MythTip: Money in Marriage

A lot of people struggle when it comes to merging their finances when they get married. In fact, not many people even think about how complex an issue it can be, and they are taken completely by surprise when they have to face these issues after the honeymoon. In this MythTip, we’ll take a look at some of the financial issues facing couples, and how two individuals can become one financial body.

Setting Goals

It is vital that you sit down and talk with your spouse about what money means to you. If you are like me, then money may represent security and safety. Others like to use money to get the most out of life. Some view money as a burden, others as a necessity. The point is that everyone has a different perspective when it comes to money and how it should be used. If you understand how your spouse views money, then you can learn how to work together with them to establish your finances in a manner that is acceptable to both of you. And if you think it doesn’t matter, then consider this: financial difficulty is the number one reason for divorce in the U.S.

Once you get an idea of how your spouse perceives money, then you both need to sit down and talk about what you would like to get out of life from a financial perspective. These are your financial goals, although you may have never realized that they actually are goals. Maybe you want to own a boat and a trailer, or have a big home. Maybe your spouse wants to retire early and spend their golden years touring the world. If you and your spouse want to achieve your dreams, then you have to both get on the same page, and be committed to do whatever it takes to make it happen. Your success in achieving these goals will be based upon your focus and willingness to sacrifice your lesser desires for the greater goal.

Budget

Now that you and your spouse both know what you want to achieve and how you want to use your money, its time to set up a budget that will enable you to reach your goals. Build a budget such that both you and your spouse can enjoy the lifestyle, while still establishing the savings habits necessary to reach your greater goals. Cut any corners that you may need and that you can bear to cut. When it gets hard, remind yourself of your goals. Put up a picture of the Ferrari you want, write an itinerary for your dream vacation, etc. Remember that you want your dreams more than you want the thing you want to spend your money on in the moment. Visit my post on budgeting for more tips on establishing a budget.

Remember when you budget to bear in mind the needs of your spouse. Many couples prefer to give each spouse a certain “allowance” (for lack of a better term) which they are allowed to spend without having to give account for it to the other. This practice is good, because it allows couples to purchase things they like and want without having to feel guilty about the budget or worry about getting an earful from their spouse. Some people like to allow the monthly allowance for each person to be rolled over from month-to-month. This makes it possible for even medium sized purchases to be achieved through a disciplined savings program on the part of the individual, with no fear of remorse.

How much should each spouse receive? It depends on your budget. These expenses should be among the very very last that you budget for, because they are the least critical. Allocate each spouse an amount that is small enough that it doesn’t interfere with your more important goals, but large enough that it can be effectively saved up for a few months for a “big purchase”. $20-$100 each is usually an effective range. Where you fall in that range depends on your income and how much you want to save.

Be very careful not to fall into the “buying game”. The buying game begins when someone says something to the effect, “You bought that so I get to buy this…” This is a very dangerous mindset, and often leads to spiraling expenses because it gives excuse for poor discipline and money management. In some cases, money can even be used as a relationship weapon.

Joint Accounts?

Many people wonder whether or not they should open joint accounts or not. Unfortunately, there is no clear-cut answer to this question. There are benefits and drawbacks to each approach. Let’s look at them.

Joint Accounts

Benefits

  • Makes keeping track of your finances a much simpler process. This is a huge benefit because tracking money is what many people struggle with.
  • If there is a difference in spending habits between spouses, a joint account will reveal the difference. If you find such a discrepancy, then perhaps you need to talk to your spouse again, and make sure that you both understand the financial plan, and make adjustments if necessary.

Drawbacks

  • It can cause a loss of privacy, and could cause some dispute if one spouse disagrees with the spending habits of the other.

Separate Accounts

Benefits

  • Makes it easier to track the transactions of each individual.

This might be a good choice for people who desire to maintain a degree of privacy in their personal transactions.

Drawbacks

  • Makes it harder to balance the overall budget and track total expenses for the family.
  • If your accounts have fees, maintaining two accounts could cost you more money.
  • The need to keep in touch with each other’s goals and views becomes all the more crucial.

