One thing I am asked time and again is how unmarried couples living together should manage their money and merge accounts. The important thing to remember is, regardless of how much you love the other person, there are still some things you should do to protect yourself and the other person in case of a relationship meltdown.
Guidelines To Merge Accounts
It makes sense to merge gradually. Of the thousands of couples I have worked with over the years, I have never seen anyone do it the exact same way twice, and everyone moves at different speeds. So don’t become too concerned if your experience isn’t comparable to other people you know!
The first three guidelines to merge accounts are:
- Start with sharing joint expenses – I know that’s obvious, right? The easiest thing to tackle as a couple is joint expenses—rent, food, utilities, etc.
- Stick to one or two joint cash accounts – don’t become too concerned about merging property, investments or anything more complicated than your checking accounts. And I advise strongly against purchasing property or acquiring a joint credit card until you’re married or have an official, state-recognized domestic partnership in place.
- Consider a cohabitation agreement – a cohabitation agreement is a guideline that you draw up with your partner to protect both of you at the dissolution of your relationship (which no one wants to think about). Who gets what furniture or media, if you purchased it together? Who has to go find another place to live? How do you split up the money in the joint checking account? Who gets Fido??? You can get more info on a legal website like nolo.com or legalzoom.com
The Basic Money Merging Accounts
When you start living together, create or use four kinds of accounts (which makes 6 accounts total):
- Joint Checking – this is what you use to pay for everything you do together, which is as obvious as paying rent, or as subtle as going out to eat. If it’s an expense you incur as a couple, it should be paid for out of the joint account.
- Individual Checking (One Per Person) – this account is used to pay for whatever you do separately from each other. For one person, it might be paying for workweek lunches out with colleagues. This used to be for my “beauty expenses” when I lived with someone (like I wanted him to know every time I got a pedicure?? Not.). Other people might keep their debt payments and student loans separate. This is where individual preferences start to come in—and, you don’t want to create an electronic nightmare for yourself, changing around bill pays and such, just to align with a guideline. Make it easy on yourself, but have a reason and be conscious about it.
- Joint Savings – this account is used to set aside money for things you want to do together in the future, like take vacations, buy new sporting gear, planning a wedding or honeymoon, etc.
- Individual Savings (One Per Person) – this account is for personal emergencies and expenses that your partner shouldn’t be expected to pay for, like a plane ticket to see your family, car maintenance, dental work, etc. This is where I used to keep money for Christmas and birthday gifts for my loved one.
Four Methods To Split Up Expenses
You have essentially four approaches you can use to divide shared expenses:
- Breadwinner – the breadwinner model is the best when one partner is making little-to-no money—perhaps still attending school, raising your love child, out of work or something else. The person bringing home the paycheck allocates a fixed amount to the different accounts, so there is money available for each kind of expense.
- Even Steven – this is best when both partners are making close to the same amount of money. Quite simply, all expenses are split 50/50, with each person placing their share of joint expenses into the joint accounts as they get paid (and the excess is deposited into their own individual accounts).
- Proportional – this method bases your responsibility for joint expenses on what percentage of income you bring in. Let’s say you bring home $50,000 and your partner $70,000—this means of the total take-home income of $120,000, you are responsible for 42%. Therefore, you should also be responsible for 42% of the joint expenses. In that example, if joint expenses are $5,000 monthly, you would chip in $2,100.
- Quid Pro Quo – some people don’t want or need to be methodical about it. Let’s say a member of the couple owns her own home and she is already making her own mortgage payment . . . to balance that out, instead of chipping in money for the mortgage, the other member of the couple would simply buy groceries, cover eating out and other stuff to balance everything out. Or add a little more to the joint savings for trips and stuff.
Bottom line, how you choose to merge accounts can be as organized and methodical as you would like it to be. And, you might evolve across several of these models as you decide what is right for your relationship.
No matter what method you settle on, it makes sense to track your expenses (with Mint) so that you know what you are spending as a cohabiting couple. This means you might have one Mint account for the household, joint accounts, and separate ones for your individual checking accounts. The most important piece of information is to know what your fixed “couple” expenses are on average, so you can start to make the most of your cash flow from Day One.
Actions This Week
- Are you single? Go find a boyfriend or girlfriend. Just kidding! I wanted to make sure you were still reading this :o) Okay, serious steps . . .
- Review your money merge set up. Does your current process align with one of the methods I mention? Look at opening an account and/or making tweaks to make things run more easily and/or smoothly.
- Think about cohabitation exposure. If you’re not talking marriage, what would be the most catastrophic financial issue of breaking up? Consider looking at cohabitation agreements to protect both of you.
- Review joint expenses. Are you on Mint? Come on now! I know I sound like a broken record (and if you don’t know what a record is, think broken DVD . . . and, I might hate you . . . ). Knowing your “monthly nut” is one of the easiest-to-get and most important pieces of financial information you can have.