Joining finances (and debt): What you need to know
By Dawn Papandrea
January 15, 2015
When you get married or move in together, it isn't always as simple as mine and yours become ours — particularly with finances.
“Because the average age in marriage in the U.S. is now 27, it's important to acknowledge that both of you have financial habits that are engrained in your psyche, and when you bring someone else into that, it's going to be a process,” says Kelley Long, member of the National CPA Financial Literacy Commission.
As you start along your life journey together, here are some financial factors to discuss so there are no money miscommunications down the line:
Get financially naked together
Before you even think about opening joint accounts or sharing expenses, you have to have an honest conversation about where you stand financially, says Long. “There has to be 100 percent transparency.” Start by sharing copies of your credit reports from one of the major credit bureaus, Experian, Equifax or TransUnion. You can get them for free at AnnualCreditReport.com. “Be careful and keep an open mind. Try not to freak out about what you might learn,” she says.
Till debt do you part?
Deciding how to proceed will depend a lot on what the credit report date reveals. “I'm of the opinion that if you're willing to marry the person, you're taking on all of their baggage,” says Clare Levison, CPA, personal finance expert and author of “Frugal Isn't Cheap: Spend Less, Save More, and Live Better.” “For better or worse, you have to come up with a game plan to take care of any debt to avoid resentment over it later on,” she says.
For some couples, that could mean working together to get both parties in strong financial shape. However, if one person has a significantly better credit standing, he or she may not feel comfortable paying for any financial indiscretions that came before the relationship, says Long.
“For better or worse, you have to come up with a game plan to take care of any debt to avoid resentment over it later on.”
–Clare Levison, personal finance expert
Still, it's important to look to the future and think about how your partner's money troubles might negatively affect your future together. For instance, if you want to purchase a home someday, in order to use each partner's income on the mortgage application, the lender must look at both credit scores. A poor score for one could result in a higher interest rate for both, which over time can cost you tens of thousands of dollars more than if you had helped your partner improve his credit earlier on.
“I'm not saying that you should have to take over your partner's debt just because you can,” says Long. But you could find other solutions, such as taking on a bit more of the shared expenses for a while in order to make a dent in credit card balances, for example.
Credit card coupling
When it comes to credit card accounts, people's opinions differ as to whether it's worth it to have joint accounts. “A lot of couples will want to share an airline rewards account, for example, because they want to build points,” says Long. Heck, that could help pay for the honeymoon. This strategy is usually best for those who have similar and good credit scores and spending habits.
One thing to keep in mind with joint accounts is that all credit activity of that account will affect each individual's credit score. For cards in which one party is the owner and the other is an authorized user, only the main account holder is legally responsible for repayment and, any negative activity would appear on the both cardholders' credit reports until the authorized user is removed from the card.
Keep in mind that having only joint accounts isn't necessarily ideal. “Having some access to your own credit is important,” says Sara Gilbert, community engagement liaison at GreenPath, Inc., a credit counseling company. “Each person should have accounts in their own name. If someone passes suddenly and one person never had credit in his or her name, that could be difficult,” she says.
A matrimony of bills
Deciding who will pay for what, especially if there's an income disparity, could be tricky, but one expert offers a fair solution. “Couples should consider starting off by calculating joint monthly bills (with or without the help of a financial planner) and contribute to a joint account in proportion to their income in order to pay joint bills,” says Pam Friedman, certified financial planner and certified divorce financial analyst. For example, she explains, if the wife earns $50,000 and the husband $100,000 and jointly they expect to pay $3,000 a month for household bills, then the husband contributes $2,000 to the joint account and the wife $1,000. Beyond that, the couple may decide that gas, auto loans and other bills are separate and will be paid from individual accounts.
“When you're deciding to get married, you have to talk about hopes and dreams of the future and how you're going to achieve those dreams.”
–Brenda Hendrickson, frugal expert
Applying for a home loan together
“When you're deciding to get married, you have to talk about hopes and dreams of the future and how you're going to achieve those dreams,” says Brenda Hendrickson, frugal expert and author of “How To Be A Frugal Millionaire: Eight Simple Steps to Creating Personal Wealth.“ A big part of that may be buying a home together. Hendrickson says you have to consider such questions as:
- How are you going to pay for it?
- Will the mortgage be held in one or both names?
- Who is contributing what to the down payment?
- And how will all that matter should the day ever come that you part ways?
Unless everything is evenly split, you have to have some sort of an agreement together, says Long. Depending on how complex each person's finances are, a legal contract, such as a prenuptial agreement, could be an option that protects everyone's best interests. Keep in mind that when it comes to property, as well as credit cards and other debt, how assets and debts are divided may depend on the state in which you live. There are nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin; and in Alaska, it's optional) that essentially divide everything attained during the marriage 50/50, regardless of whose name various accounts are in.
When in doubt, seek good counsel
Each couple's views on money are unique. What works for one might seem foolish to someone else. That's why if you're unsure about what to do, financial advice can be helpful as long as you're not misled. “The worst thing to do is talk to a friend or relative about finances because they are usually biased,” says Hendrickson. “Have someone who is objective. They will give you a lot of direction and come up with a lot of questions you didn't even think of that can impact your life.”
Money might not make for good pillow talk, but joining your finances in a way that strengthens your relationship could set you up for marital happiness for years to come.