Bear in mind that privacy with separate accounts can only exist with the trust and confidence of your spouse. It can become a strain on the marriage if one spouse feels that the other is not following the financial plan. Notice the use of the word feels, not is. You need to be able to trust each other.

Joint and Separate Accounts

As a third, hybrid, solution there is the option to have both a joint account and separate accounts. One scenario for this would be to use the joint account for any purchases that are required and the separate accounts for personal purchases only.

An example of a hybrid solution would be to give a personal account both spouses, and have one joint account they share. Every month the budget is used to transfer money into the joint account. All bills, reoccuring costs, groceries, fuel, and shared purchases come from the joint account. This accounts for 90% of the money that is spent every month. As per the budget, a set amount is put into the separate accounts to be used at the discretion of the individual. This is done with the understanding that the other spouse has no control how that money is spent; it is their private fund.

Benefits

  • Allows for a separation of required spending from personal spending.
  • Keeps personal purchases private.
  • Budgeted purchases are still in one location for easy balancing.
  • Goals are still shared and concentrated and should come from the joint funds.
  • Separate funds need to be divided equally.

Drawbacks

  • Requires that spouses respect the privacy of the other spouse’s personal purchases.
  • Extra effort required to manage three separate accounts
  • Separate funds need to be divided equally.

Credit Management

Getting joint credit cards is not the same issue as getting joint bank accounts. If you want to add your name to your spouse’s credit card, be aware that doing so will make you equally liable for the card’s repayment, and that the card will impact your credit, for good or ill, just as much as it does theirs. If you want to keep your credit scores separate (which may be wise), then you can simply call the credit card company and give your spouse account privileges. This will enable them to make payments and changes on the account, without tying them up in any credit problems that may arise.

You can use credit cards in lieu of checking/savings accounts when contemplating the issue of joint/separate accounts. For example, joint checking and savings accounts can be established, with each spouse maintaining their own separate credit card which they use for most of their purchases. Each month, the full balance for both credit cards (don’t pay interest!) is paid using the joint account (if you can get rewards points for your credit card purchases, that makes the deal even sweeter). By using such an arrangement, both spouses can maintain separate credit identities and scores, while tracking their individual purchases through the credit cards and the family’s budget through the bank accounts.

Another example of such a system would be to have one credit card for each of the family’s accounts. Each spouse has a credit card (tied to their individual account) that only affects their credit score. For their joint account there is a credit card that is shared; this is used for the bills, purchases, etc. that are required every month and affects both credit scores. This works well since it makes both responsible for making sure all bills are paid and that the budget is met, and since they both worked for it, both should get the credit for it. It also allows for equality in the separate credit accounts since both have the same allotment each month and the same opportunity for credit growth (or failure).

Please Note: If you choose to use one of these approaches (or something similar), be careful that you do not spend money on your credit card that you do not already have in the bank, or you may find yourself drowning in debt before you realize you’re in trouble.

Insurance

When you get married, you will need to adjust your insurance quite quickly. If you can it is better to discuss your insurance needs prior to the wedding. If you have never had insurance before, consult with someone who can explain the fundamentals of selecting a policy to you (ie what is a deductible, co-pay, out-of-pocket limit, collision vs liability coverage, death benefit, etc). The insurance policies you select are a vital part of your financial condition, and poor selection can be very costly, especially in the case of health insurance.

Before you decide which policies to purchase, it may be worthwhile to consider keeping your policies separate. Do not make the mistake of assuming that you must use a family policy just because you are married. Keep an open mind when shopping, and consider all potential alternatives. Also remember that just because you may get a discount at one company for bunching your policies (like having two cars on one insurance policy) doesn’t mean that it is still the best deal. The point is that you never know where the best deal will come from or what you may need to do to get it, so keep an open mind and be sure to explore all possibilities before coming to a decision. Oh, and don’t skimp. Insurance is no fun to pay for, but good coverage can (and probably at some point will) be a financial life-saver.

Posted on 28 Jul 2008