When you’re in a long-term relationship it can be tricky situation when you decide to combine your finances with your partner.
Combining your finances makes sense for many reasons, although not everyone chooses to take this path. If you’re preparing to tie the knot, you might wonder which option is best for you.
There are many benefits to combining your finances including it may give women greater security as Australia’s Gender Pay Gap Statistics shows women earn 13.8% less than men; it keeps things simple when managing household bills; allows for better flexibility; and together you can work towards shared goals. Combining your finances will enable complete transparency over the household finances. It is also simple to manage, as you don’t need to worry about splitting bills. Having a summary of your whole financial position can also help with financial planning and money management.
Although combining your finances isn’t for everyone, there are some downsides including making debt a bigger issue and this can cause arguments – for example one spouse may prefer to pay down the mortgage while the other thinks it’s wise to invest instead. It can cause either of the parties to feel constrained. It’s natural to want to spend money however you see fit, but once you’ve combined your finances, you can feel you cannot spend money on those personal items as you previously did.
Combining your finances is a big step in every relationship and shouldn’t be tackled all at once.
Have a discussion with your partner
The first step is to sit down and discuss your finances with your partner, it’s important to be honest, open, and transparent about your financial situation and expectations upfront. Money can become a source of tension in relationships, often due to mismatched values, poor financial habits, or financial infidelity.
Before you decide how you will combine your finances – discuss your current financial situation, including debts and bad spending habits. Talk through your goals and vision for future. Putting a financial plan in place will help you reach your individual and shared goals. And work out which approach to sharing money will work best for both of you, so that you can set up your accounts to manage household expenses.
Decide how you merge the finances
There are several methods that will enable you to share finances as a couple – including proportional method, equal shares method and combining all method.
The Proportional method involves each couple contributing into the household bills that is proportional to their individual income.
Example of Proportional method: Harry and Lisa
Harry earns $2,000 per month, which is 33% of the total household income; Lisa earns $4,000 per month, or 66% of the total household income.
The couple spends $3,000 per month on their bills, including their mortgage, utilities, and groceries, with one-twelfth of their annual expenses going toward property taxes.
Harry pays 33% of their $3,000 monthly bills which equals $1,000; Lisa pays 66% of their monthly bill, which is $2,000.
The advantage of proportional method is neither partner feels the pressure to keep up with or budget down to the earnings of their partner.
The disadvantage of the proportional method is the high earner can start to feel resentful or they might start to feel like they’re being punished for earning more.
Equal Shares Method
The Equal method is combining equal funds regardless of how much each earns. In this method, expenses are split down the middle, regardless of who earns what. You keep the rest of your income to spend how you like. That means you’re also responsible for paying down debts you’ve stacked up on your own – your finances are essentially separate.
Example of Equal Shares Method: John and Deb
Deb earns $3,500 a month. John earns $4,000 a month.
Their household bills come to $4,000 per month. They each chip in $2,000 and keep the remainder of their money in separate accounts.
The advantages of the equal share method are the high earner doesn’t feel punished for earning more and the lower earner doesn’t feel endowed. This is a great option for those who value independence especially in the early stages of the relationship, neither feels they are contributing too much or being taken advantage.
The disadvantages of the equal share method are the relationship could become strained if Lisa lives more extravagantly than Harry and some couples feel this method is more like roommates’ agreement than a couple sharing finances.
Combining all method
The last method is combining all finances together. Couples who use this method use joint accounts, credit cards, shared loans and so on. Each partners income is deposited into the joint account and all the household and personal expenses come out of the joint account.
Example of the Combing all method: Devon and Hilary
Devon earns $3,700 a month; Hilary earns $2,600. Both incomes get direct deposited into a joint checking account, which the couple uses to pay all their bills.
The couple also carries joint credit or debit cards, which they use to pay for all their purchases, regardless of whether it’s a household purchase (like a microwave) or an individual purchase (Hilary spends $50 a month on vintage records, while Devon likes to collect baseball cards.)
The advantages of the combining all finances method is the couple feels more untied as unit – it’s not you and me, and if the one person’s income rises and the others falls, they’ll will balance each other out. It is also easier to keep track of your finances being they are all together in the once place.
The disadvantages of the combining all finances method is that the higher earner can feel resentment towards the lower earner for spending his/her earnings and if one tends to spend more than the other there could be an imbalance of spending.
There is no right or wrong way to combining your finances with your partner. Take your time when deciding which method is best for your both – weighing up the advantages and disadvantages of each method, and together decide which fits you both.
Regardless of which method you decide on, the most important thing to remember is to talk regularly about finances and review and alter your approach as your situation changes. It’s vital to set up monthly checks, especially during the early stages of combining your finances to see how your both going and make any necessary adjustments.
For more information on reaching financial goals as a couple or individuals, get in contact with an Oracle financial adviser. They will devise a strategy to manage your money over the long term.