Combining your finances with another individual is a delicate, significant step to take that can strengthen or ruin any relationship. A recent survey in the US revealed that around 70 percent of couples argue about finances on a regular basis. This surpasses disagreements about sex, dietary choices, snoring, spending time together, and household chores. Couples who took part in the poll quoted household budgeting, frivolous spending, and credit card debt as major sources of friction of joint finances. Another poll confirmed that couples who had debt argued much more about money than those without debt.
Should couples manage finances jointly or separately?
While some couples choose to combine all income and expenses, including the household budget, credit cards, and retirement funds, others prefer to jointly accept responsibility for major expenses such as rent, car instalments, and groceries, while leaving certain things such as clothing and other personal expenses up to each individual.
Regardless of whether they are married or just living together, there is no system that works for all couples. There are, however, certain universal principles that could make or break the arrangements or the relationship.
Considerations when jointly managing finances
In the first place, whatever system you decide on should be fair to both parties. One person in the relationship should not have the right to spend more than the other. Reasons for spending imbalances should be mutually agreed upon when managing joint finances.
Whatever system you decide on should also be transparent. Both parties must know exactly where the money goes to. When it comes to money, secrecy can quickly build resentment.
Both parties should also have an equal say in deciding how the money is spent. No single party’s needs should be explicitly or implicitly be regarded as more important than the other one’s. If not handled correctly, this is the part of your joint financial management that can cause friction.
The budget for non-discretionary expenses
One of the most important principles is that they should sit together and draw up a monthly expenses budget. You don’t have to be a financial guru to do this. If you know your way around spreadsheets, that’s a great help. If not, just start with a pen and an empty sheet of paper.
There should be two columns: one for income and the other one for these ‘compulsory’ expenses. If both of you have stable incomes it makes things easier. As you won’t have to draw up a new budget every month.
When it comes to expenses, simply list those things that you both agree should be paid every month. Examples include rent, a mortgage, water and electricity, car and credit card instalments, insurance premiums, etc.
The medium-term & long-term budgets
Once you have budgeted for all the regular monthly expenses, sit down and talk about your medium- and long-term finances. Decide how much you want to set aside for your combined retirement fund every month. Since you will probably be spending your annual vacations together, you also have to set a certain amount every month to ensure there will be enough money to cover the cost.
Also, consider your other medium- and long-term goals such as buying new furniture, replacing the car or cars, renovating or upgrading your home, and paying for emergencies such as your cat getting sick or your car breaking down.
By its very nature, this kind of planning comes with uncertainty. You don’t know if or when the car will break down, and if it happens how much it will cost to fix. You also don’t know what a new TV will cost three years from now.
A rule of thumb is that the older your car, TV, refrigerator gets, the more you should set aside for potential repair costs. And the closer you get to retirement, the more urgent having a sizeable ‘nest egg’ will become.
You can transfer all the money you are reserving for this type of expense into a single savings account. Just make sure to keep track of what the money is intended for.
The discretionary budget
Discretionary income refers to part of the monthly budget where you have a choice about how it is spent. For example, beer with your friends or cosmetics, a new dress or a new set of golf clubs, or a dinner out for two. Learning to give and take is the one secret here that can save both your finances and your relationship.
Luckily there is a fairly simple solution that works well for most couples. Make provisions for medium- and long-term expenses such as vacations, repair costs, and retirement. Thus, setting aside money for everything that has to be paid. There is no reason why you should try to split every dollar you have left into two separate parts. The process can be made easier if you and your partner share the rest of the money between the two of you. Whatever each one of you earns, simply transfer half of the remaining money into each partner’s account.
The downside is that you might have to open one or two new bank accounts. This obviously involves additional bank charges and other costs. If both of you already had separate accounts before getting together this will be easier and quicker to do.
The upside is that a lot of arguments can be prevented. Doing it this way means it’s up to each of you how you spend your ‘pocket money’. If your partner prefers to splurge it on what to you appears to be useless rubbish, just stay quiet.
Joint finances and managing debt
Before you got together, each of you probably had your own debts. One might have had very little debt, while the other one could have had what appears to be excessive debt that the other partner regards as a sign of poor financial management.
Just accept that there is nothing you can do about your partner’s past spending habits. Just like you welcomed him or her into your life, you now also have to welcome their past debts. Unless you can amicably agree that each partner first pays the installments on his or her past debt before the rest of their income goes into the joint account. But beware, this could cause resentment, which is not a good start to any relationship.
Once you are together, however, you should hammer out a mutually acceptable system to manage debt from there onward. As we already mentioned earlier, debt is a bone of contention in many relationships. It can also become a huge source of stress.
Agreeing to limits
You and your partner should agree on a maximum percentage of your monthly income to go toward repaying debt, excluding mortgage repayments. This is where the DTI (Debt-to-Income) ratio comes in. It measures the percentage that debt repayments form of an individual or a couple’s total income. If, for example, a couple jointly earns $10,000 a month and they are spending $4,000 on debt repayments, their DTI ratio is 40%.
Why is the DTI ratio significant? The highest DTI ratio a borrower is allowed to have to qualify for a mortgage is 43%. However, if you have a DTI ratio of more than 36% you are already going to struggle getting a home loan.
The next factor to take into account is that home loan repayments are typically not allowed to be higher than 30% of your total income. Let’s add this together. If your mortgage repayment takes up 30 percent of your monthly income (i.e. the maximum) and other debt repayments take up 40% or more, that’s 70% of your budget gone before you’ve spent a cent on anything else.
That is why lenders use the DTI as an indication of whether you are able to properly manage your finances or not. And why it’s so important for any couple to pay off their debts as quickly as possible.
Having no debt is not always possible, we know. But spending more than half of your hard-earned money every month on repaying old debt is not sound financial management. The interest on that debt alone might eat up most of your discretionary income (see above). Thus, leaving you with a bitter feeling that there is never enough money to buy the small things that could make a difference to your quality of life.
There isn’t any single method of managing your finances that will work for all couples. The most important aspect is to understand that there are different ways to do it and to customize the one you like most to suit your individual needs. Once you’ve decided on a particular method, don’t be too scared to change it if it doesn’t work well for both of you. The two of you are now a team, and you are free to experiment with different ways to find the perfect compromise between your collective and individual needs. Perhaps sit down once or twice a year and calmly discuss where the system works for you and where you feel it has to be changed.