Yesterday, I received a question from a reader, Lindsey. I’m not much of a fan of giving advice; there are professionals out there whose job is to provide sound financial advice. All I can offer is my opinion. Here is Lindsey’s question.
What should you do if you and your partner decide to combine finances (checking accounts, credit cards, leases, etc.), but you, in the past, have had very different personal finance personalities? I meticulously keep track of all my expenditures and income in a budget spreadsheet, I save all my receipts to check against my statements, at any given moment I can probably tell you how much money is in my different accounts and how much money I have left to spend in a certain area each month (or for the year for more irregular expenditures). I have an emergency savings fund, a Roth IRA, and a 401(k) through my employer. He basically lives paycheck to paycheck, has no savings, does not keep track of where his money is going, and has very little credit (which can be worse than bad credit!).
What do you recommend? Is there a way to responsibly consolidate, or perhaps a happy medium?
First of all, I don’t think it has to be a problem for two people in a committed relationship to have two opposing personalities when it comes to money management. What’s really important is the goal. If two people agree on some basic principles, there is room for differences in habits. In a partnership, there are ways each individual keeps the other in check and offers compromises.
In fact, when it comes to money management, a relationship in which one is meticulous about record keeping and the other has differing interests can be just as strong as a relationship in which both individuals think exactly alike; in fact, the varied relationship can prove to be more interesting. You’ve obviously decided that this is the right relationship for you despite some disagreements about money, but finances can still be successfully combined.
Don’t go into the fusing of your finances with the intent on changing his philosophy. It’s true that he will have to be willing to compromise on some issues, but most likely, you will be leading the charge. In compromising, you may also have to be willing to loosen your grip, but just a little bit.
He’s living paycheck to paycheck, and you’re not. In his situation, will he be contributing to your combined accounts? As you merge your finances, if you also combine your bills, you might find that the two of you are able to contribute more evenly to savings or bill payments. However, you should consider contributing only as your means allow rather than aiming for equity. For a simplified example, rather than both of you contributing $500 to the mortgage each month, contribute 10% of your respective salaries towards that bill.
You partner may find that the ease on his financial obligations will allow him to contribute to savings and a 401(k). From what you mentioned about his philosophy about money, you may have to inspire him to find an interest in long-term saving.
His bad credit is another issue. You may find it difficult to purchase a house together, if that is one of your plans for the future. You will have to decide, assuming this is an option for you, if you want to save money by keeping a mortgage solely in your name. The other option is to share ownership but possibly qualify only for a higher-interest mortgage due to this credit. You’ll have to run the numbers — as the financially astute half of the couple, this will be your job — and once you’ve run the numbers, you’ll have to decide whether the decision should be based solely on those numbers or if there are other variables that come into play.
The broad answer is that consolidating your finances can be accomplished, but varying philosophies and major differences in income can make the transition difficult. The two of you have already decided to combine finances, so at least you are on the same page in that respect. Whether to combine your finances or not is not the issue; you are past that point. Here are some thoughts.
What are your goals? Are you looking towards retirement with each other? If so, then saving for retirement must be a priority for both of you. Do you plan on having children? The two of you may not be able to contribute equally towards these goals. Your investment actions, including asset allocation and risk tolerance, should support your goals.
Which accounts should be combined? Any accounts you pay bills from can be combined, with each contributing the amount or percentage of their income that you decide is fair together. Any savings accounts for future couple-related goals, like purchasing a house, can be combined. Do you want to keep separate accounts for some fun money? Some couples do this and use their fun money to “surprise” the other with gifts or spend on singular indulgences.
Who will manage the money? This seems pretty obvious in your case, as you are the one with the interest and the skill in money management. I’ve heard that it’s best when only one individual in the couple tends to the details, so this is one aspect where your differing philosophies may work in your favor. The money manager should keep the other periodically (and briefly) informed of the financial state of the union. Even with one money manager, major financial decisions should be discussed together.
Be prepared for sacrifices and compromises. That probably goes without saying, as any relationship requires this. Money tends to amplify the issue. How will you handle disagreements?
What are your obligations? Mortgages or rent, phone bills, cable, and insurance are only the start. Will you be expected to take care of an aging relative? Does your partner have outstanding student loan debt, or will you be supporting him through medical school?
Personally, the most combining I’ve done is a combined savings account with my girlfriend that hardly receives contributions and is used to pay for vacations or other experiences we share. For example, when we sold our old college textbooks on Amazon.com, all the proceeds went to this joint account. We used several hundred dollars from the account to pay for our recent vacation to Boston. This is the limit of my personal experience.
Readers: do you have any suggestions for Lindsey? She and her partner have already decided to combine their finances. How can they do so with the difference in situations and philosophies?