It’s wedding season again, which means couples across the country are committing to a happily ever after together. And while most weddings don't mention finances in the ceremony or vows, thinking about how to combine money is a crucial part of marital success.
According to a survey of divorce professionals, money issues are one of the leading causes of divorce. That doesn’t mean you’re doomed to divorce if you’re not sure how to handle your finances as a couple, but it does mean you need to understand how to talk about money and figure out how to use it together.
Everyone thinks and feels differently about finances, no matter how much you earn. Know that different money personalities and levels of income require unique strategies. Below are a few options to consider with your new spouse.
(And before you get started, it’s worth noting that these different money models are intended for couples that are married or have committed to a life partnership. For couples living together who have yet to lock it down, it makes more sense to keep finances separate and divvy up joint expenses as you see fit.)
Joint accounts for everything
Keeping joint accounts for all your finances is the easiest solution for combining finances, but good communication is a must. There are two ways to maintain an open dialogue about money.
The first is setting a spending threshold that requires spousal notification. For example, some couples will agree to tell each other when they make a purchase greater than $250. It isn’t intended to be an approval process, but it ensures that lines of communication remain open at all times.
Second, review your financial goals and financial statements together every six months. This will raise important conversations and create opportunities to express money concerns before something becomes a problem.
Separate accounts for income and spending
The complete opposite of merging finances is maintaining separate accounts, which allows couples to divvy up joint expenses and enjoy total freedom over their own finances.
Although having similar incomes makes this much simpler, couples with different levels of income can separate finances by assigning more expensive items like a mortgage to the higher earner and utilities to the lower earner. Where things get trickier is saving for retirement or paying down debt.
This is not a set-it-and-forget-it solution because life (and your finances) gets more complicated over time. This system requires regular assessments of different assigned expenses, particularly as children enter the equation or career growth creates greater income disparity between spouses.
If you prefer making financial decisions that require less ongoing maintenance, then this system might not be ideal for you.
Allocate percentages of income to joint and individual finances
Hybrid models allow each spouse to have some money of their own while most everyday expenses are paid out of a joint account.
There are two methods for employing a hybrid model. The first is the “percentage model.”
Here’s how it works: Both spouses put 80 percent of their income into a joint account and 20 percent into separate accounts they hold individually. The joint account covers everyday expenses like mortgage, groceries, meals together, medical bills, long-term savings, etc. Personal accounts might cover items such as clothing, electronics, accessories or trips without the other spouse.
The percentage model can create difficulties if one earner has a significantly higher income such that provides them with a lot more personal spending money. In this case, you may consider changing up the income split — one spouse might put in 90 percent of income while the other puts in 70 percent.
When using a percentage model, use an 80/20 split as a starting point and calibrate it to your personal circumstances.
The second hybrid model is the “fixed dollar model.” This means allocating a specific portion of each paycheck to your own personal accounts and the rest towards a joint account.
For example, imagine one spouse has a monthly after-tax paycheck of $10,000 and the other has a monthly after-tax paycheck of $5,000. Each month, both spouses might put $1,000 into each of their personal accounts and then pool the remaining $13,000 into a joint account.
The result of the fixed dollar model is that both spouses get an equal amount of personal money. For some couples, this works better than the 80/20 model and reduces the sense of inequality.
A variation of the fixed dollar model, using the above example, has the higher earner put $1,500 or $2,000 a month into a personal account while the lower earner only puts $1,000 into a personal account.
Choosing the right method for you
The most important thing in deciding how to combine finances is to be honest about your feelings from the start and always keep an open line of communication. Money is frequently considered to be the biggest strain on relationships, but working together to find solutions that work for everyone can reduce some of the stress.