In American society in the past, when it was more common for a family to have one income, that income might have covered the family’s expenses that correspond to the expenses that two incomes pay for now. That family, if typical, often consisted of a father, a mother, and two children. The one income was enough for the necessities and, if this was a middle class family, some additional expenses. For a variety of reasons, two-income families are more common now. The question of whether the two incomes represent money for the whole family or whether there should be separation between the funds contributed by each income-earner.
New couples are often faced with this decision. Some will choose to ignore the issue and never communicate about money, which could lead to other problems after time. Those who do confront the situation have a number of options. Although some states make the decision for a couple from a legal standpoint, there is still the issue of how money will be handled practically.
Three options for combining finances
Here are a few of the possible options for managing two (or more) incomes in a family.
1. Keep finances separate. This is an option that works for many households. Having separate bank accounts can be beneficial if everyone is comfortable managing their own finances. One of the most important aspects of communication within a long-term relationship is communicating about and agreeing on long-term goals. When both parties are dedicated to these goals and make financial decisions that help achieve these goals, like getting out of debt and spending less than one earns, there is no harm in having separate savings accounts and investments. That doesn’t mean that there should be secrets, however.
This may be a good option when both incomes are roughly equal; no one person needs to contribute more to keeping the family running than the other. It is possible for families to contribute an equitable amount, though, even if incomes are not roughly equal. For example, if Joe brings in 80% of the family’s income, his contribution to family expenses could account for 80% of the total.
2. Combine all finances. When two incomes are significantly unequal, this solution may make more sense. Also, if only one individual in the family has the skills or the desire to manage finances, combined finances could make money management simpler. There will be fewer checking accounts and investments to manage. Some people argue that this is the best option to help encourage long-term survival of a marriage because it relies on communication, trust, and compromise, but I think all choices require the skills that are beneficial to a relationship.
Combining all finances would also mean that “his” debt prior to the combination would become “our” debt. If only one individual is entering the relationship with debt, consider the idea that two individuals are now a team, and may work to pay off that debt together. Does it matter if that is student loan debt that accumulated in order to qualify for a high-paying job or if it is credit card debt brought on by a shopping compulsion?
3. Combine some finances. This isn’t an all-or-nothing decision. Legally, if the relationship ends and assets are divided, your state may have laws that govern whose assets are whose and whose debts are whose, that’s only a situation during a divorce. Assuming that the marriage lasts forever, you have the option to handle finances however you determine is best for you. There are a few ways a couple can combine part of their finances. They could keep separately owned bank accounts for the bulk of their income and spending but establish a new account for household expenses. Each income-earner in the relationship could contribute an equal amount or an amount representing their percentage of the total income, like above, but the bulk of the income will stay with the individual. The household gains only what is necessary to pay the expenses, and investments and other assets remain separately owned.
Another approach is to combine most of the income, leaving only a little for each partner. This is often preferred because it establishes shared assets while leaving some “play” money behind. When all income is combines, buying presents for one another seems almost like an empty gesture because the money is coming from the household. With small separate accounts set aside for small surprises, even though the money is coming from the same place, it can feel like you’re not robbing from the house or using part of the recipients money to buy the gift. With separate accounts, you can make that purchase at Jared’s or B&H Photo and Video without the other wondering what they should be expecting.
Who owns the house?
When it comes time for a new family to buy a house, if they choose to do so, will both parties be splitting the down payment and mortgage payments equally? Whose name will be on the title? There could be a situation in which one individual earns more than the other, but both parties want equal ownership. This can be a tricky situation, and it’s something to discuss early on in the house hunting process, before you even begin to look at houses.
When is the right time?
There is a risk in combining your finances too early. If you don’t know whether you will be spending the rest of your life with your current partner, it’s a safer decision not to combine your bank accounts and investments. That goes for adding authorized users to credit cards and co-signing loans, as well. The best time to combine finances is after marriage, though engagement can be a good time to get the process started.
Each relationship has its own dynamics, and a decision that works for one couple may not work for another. For those who do wish to combine finances, here are some tips for combining money successfully in a relationship. Do you combine your finances with your spouse or partner?
Updated January 13, 2011 and originally published January 12, 2011.