I officially got married over the weekend. While I’ve been excited for this next chapter of my life for a while now, I wasn’t as sure on how my wife and I would approach our finances. After all, how do you get two individuals who’ve managed their own money for so long to bring their financial worlds together?
I’ve heard many different solutions to this problem. Some say that you should pool everything together into a joint account while others insist that you keep your money separate. Which is better?
Honestly, I’m not sure. I’d seen couples thrive using both approaches. But, what if there were a better way? A way that encourages collaboration while also preserving each person’s financial independence?
Well, I believe there is. After many discussions with my then fiancée at the beginning of the year, we created a system that meets both of these seemingly competing goals. Best of all, it made our relationship even stronger as we tried it out over the last six months (before we were married). Let’s look at how it works.
The Separate + Joint Method
Before merging your finances, make sure that your assets prior to the marriage are under your control. As much as I want to create a collaborative financial environment, I believe it is also crucial that each partner have their own money that is theirs and theirs alone. I believe this is especially important for women, who may be unwilling or unable to exit abusive relationships if they don’t have the financial resources to do so.
Once your separate accounts are set up, then you will need to set up a single joint bank account. This account will be the financial hub for your marriage. Here’s how it works:
- All of your income and your partner’s income flows into this joint account.
- That income is used to pay for all shared expenses.
- Any excess left in the account (above a certain threshold) can either be left in the account or distributed equally between you and your partner (to your separate accounts).
In using your joint account in this way, it serves a few important functions. First, it creates a central location that both you and your spouse will have access to. Second, it allows you to easily monitor your household’s financial progress on a monthly basis. If all of your income goes into this account and (almost) all of your expenses come out of it, then it will become quickly apparent whether you are living above (or below) your means.
If you and your spouse are making a good income and staying financially disciplined, you should see that the money in your joint account grows over time. If this happens, you can choose to do one of the following with the excess income:
- Distribute it evenly between you and your spouse
- Acquire shared assets (investments, property, etc.)
- Leave the money in the joint account
While I generally don’t recommend (3) as you won’t generate any return on your money, there are some situations where this is necessary.
There is only one other rule with the joint account—any money you take out of the joint account, your spouse gets to take the same amount out of the joint account as well. So if I withdraw $1,000 to buy myself a fancy electric guitar, my wife gets to take $1,000 out to use as she pleases.
The same rule applies if either of us needs to top off the joint account using our own money. If my wife and I outspend our income for one month, then we would both need to put in half of the necessary shortfall to close the gap. Therefore, if we overspend by $1,000, then we each contribute $500 out of our separate assets to cover our overspending.
Note that these kinds of transactions (where money goes into or out of the joint account to separate accounts) should be rare. Since basically all of your spending is already being pulled out of the joint account (via credit cards payments, recurring debit charges, etc.), the only time your separate account will interact with the joint account is during one of the following:
- Excess withdrawals from you and your partner
- Shortfall deposits from you and your partner
- Non-shared expenses paid for by you or your partner
But what is considered a non-shared expense and how should you and your partner deal with them? Let’s turn to that now.
Dealing with Non-Shared Expenses (and Assets)
Earlier I said that “almost” all of your expenses will come out of your joint account because these are considered shared expenses. But what is a non-shared expense? The answer is: whatever you and your spouse agree on.
For example, if my mother’s car breaks down and I have to send her money for a new one, I would consider that a non-shared expense. Therefore, I would send her money out of my separate assets. However, if I did use funds from the joint account, then I would also ensure that my wife got the same size distribution that she could spend as she saw fit.
You and your spouse can classify non-shared expenses however you want. My wife and I use a dollar limit: anything over a certain amount that is not for us as a couple is considered non-shared.
The goal with non-shared expenses isn’t to nitpick everything you and your partner buy. It’s to come up with an agreed upon philosophy and work on it over time. This method is supposed to be easy to use and reduce any disagreements you and your partner might have about money.
The logic that works for non-shared expenses, works for non-shared assets as well. If my spouse wants to buy a rental property with her own assets, she is free to do so. Of course, I’d hope that we would communicate about such issues, but, ultimately, it’s her money so it’s her decision.
Now that we’ve looked at non-shared expenses/assets, let’s turn to our last item to deal with—shared assets.
Dealing with Shared Assets
When it comes to buying shared assets, like a home, the solution is once again in your joint account. However, instead of just withdrawing money out of the joint account, you may have to contribute money into it.
For example, imagine you and your spouse decide to buy a $500,000 house and need to put 20% down ($100,000). Assuming that your joint account doesn’t have the $100,000 needed, then both you and your partner would need to contribute $50,000 from your separate assets to the joint account to make it happen.
This assumes that you’ve been saving for a few years and taking money out of your joint account into your individual accounts. Otherwise, you wouldn’t have the money to buy the house.
The nice thing about this system is that shared assets are owned 50/50. The money to fund them can come from separate assets (prior to the marriage) or from assets acquired since the marriage began. Like everything else with this system, it’s up to you and your spouse to decide what makes sense.
The Bottom Line
Managing money with a partner can be hard. However, I hope that the Separate + Joint method I’ve outlined above can make it easier for you to manage your marital assets in a fair and transparent way.
The reason I like this system is that it allows you to divide your marital assets over time (if you wish). If there is too much money in the joint account, then you and your partner can take an equal-sized distribution out of it into your separate accounts. These distributions into your separate accounts can now be thought of as separate assets. This allows for collaboration while also maintaining financial independence for you and your spouse.
Lastly, this system works no matter who is working or how much income they are making. Since all the income and expenses are netted out of the joint account, what’s left over is always split evenly. In other words, the Separate + Joint method is a pro-rata system in disguise. If I make 70% of the income, I end up paying for 70% of the expenses. However, we still end up splitting any money that is still in the account after expenses. So, even if my wife stops working, she will continue to get half of the excess joint money throughout our marriage.
This system might feel unfair to the higher earner who contributes more financially, however, marriage is rarely 50/50 in all things. If one partner steps back from paid work for caregiving or other roles, I don’t think they should be punished monetarily as a result.
Ultimately, what matters here isn’t the particulars of the money system you use with your partner, but the conversations you have around it. The foundation of a successful partnership is built on communication. And this is especially true when it comes to your finances.
Of course, you should take my advice with a grain of salt. I’m a newlywed who’s only been using this system for about six months. Nevertheless, I believe that it strengthened my partnership with my wife. But only time will tell.
Until then, thank you for reading!
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This is post 455. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data
