As seen on Kiplinger.
Picking the right money-handling strategy for your family – separate finances, a joint account or something in between? – can make a big difference on how well you function and how well you get along.
What is the “right” way to manage finances with a partner or in a family? As financial advisers, we are asked this question all the time. The answer is that there isn’t just one right way – only the way that works best for your situation.
Before you even consider what might be the best approach, you need to first understand each other’s priorities and attitudes about money. This will help you figure out how you are similar and, importantly, how you are different so that you can identify potential problems before they arise. Additionally, you may find that one approach works now, but you would like to have a different arrangement in the future – for example, if both partners are working now, you may choose one approach but would like to change tacks if one parent steps out of the workforce to focus on raising children in the future.
Before you decide whether you want to keep your finances separate or combine them, you need to consider some important factors:
If one partner has a poor credit score, being married won’t necessarily affect the other spouse’s score. However, if you open joint accounts or apply for credit (such as a mortgage) together, both partners’ credit scores may be considered, and this could make a difference on the approved loan amount or interest rate you are offered.
Check your individual credit scores and share them with each other so that you have an idea of where you stand. If one spouse has a poor credit history stemming from bankruptcy or foreclosure, the couple might not even qualify at all for a joint loan – even if the other spouse has excellent credit.
Understand whether you have a joint credit card account, add your spouse as an authorized user on your existing individual credit card account, or take out a joint loan for a home or car, each borrower is equally responsible for repaying the debt. The entire amount borrowed and payment history are reported on both spouses’ credit reports and scores. In community property states (Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, Wisconsin and optional in Alaska), both spouses are equally responsible for all assets and debts that are acquired during the marriage – so even if you don’t know your spouse has racked up a large credit card balance while you are married, you would still be on the hook to make sure it got paid in full.
Be clear with your expectations. Maybe that means that you agree that any purchase above a certain dollar amount needs a joint decision before the money is spent. Perhaps that means you have a monthly “The Business of Us” meeting to discuss your budget, your progress toward joint financial goals and discussions about who is responsible for handling what part of your financial responsibilities.
No matter how uninterested one of you might be in managing your family finances, allowing only one partner to make all the money decisions is a bad idea. You both need to be knowledgeable about how your assets and debts are handled so that if something happens to one of you, the other partner can confidently handle the finances.
There are many factors to consider when deciding how you want to approach handling finances, but in general, there are four main ways to proceed:
Deciding how to handle “The Business of Us” is a big decision – but not one that must only be done one way, nor one that can’t be handled differently at different times. The most effective way to handle your finances is the method that works best for your unique circumstances.
The “right” way to manage your finances with a partner or in a family is to discuss the setup with your financial adviser, who can give you advice on what makes the most sense for your personal situation and help manage financial transitions in your life at every stage.