Thursday, June 14, 2012

MONEYtalks: Joint Finances


When it comes to joining finances with a significant other, I really don't think there's one right or wrong way. People may say their way is the right way but just as each relationship is different, so I believe may each financial arrangement.

So instead of telling you what to do, I'm just going to tell you how we do it. Hope this helps you find your own "right" way or if not, hope this was an interesting read for you. I'll admit, I'm curious about these things myself!

C and I rented an apartment together while we were dating. During most of that time, we kept our finances separate. Each month, he would pay the bills, calculate my half, and I would transfer the funds to his account form mine. As for discretionary expenses like collective trips, dinners out, etc. we usually took turns paying. We didn't track who paid last or how much it was for. We just ballparked it. One of us might also offer to pay if we wanted to do something but the other was short on cash and/or wasn't 100% on board.

So what worked and what didn't?

▲ We had the freedom to manage our own accounts. As long as we paid our half of collective bills, the rest was our own to do what we wished with.

▲ Should something happen to either one of us or we parted ways, separate accounts are much easier to deal with since legally we weren't married, didn't have a child together, nor large debt such as mortgage.

▼ Even though our accounts were separate, our finances did affect each other. There were times when one wanted to do something (go out for dinner, a trip, etc.) and the other was short on cash so it was either pay for both or not at all.

▼ Splitting bills and calculating who owes want was a hassle. To avoid that, sometimes we would take turns paying. But that meant twice the amount up front. Simple enough for a quick fast-food meal but bigger expenditures did put a good dent in one's account.

After we got engaged, we decided to merge our finances because with marriage and a house in the future, our collective expenses were going to increase and our assets would be combined in the eyes of the law anyway. But the question should we do it?

We considered 3 options:

1) Pool everything
2) Combine a set amount per paycheck
3) Combine a set percentage per paycheck

We ended up going with option 3. Here's the how and why:

HOW:Our company allows us to deposit pay into two bank accounts. We each put 80% into a joint bank account for which we each have a debit card for. We put 20% into our own accounts as "spending money". Anything that is a collective or neccessary expense is jointly paid. Discretionary expenses come from our own accounts unless the other person explicitly says it's okay to debit the joint.

WHY:We didn't go with option 1 as we wanted to still keep some financial independence. We didn't go with option 2 because we felt proportionate was more equitable. Right now we earn about the same but what if in the future one of us earns twice the other? The same dollar amount was mean a much bigger piece of one person's pie so to speak. As for why we did 80/20? We did a rough calculation of how much we needed for joint expenses and what would be a sufficient amount for discretionary spending.

So what works and what doesn't?

▲ It's so much easier to pay from a joint account than transferring money back and forth or split bills.

▲ It's also much easier to track payments for bills and other past expenditures.

▲ We can pay for larger expenses without crippling one person's account.

▲ We get the ease of a joint account while still maintaining some of our financial independence.

▲ There's no pressure on one person to pay up or forgo something or pressure on the other to do something they even when they're feeling crunched some the cost is beared by both.

▼ Only our bank account is joined so some purchases that have to go on credit card are on one person's credit card. Also, we don't get to take advantage of cash backs or points because the vast majority of expenses are via debit (cash).

We've talked about increasing our joint amount now that our collective expenses are higher but we may wait until fall, after our big trip and things have quieted down financially.

I just consolidated two credit cards with the same provider and turned it into a cashback card instead. We may make that one a joint card so we can make more collective purchases via credit card and enjoy the card benefits cash wouldn't give us.

I'm not going to say everything is perfect and we never have arguments over money. But this was definitely the right choice for us and works much better than our previous arrangement.

So readers...what about your experiences when it comes to money and your significant other? Any hardships or success stories? What are your thoughts about combining finances or keeping them separate? I'd love to hear all your thoughts on this (often touchy) subject.

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