The debate over whether to merge finances or not after a couple commits to a long-term relationship continues to rage. Seemingly every week, another article in a financial publication pops up discussing the merits of “to merge or not to merge.” For me and my family, the question was never open for debate. All money is family money: all debt, all investment capital, everything.
If you want to build a great family, then you need to go all in and commit. I see the unwillingness to merge finances as a hedge against a future break-up or divorce. There is an old adage that no one goes into a marriage expecting it to fail, yet many end in divorce. Of course this is true, as many old adages are. However, saying that would be the equivalent of saying that no one goes into show business expecting not to make it big or no one goes into writing expecting not to be on the NY Times bestseller list. Well, of course they don’t. But fully committing does make success more likely. Even Cortez burned his ships after landing in the New World.
I am not suggesting that spouses or partners do not maintain separate accounts. In fact, we have separate bank accounts in my family, but these are in addition to our main joint accounts and are there for the fun money that we give ourselves. Yup, we give ourselves an allowance each month, but it’s an equal amount to both of us. My wife likes to get a massage once in a while and I spend too much money on power tools. Yet this amount is fairly small (our allowance equals less than 5% of our total expenses each month) and is strictly for those fun little purchases. Everything still flows through our main checking account and since we do a monthly accounting of all of our assets, we both know how much is in each other’s account (although we never check each other’s spending).
We do not have separate credit cards, investment accounts, or savings accounts. Solo credit cards can be dangerous, since it is easy to run up a balance and if those expenses occur during the marriage, the debt is both partners’ liability. Investment and savings accounts are for big picture items, exactly the types of things that should be planned for together. For example, perhaps one partner really wants to go to Antarctica, while the other partner hates the cold. Should joint money be used to fund a trip to Antarctica? Within reason, of course. If your spouse has a dream (a serious dream, not just a fleeting one) and has wanted to go to Antarctica for years, then why wouldn’t you want to support that and see that dream come true? Balance has to be a prerogative here, as one spouse may have more expensive dreams than the other. So long as it is discussed up front though, and one person’s dreams doesn’t overwhelm the other’s, then feel free to support those dreams through the joint accounts. I want my wife to live a full life, and if I don’t share all of her dreams, that’s okay too.
Divorce and Marital Strife Occur Due to Other Issues
Sam Dogen, at the Financial Samurai, wrote an article about why married couples should maintain separate accounts (http://www.financialsamurai.com/financial-dependence-is-the-worst-why-each-spouse-needs-their-own-bank-account/). If you haven’t read it yet, I suggest that you do. Sam uses several reasons for having separate accounts that make complete sense: fun money being one that I agree with. I am a big fan of the Financial Samurai, but disagree with many of the other reasons. The use of a separate account as an insurance policy is likely never to be an issue (especially if your accounts are joint accounts) and the financial trainer example sounds a little too much like a separate financial life for my tastes.
Financial Samurai uses three examples to demonstrate the merits of separate bank accounts, but I’ll use it here instead to demonstrate some of the other issues in the relationship:
- Husband with a wealthy wife wants to make his mark: In the first example, a husband working hard to become a published author married into a very wealthy family. He feels uncomfortable that people look at him as someone who just married into money and wants to make a name for himself. Overall, I completely understand, and would want to do the same if I was in his shoes. However, having separate accounts doesn’t help or harm that dream from coming true. Assuming his wife is aware of his dream, she should understand and be willing to help where it is wanted and needed.
It sounds like the individual is a little uncomfortable in his new life, and should have a heart to heart with his wife. Perhaps he would have been more comfortable in a simpler lifestyle. To some extent, he probably knew (or should have known) exactly what he was getting into. However, if he’s committed to his wife, then compromises need to be made on both sides. Setting up separate finances won’t make him feel more comfortable in his new lavish lifestyle, or prevent others from making comments about marrying money.
- Stay at Home Mom: Another example uses a stay at home mom whose husband is a Google engineer. She doesn’t feel comfortable spending $120 for a massage, or any money for any fun indulgences. This is a very similar situation to my wife and me. She became a stay at home mom after we had our first child. For us, both parties having separate accounts that get an equal deposit helps alleviate this problem. I understand how a stay at home spouse may not feel they are “contributing to the household” from a financial standpoint. They shouldn’t feel that way though; have you seen how much a full time nanny costs!
Beyond having a separate fun money account, the stay at home spouse should have an honest conversation about where their finances are and where they can loosen the purse strings. Maybe the husband does not know that his wife feels too constrained and wants to enjoy a few, low cost indulgences. Or maybe the wife does not know that the husband does not feel secure in his job and wants to save as much as possible before a potential layoff or firing. Without having the conversation, neither party knows.
- Secret Poker Player: The final example is about a wife who let her husband handle the finances and the husband had a secret life playing poker. First thing first, neither spouse can wave the white flag and give up control of the finances to the other. It’s not fair to either party. It puts too much pressure on the spouse managing the finances to get it right, and doesn’t allow the other spouse to know how to manage the finances or what state they are in. Secondly, holy cow! There are some major trust issues here. Having a separate account or not would not change the fact that the husband had a secret poker playing life (and potentially other activities) away from his family.
Finally, Financial Samurai makes the argument that a stay at home spouse should get paid by the working spouse an equivalent to what a nanny should get paid. I just do not know how this would work in practice. One of the benefits of receiving a paycheck is that you receive validation from a 3rd party (your employer) that you’ve done good work and deserve to get your salary. If your spouse is paying you, that validation is greatly diminished or could even be considered demeaning. If you are the working spouse, paying your stay at home spouse like a nanny diminishes what they are doing. A stay at home parent is far more than a nanny.
