Tuesday, 25 November 2014

How to combine finances with your partner...a transitioned approach

A few months ago I asked whether there was a right way to combine finances with your partner.  I received some great tips both from the comments on the website and from some very detailed emails that people sent me.

What I realised was that everyone's situation was different and it completely depended on the couple involved.  In my original post I outlined some of the ways that couples combined their finances.  In this post I will talk about transitioning to such an arrangement - i.e. how do you combine finances with your partner smoothly.

How to combine finances with your partner in a smooth and trouble free manner

Some people are completely comfortable joining their finances together immediately.  I talked to plenty of people who didn't bother thinking about it too much - they just did it and worked it out along the way.  However largely these people seemed to either
  • Be broke (or not have a lot) when they combined finances - combining nothing is quite easy to do!
  • Regret not thinking about it more at the start - they were 'young and thought nothing could go wrong'
If you are thinking about combining finances when you're a bit older and if you're the type of person that thinks about things far too much (like I do) then mashing together two peoples financial lives straight away doesn't seem like the best idea.

Transitioning to joint finances has many advantages

There are several advantages of transitioning to joint finances instead of setting up one bank account and putting everything you have in there straight away.  These include:
  1. Being able to see how your partner deals with money
    • You will probably have a feel for this well before it comes to it however when you are actually sharing finances you will learn far more about how your partner thinks about and deals with money
    • For example - I never thought my fiancée was bad with money however she never really seemed to save a lot and didn't have any sort of nest egg.  What I discovered when we started saving together was that as long as she had a goal and knew how much she had to save each pay check then she would save like a fiend!  It's not the way I operate with money but it gave me far more comfort in combining finances
  2. Allows two people who come to a relationship with vastly different financial situations to have a 'mine', 'yours' and 'ours' bucket
    • I have no doubt that eventually everything is going to fall into the 'ours' bucket...especially when I get married
    • However in the interim I didn't feel comfortable lumping everything together straight away.  Perhaps I'm just a cautious person but I did prefer a slower integration
  3. You don't feel 'trapped' too early
    • A lot of people (including myself) valued the sense of freedom that came with being single.  This didn't mean that I don't want to be in a relationship...but if I have been saving for my sports car for a few years I don't want to have to have to run that by someone else (I saved for this!)
    • Eventually your finances will probably be completely shared and then something frivolous like a sports car becomes a joint decision but early on it should still be yours and transitioning to combined finances helps with this!
  4. Avoids some potential tax issues
    • If you already have a share portfolio or other assets be careful about transferring title (even when you do get married)
    • Often transferring title (even to a trust if you decide to set one up) will result in a capital gains event and will result in you having to pay tax even when you don't plan on selling the shares

A slow and progressive transitioning to combined finances is both natural...and it works

I found that slowly moving to more integrated finances is the best way to combine finances.  Below is an example of how you can slowly move to integrated finances:
  1. Set up a joint account and pay shared bills out of that account if you live together  
    • Work out roughly how much you need to spend each month in joint expenses and then each of you transfer an assigned amount into this account (it does not necessarily have to be half and half but it should be shared)
    • Continue to pay your wage etc. into your own account...the point of this is to combine finances slowly
  2. Set up a joint savings account for a big goal
    • The first time my fiancée and I did this was to save for our South American holiday - we set up an account and contributed cash to it and spent out of it on the holiday as we required
    • We are now doing this for bigger purchases - we are saving for our wedding and after that it will be for a house
    • The joint savings account is not one where your pay goes into.  Transactions accounts are generally free - so it costs you nothing to keep your pay in one account and your joint savings in another
  3. Start to purchase assets together
    • This is where it starts to get serious...but don't forget by this point you have probably already been in this transition process for a fair while
    • If you have been saving for a house you will probably purchase the house together and go into debt together
    • This is a massive step but by this point you are probably aware of what your partner is like with finances and hopefully you have worked out a system that works for you
  4. Start to transition your assets into joint names
    • If you have got to this point the chances are that you have been together for a long time and legally your partner probably already has a claim over your assets
    • Why would you transition assets into joint names?  Most of the time it is for tax reasons.  For example my tax rate is much higher than my partners and so it would make sense for any shares that we owned to be in her name
    • Any new shares I bought at this point would probably be in our combined names or her name alone.  As mentioned above I wouldn't transfer shares early because that would create tax issues but if this is done gradually as your portfolio turns over then it can be very tax effective
  5. You're so entangled at this point...it's probably best to do everything together
    • At this point in my guide you have combined spending accounts, savings accounts, combined assets and combined debts and even your old assets have been transferred into shared accounts...you're in deep friend!
    • Whether you choose to go the whole hog and just pay your wage into the same account as your partner and have everything in joint names is up to you and your circumstances.  Different things work for different people
The above example is just one way you can transition from being a single, financial independent person to being part of a financially co-dependent couple.  You can do this as quickly or as slowly as you feel comfortable doing.  I'm probably going to do this quite slowly and over a number of years.  At the moment I have done steps 1 and 2 but 3, 4 and 5 are a reasonable way off.

Many thanks to all those who gave me suggestions on how to navigate this path (especially those who took the time to share their own stories).  If you want to share how you combined finances with your partner and how it worked out I'd love to hear about it.

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  1. Cool post 90M, I like it how you've broken down the details here. Would be interested to hear how the theory translates to in practice.

    I'd say initially I would want to keep the finances separate and then gradually start to move them in together but always have the opportunity to have a % separate.. What are your thoughts on the importance of having similar financial goals for the sustainability of the relationship?

    1. Hi Jef! It's been a while!

      I agree completely with what you would want to do. It's pretty much exactly what we've done. We're still remarkably separate however slowly our financial lives are getting more intertwined.

      For a sustainable relationship I think you need the ability to talk about money and you need to have the same approach to money and spending. However I don't think you need to have the same financial goals.

      For example my fiancée is not at all concerned with building wealth. However she is happy for me to make that the focus of what I do as long as we as a couple are achieving the goals she wants to achieve as well. In that way she is more than happy to save a ton of her wage so that we can travel and buy a house etc.

      I think a big thing is the persons mentality when it comes to money. I think it would drive me insane as a saver if I was with someone who (in my opinion) wasted money.

      Those are just my thoughts - what do you think?