Creating Financial Harmony Newlyweds | Money Mistakes

One of the most beneficial conversations you can have with your significant other is about money. As a divorce financial professional, I have seen numerous couples who ended their marriages for a plethora of reasons – one of the most common being money and the problems that arise from the lack of communication about their money. If they had a conversation early on in their relationship setting the foundation for open and honest communication about their finances, this aspect of marital strife may have been avoided.

The best way to get started is to ask yourself if you are willing to have an open and honest discussion with your partner about money. This would include discussions about assets, student loans and other debt, credit history, income, spending and saving habits, and financial goals. For example, if you make significantly more money than your partner, you may worry that they are just seeking a higher lifestyle especially if they are more of a spender. If you and your significant other are open and honest about your current and ongoing financial status, you will not only build a strong foundation going forward, but you will also build trust.

Find a comfortable time to sit down and have relaxed conversation – do not wait until a financial problem arises. Discuss your philosophy about each of the financial areas. Share your opinions, goals, and past experiences with money. Discuss how your parents managed their money during your upbringing and what money philosophies they instilled in you. Begin a dialogue about how you handled money in a prior relationship and what the successes and failures were. The most important thing to remember is that your relationship is the number one priority. You both need to be willing to negotiate and compromise.

If you or your partner are uncomfortable talking about your finances on your own or your goals are not in alignment, you could consider seeking out a professional to help you both assess your financial issues. They could be a financial planner, therapist, or marriage counselor.

After you have established an open dialogue you should discuss and write down your financial goals as a couple. This could include topics such as the following:

buying a house
reducing debt
children’s expenses, including childcare
mechanics of money management
investment choices
discretionary spending
aspirational goals

These goals will change as your life together progresses. It is important to revisit these goals every few years.

Handling Finances Before Marriage

There are several dos and don’ts of handling finances before you and your significant other are married. Marriage can provide legal and financial protection for both you and your significant other. Prior to marriage you should keep your individual assets and debts in your own name. This includes real estate, cars, bank and investment accounts, mortgages, car loans, personal loans, etc. By combining or retitling assets, you create complex and potential legal matters if your relationship ends. You should not co-sign a loan for your significant other before marriage as you could become liable if your partner defaults and it could impact your credit history. On the other hand, you should share common expenses. If you live together that would include rent, utilities, and other joint living expenses either 50/50 or in proportion to income.

Structuring Accounts: Joint, Separate, or Combination

Once you are married, combining your assets and liabilities is very common. You and your spouse should discuss what feels comfortable. Premarital assets may need to be considered. There are three options when combining bank accounts and/or investment accounts. You can set up a joint account, you can maintain separate bank accounts, or you could have some combination of the two. Having a combination of separate and joint bank accounts is often the best option for most couples. This method lets you each track your own private expenses while also providing for the ease of tracking within your joint accounts and alleviating the income disparity issue while paying the bills, thus, creating fewer money squabbles.

How to Pay Expenses

One method of paying expenses is to have separate bank accounts and credit cards. Under this method of splitting expenses, one person typically pays up front, and their significant other reimburses them, or each person pays different bills that are reconciled monthly to achieve an equal split.

Another method of paying expenses is to do it in proportion to income. This method is exactly how it sounds. For example, if John makes $200,000 a year and Mary makes $50,000 a year and their monthly mortgage payment is $2,000, John would pay $1,500 and Mary would pay $500.

The third method, the free-for-all, is not recommended. In this situation one person will pay the large bill, such as the mortgage, and the other person will end up paying for everything else. In this situation, the person paying for all the other expenses could end up paying more than their partner. Again, if both partners are okay with doing this, this arrangement could work, however, a lot of times this could be a potential spot of resentment towards the partner paying less.

Should the person who makes significantly more than the other pay a larger percentage of the monthly expenses? This is a decision you need to make as a couple. If you and your partner lead a modest lifestyle and it is affordable to pay joint expenses equally, the separate but equal approach may be fine. However, if the higher wage earner has more expensive tastes, takes extravagant vacations, buys a large home, and dines out frequently, then it may be appropriate to pay in proportion to income.

The Do’s and Don’ts of Merging Finances

Once you are married there are numerous dos and don’ts of merging finances. One of the most important things you and your spouse can do is to track your spending and commit to a joint spending and savings plan. Monarch, Simplifi, You Need a Budget, and Zeta are fantastic apps to use to track your spending and establish a budget. Both of you should come up with spending and savings guidelines and goals and then allow your partner to manage their own personal spending. This will help minimize money arguments. Another do of merging finances is to designate a bill payer. One of you is most likely better at day-to-day money management. This person should be the designated bill payer. However, the other partner needs to be involved so they know what needs to be done. You also can share financial responsibilities if you are both good at day-to-day money management. It is important to clarify who is responsible for making the payments, so no bill goes unpaid. For instance, you could be the one responsible for making the mortgage payment while your partner could be the one responsible for making all utility payments. The third do is that each of you should have at least one credit card in your own name to maintain your own separate credit history.

Money Mistakes to Avoid and Other Tips

There are countless money mistakes you and your significant other should strive to avoid. The most important ones are as follows:

not setting mutual financial goals
not making time to talk about finances
hiding money
keeping debt a secret
being in the dark about your significant others finances
letting emotions drive your financial discussions
rushing into a joint account
trying to keep your finances 100% separate
not establishing spending rules
not planning for retirement
thinking you can change your significant other’s bad money habits.

It is important that you and your partner build an emergency fund. As a general rule, this should be comprised of three to six months of your living expenses. Your emergency fund should be in an account where you can easily access it, such as in a savings, checking, or money market account.

Additionally, it is essential to plan for the worst. Around the time of your marriage, it is a good idea to capture your pre-marital assets, i.e., the balances of your accounts. It could be advisable to discuss having a prenup before your marriage. Once you are married it is important to review life insurance and disability insurance needs as well as beneficiary designations. You should also meet with an estate planning attorney to complete your wills, health care proxies, and financial power of attorneys. It is also a good idea to have a financial planner look over your estate planning documents to make sure everything is set up in the most efficient way possible relating to taxes, titles, transfers, etc. Since you will be filing your tax returns as married it is important to review your withholdings and tax considerations.

The most important thing to remember is to be open, neutral and honest with your significant other about money. If you can do this, it will build trust and you will learn from one another. This will build an even more solid foundation for your relationship and set you up for financial success going forward!

For more information, please contact Abbie Niehoff via our online contact form.

Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.