Let me put this notion to rest: my wife made a sacrifice giving up her career to stay at home and take care of our kids. We both agreed to it and maybe she’ll go back to work full-time someday, but the fact that she is out of the workforce now hurts her future earnings power. Just because I earn money working does not give me a greater say in how we spend it or save it, and just because my wife is caring for the children full-time does not give her a greater say in how we raise our children.
You Chose to Marry, You Own or Owe It Too
Unless you are getting married right out of high school (believe it or not, it still happens), you will come into a marriage or other long-term commitment with some amount of financial baggage. Some of that baggage, like student loan debt or an IRA, is purely financial. Much of the financial baggage is the set of beliefs and knowledge relating to money. When you marry someone, you marry all of it, and you have to take the good while trying to work out of the bad.
Most of the financial baggage is related to the set of beliefs and knowledge developed in childhood and early adulthood. Knowledge is limited and most of the beliefs are wrong! It’s your job as a family to work through those and begin moving to a better place. Some common beliefs that must be un-learned include:
- Everyone has debt: Not true! We paid off all student loans in our mid-twenties, never had credit card debt or an auto loan (both terrible ideas), and have been mortgage free since our early thirties. Debt is not something that everyone has and is not something that you have to live with for the rest of your life.
- Money will take care of itself: No, it won’t. You have to pay attention, continue to learn, and work to optimize and improve your financial situation. No one cares more about your money than you do.
- Money is the root of all evil: First of all, that quote is not correct. It’s the love of money that is the root of all evil. Money is just a medium of exchange and has no dog in the fight. You can grab as little or as much money for yourself and your family as you are willing and able.
- Save 10%: Saving 10% may get you a somewhat comfortable retirement, but it will never get you wealthy, or allow you to have intergenerational wealth. Aim for 50% or higher – which leads to:
- It’s not what you make, it’s what you save: Nope, not even close. It’s a combination of both, and it’s much easier to save more if you make more. Saving 50% of your income when you make $25,000 would be nearly impossible. Saving 50% of your income when you make $250,000 is not really all that hard (outside of NYC and San Francisco). So learn to save, but focus on increasing your earning ability.
Further, some of the biggest financial baggage is you and your spouse’s view on the future. Hopefully you discussed hopes and dreams when you were still in the courtship phase, but if not, you better get to it. If the two spouse’s dreams are too far apart, reconciling how to save for those dreams becomes very difficult. Having the exact same dreams is not required, but having dreams that are shared is important. If one of you wants to lead a lavish lifestyle when you’re young, while the other wants to retire when you are in your thirties, meshing the ideas will be impossible. Focus on finding shared dreams and work on building out your ideal life together.
The other half of financial baggage is the actual dollars and cents: debt and assets. When you decide to form a family, then you are also deciding to share in everything you earn and save in the future, as well as everything you bring with you. Good and bad. For example, my wife brought in $25,000 in student loans to my $3,000 when we got married. Our family had $28,000 in student loan debt; the name on the bill didn’t matter. Both of us also brought in some assets as well. My wife also had a $60,000 settlement that was due to her from an accident when she was a child. That money helped our family pay down the above student loan debt, as well as our 2nd mortgage at the time. What we did not do, though, was divvy up the assets and debts according to who brought them into the family.
One final point that needs to be driven home on family money is this: radical transparency is a must. Financial secrets can be the result of issues elsewhere in the relationship, but can be devastating to both parties nonetheless. Both my wife and I have the ability to manage our family’s day to day and month to month finances. We both have access to each other’s accounts, although neither of us feel the need to check. We also have a shared vision of the future for where we want to take our family. This means that our investment and savings accounts line up with our shared vision. There are no hidden accounts, and no need to have hidden accounts. Our family discusses our finances monthly at one of our family meetings so that we’re all aware of where we are on track and where we may be falling behind.
Structuring Family Money
In my opinion, the optimal way to structure family money is to have all sources of income flow into one joint account first. I know many couples that have their paychecks flow into their separate accounts and then contribute to a joint account. However, I think that this structure falls short, particularly in transparency and in fairness. If one spouse out-earns the other, but they either contribute a fixed amount or a certain percentage of their respective incomes to the joint account, the lower earning spouse will always have less than the higher earning spouse. The level of your paycheck should not determine where you stand in your family. You are equal partners.
From our joint account, we pay all the bills, contribute to savings and investment accounts, pay off the joint credit cards, and give each other a monthly allowance. Sometimes giving ourselves an allowance feels like we never grew up! Having everything flow through the joint account makes the accounting easier, and gives each spouse the ability to manage the day to day cash flow. Having separate accounts for fun money provides the relief valve of not having to worry about funding those little purchases.
In addition, all of our taxable investment and savings accounts are structured as joint accounts. We both have access at all times. For our retirement accounts, these have to be in an individual’s name, but we manage the funds as though it were one big pot of money. We have five separate retirement accounts (each of us has a Roth IRA, a traditional IRA, and I have a 401k). However, our retirement timeframe is within a couple of years of each other, and hence, managed as though it were one account. This is a little challenging logistically, but can be accomplished with a bit of thoughtful planning. The key is to find the best investments in each respective plan, and try to balance out the portfolio across accounts as much as possible.
All Money is Family Money
When you first form a family, it is important to go all in. Particularly if you want to build a great family that will last generations. Much of the financial strife found in many marriages is the result of other issues: trust issues, asymmetric personalities, or the absence of a shared vision. These issues just flow into the family money issues. Working with your spouse to build shared dreams and an ideal life, while working through any of the financial baggage brought into the relationship is the key to creating family money.
Keep building my friends.