Finances for Couples: to Combine or Keep Separate?

Presented by Lucas Group Financial Advisors |

We recently received a question, “What are the pros and cons of separate vs shared finances in a relationship?” As with all things financial, there is no single answer that works for everyone; however, for the long-term health of a relationship, finances are an important area to navigate. While it is difficult to determine exactly how many divorces are caused by financial arguments, it is clear that financial stress is among the leading reasons of a break-up. In particular, spending habits that vary greatly between couples and high consumer debt (credit cards) can cause financial strain.

So is it better to combine your finances, or keep them separate? The reality is that for most couples, financial successes or burdens will be shared to a certain degree, even if they are kept in separate accounts. Especially as it applies to long-term goals, it is important for a couple to thoroughly discuss their finances and work toward a shared vision, even if they choose to keep their accounts separate.

Example: Mary is saving a great deal into her retirement plan. Her goal is to sell the home and move to Florida at age 60. However, her husband John does not save much and will need to remain at his job until age 70 in order to receive maximum Social Security benefits. These financial plans are not compatible; Mary may retire early, but be forced to delay the move to Florida until John retires and they can sell the home. Alternatively, Mary may decide to work until age 65, allowing her savings to continue growing so they can retire together and move to Florida on her savings. However, this may cause some resentment if John’s lack of savings causes Mary to work longer or delay her own goals.

Long-term plans aside, there are two primary systems that couples may use on a monthly basis.

Finances are kept separate – each person maintains their own bank accounts, credit cards, and debt

Pros

Cons

Individuals maintain some privacy over spending. They aren’t subject to scrutiny over their spending habits, and can keep surprises for the other hidden.

Individuals may not know about any financial difficulties the other is having. Keeping separate finances makes it easier to hide problems such as high credit card debt or a gambling addiction.

One person’s income is not subject to the other person’s spending. Each person gets to keep and spend what they earn.

Couples may not be saving toward the same goals. Additionally, in the event of a divorce, one spouse may be in for a nasty surprise – keeping finances separate does not necessarily protect their accounts in divorce (discussed later).

One person’s poor credit score does not affect the other. By applying for debt separately, the person with the higher credit score may receive better loan terms than if they had applied jointly.

If either person experiences a period of unemployment or low earnings for any reason, this may cause additional strain on the finances of the partner, who may not have known the extent of the other's expenses or be able to cover the shortfall. 

Especially regarding debt, keeping separate accounts can protect the other person. For instance, many student loans should remain in an individual's name instead of joint, as there is often a provision that the loan is forgiven if the student borrower dies.

Couples must determine how to divide expenses, which can be especially difficult if there is a wide gap in earnings (see below).

 

When keeping accounts separate, what is the most fair way to divide shared bills, especially if one person earns significantly more than the other? This can be a disadvantage of separate finances when there is a wide gap in earnings. If one person makes $80,000 and the other makes $40,000, should bills be split 50/50 between them? This could leave the higher earner with additional funds for savings, eating out, entertainment, and other luxuries that the lower earner can’t afford, as their share of the bills represents a larger portion of their income. This could cause considerable tension, and stress on the lower-earner if they are struggling to meet their obligations. Alternatively, the bills could be split as a proportion of overall income; in this example, the higher earner would pay 2/3 of the bills, and the lower earner would pay 1/3. While this would mean they are contributing unequal dollar amounts, they would be contributing an equal proportion of their income, and hopefully both would have additional funds left over for other desired spending.

 

Finances are combined – income and expenses flow through a single bank account

Pros

Cons

Largely eliminates argument over how to split the bills, as all income and expenses are paid from a single account. This may make it easier in the event of an earnings gap for one person - whether due to caring for a child or sick family member, losing a job, or starting a business.

One person may feel as if they are supporting the other’s spending habits (and the spending spouse has full access to all account balances). A monthly budget should be agreed on ahead of time, and large purchases should be discussed prior to purchase.

Both spouses have access to view the accounts and statements. This may allow them to identify any problems and solve them before they get too far (spending or gambling problems, for example).

No privacy for individual spending. This can be fixed by keeping separate credit cards even with a joint bank account (ideally, with a monthly spending limit) or use of a monthly cash allowance.

The couple can decide together where to best save their money. Is it better to pay off one spouse’s debt first, because it’s charging a higher interest rate? Family finances can be viewed and planned more easily as a whole unit.

If applying for loans together (auto, mortgage), one person’s low credit score could result in higher interest rates or worse loan terms. It may be beneficial for the spouse with the higher credit score to apply for loans alone, even if paid out of shared accounts.

 

Whether accounts are combined or separate, if one person spends significantly more or racks up credit card debt, this could create a large source of tension. You can read more on that topic in another blog post, “When a Spender and a Saver Fall in Love.”

Of course, there are several hybrid options, such as contributing a certain amount monthly to a joint account (out of which shared bills are paid) but still maintaining separate accounts as well. This can be especially useful for larger goals and expenses, such as when the house needs a new roof or you choose to purchase new furniture. It is also important to consider the benefits each person receives through work, and take advantage where possible even if keeping finances separate. If one person has better insurance offerings, it may be advantageous for the couple/family to go on one plan instead of two.

Finally, it should be noted that keeping separate financial accounts does NOT guarantee that each ex-spouse will keep their own accounts in a divorce. Without a prenuptial agreement in place, many courts will view all savings/debts accrued throughout the marriage and try to arrive at an equitable (not necessarily equal) division. Even if a couple has mutually decided to keep money separate, the divorce process can become complicated and one ex-spouse may back out of any verbal agreements that were made. If you are concerned about protecting your assets prior to marriage, you should discuss your options with an attorney - they may advise a prenuptial agreement, or make other suggestions to keep your existing assets separate from anything accrued during the marriage. If you are married and concerned about a divorce and what that means for your finances, you should contact a knowledgeable financial advisor (such as a Certified Divorce Financial Analyst, as we have in our office) or an attorney to determine your options.

At the end of the day, every relationship is unique and couples need to develop a financial arrangement that works for them. However, the time to discuss these issues is before cohabitating or merging finances, not after. Discuss your current finances and your long-term goals, and negotiate an agreement that feels the most fair to both people. A financial advisor can also help in discussions of long-term goals, and in determining how both individuals can contribute.

 

The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security or investment advice. This content is developed from sources believed to be providing accurate information, however, the accuracy of this information cannot be guaranteed. In all cases, you should consult with a financial or legal professional familiar with your particular situation for guidance concerning specific matters before making any decisions.