Marrying your money
Three questions to ask when deciding how joint your finances should be.
NEW YORK (CNN/Money) - If you and your betrothed are banking on wedded bliss, bank on this: Marriage is as much a financial partnership as a union of hearts and minds.|
But getting that partnership to work well takes effort. The first step is to discuss your expectations about how money should be handled. (If you think you don't have expectations, just wait until your partner pays a bill late, drops $300 on a pair of Italian pumps, or questions every penny you spend.)
For better or worse, money is a source of stress for all couples and it can be a catalyst for divorce. But a big difference between people who stay together and those who split is how they manage money conflicts, according to PREP, Inc., a marriage education program at the University of Denver.
Handling those conflicts well depends in part on the money management system you set up. "Couples have to create an organizational system that makes sense to both of them. If it makes sense to one but not the other, it won't work," said Ruth Hayden, author of For Richer, Not Poorer: The Money Book for Couples.
When deciding what approach you should take, ask yourselves the following three questions:
Question 1: So, what exactly is the deal here?
First, get a few things out in the open: what you make; what you've saved; what you own (e.g., stocks); what you owe (e.g., credit card debt); and what financial goals you share (e.g., buy a house).
Now, before dealing with niggling expenses and calculating who pays for what, think big, said financial adviser David Bach, author of Smart Couples Finish Rich. Decide how much you want to save for shared desires.
Say your combined gross income is $100,000 and together you want to save $10,000 a year for retirement and $10,000 for a house. Now you'll know you need to set aside $20,000 a year, and use the remaining $80,000 to cover living expenses, debt payments, taxes and discretionary spending.
Question 2: How many pots of gold do we want?
Next, discuss how many bank accounts you want. You have three basic choices: a one-pot system, a two-pot system or a three-pot system.
Some people would rather share their toothbrush than their checking account. Others, meanwhile, can't imagine not having all their money pooled since to them marriage means sharing everything. Deciding what's right for you is a mixture of the practical and the primal.
Weigh in with your opinions. Take our Marrying Your Money poll.
The one-pot system simply means a joint account for everything. For it to work, you and your spouse have to be very comfortable with each other's spending and accounting habits.
But experts caution that merging everything too quickly can be a mistake for many couples. "It's almost like closing your eyes and jumping off a cliff," said psychotherapist Olivia Mellan, author of Money Harmony: Resolving Money Conflicts in Your Life and Relationships.
It also may hinder a woman's financial strength should life take a turn for the worse. Women are more likely to have money struggles after divorce or a spouse's death, so it's critical they establish credit in their own name and have at least some money of their own during marriage, experts say.
The two-pot system -- separate bank accounts for each spouse -- appeals to highly independent partners, but it's less efficient when it comes to paying joint expenses, Mellan said.
Bach is more critical. "The worst way to do it is to separate everything," he said, noting that among couples he has worked with, separate accounts often point to a rocky relationship. (It should be noted, however, that some studies show the two-pot system is a more common choice in second marriages and that for those marriages it is not necessarily tied to dissatisfaction, according to PREP.)
The three-pot system gets the highest marks from experts. A combination of joint and separate accounts, it gives both partners spending autonomy through use of their individual accounts, but also provides an opportunity to act as true financial partners in managing joint assets.
Bach suggests a joint checking account for common expenses; a joint savings account for shared goals; and two individual bank accounts for each spouse's discretionary spending money. On top of that, he said, each spouse should have their own retirement accounts.
Keep in mind, your money system may evolve as circumstances change. Say one of you quits work to raise children. You must learn to live on one salary and decide how to divide the income between you. Whatever you do, continue funding the stay-at-home spouse's retirement savings through an IRA, Bach said.
Question 3: How much should we each pay?
There's still one more key issue to resolve: who pays for what. It's the rare couple that make identical salaries. One partner usually earns more, but does that mean he or she should pay more?
One option is to split the joint savings and expenses 50-50 and keep whatever is left from your respective salaries as your own spending money. The downside is that the lower-paid spouse will have less left over, and therefore less spending autonomy.
Or you might pay for things proportionately. Say your combined gross is $100,000, but one spouse makes 70 percent of that ($70,000). If your yearly housing costs are $10,000, the person making 70 percent pays 70 percent ($7,000). The other person, who makes $30,000, pays 30 percent ($3,000). In effect, however, both partners are only paying 10 percent of their respective salaries.
There's another option, Bach said. First, figure out how much together you'll have after funding your retirement and joint savings. Next, decide on a percentage to give each partner for discretionary spending and then use the rest for all other expenses. For example, if you have 80 percent of your combined gross left after savings, you can agree to put 5 percent each in your individual spending accounts and live off the remaining 70 percent.
Go 50-50 on big ticket items
One area where everything should be 50-50 is major decision-making, experts say. Even though one partner may take the lead in managing the books, Bach said, spouses should participate equally in deciding how money is spent on joint endeavors.
Of course, every $30 household item isn't worthy of a spousal conference. But you might agree to discuss purchases over, say, $200.
If all this sounds a little too rational...well, it is. In fact, don't be surprised if money discussions get a little heated at times. "Core money beliefs aren't logical," Hayden said, in part because money represents different things to different people -- love, power, intimacy, freedom, you name it.
That's why getting the money part of your relationship right requires patience and compromise.
But the benefits are worth it. Nothing is more powerful than two people on the same side of an issue, Hayden said. "Your whole perspective changes on what's possible. You can make dreams happen."