for couples who are on equal footing in terms of debt and income. Often, this is the strategy couples choose when they merge their finances before marriage, because it still keeps expenses fairly separate. Money from the joint account pays for groceries, rent, utilities, and any other shared expenses.
Both parties should trust the other not to use the money from the joint account unfairly, or for purposes for which it wasn’t intended. When opting for this approach, it’s particularly important to openly discuss how much each person has in savings. If one person loses their income for any reason, these savings will pay for rent and other necessities.
Each person covers certain bills.
Sometimes, couples choose not to combine their accounts and instead split their finances by dividing bills. This approach works for couples who earn different amounts, since the bills may not be equally distributed, and for couples who don’t want to open a joint account. This option can also work well if one person is already paying a mortgage and the other chooses to move into the home. In general, it’s not recommended to help pay down the mortgage on a home owned by someone else (even a partner), and rent situations with significant others can feel strange. Instead, the other person could cover utilities and groceries. Each party should feel that the bills are split fairly.
Each person pays according to income.
Some couples create a joint account to cover shared expenses, but contribute different amounts to it. This approach makes sense if one individual makes a lot more money than the other. If one person makes double, that individual contributes twice as much to the joint account. In this scenario, each person typically has a personal account for spending money as well. Ideally, contributions to the shared account should not amount to more than 50 percent of either person’s income; otherwise, the couple may be living outside of their means. This approach requires honesty and openness about expectations to avoid either party feeling like they are contributing too much or too little to the joint fund.
Income is fully integrated.
One of the most basic, but perhaps intimidating, options is simply to combine all income from both individuals. All money goes into one account that can be divided further into savings, bills, and other sub-accounts. Sometimes, couples who choose to fully integrate their finances still keep their own personal “fun” money accounts. Each personal account is allotted the same amount from the joint account every week or month. That way, no one feels like the other person is spending recklessly and thus limiting what he or she can spend. Other couples may simply choose to have another joint account for fun and entertainment purchases.
With this approach, it’s critical to have regular conversations about expectations and goals for savings, as well as paying down debt. After all, if one person came into the relationship with more debt than the other, both individuals will be paying it down together with this approach.