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How Young Couples Can Plan a Smooth Money Merger

Dec. 20, 2013
Personal Finance
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Young couples have plenty of partnership problems to solve: who claims the covered parking space? Who gets the bigger closet? And who wins the next DVR scheduled recording conflict? And then there are the matters of money. Making the transition from single and separate to couple and combined can be stressful. Whether getting married or just moving in, there are conversations to be had and decisions to be made.

Roommate or pooled finances?

Patricia Jennerjohn is a financial planner based in Oakland, Calif. She believes there are two ways for young couples to form a financial union.

“Couples often use one of two methods — the “roommate” model, where each is responsible for a share of the expenses but keeps separate accounts, or the “pooled” model where everything goes into joint accounts,” Jennerjohn says. “I personally like a hybrid of the two — sometimes one member of the couple wants to lovingly merge everything, yet it is important for each member of the couple to have some independent money.”

Jennerjohn advises couples to form a pooled account for joint expenses, like rent or mortgage, utilities, groceries, and home upkeep, to which each member contributes in proportion to their income.  Meanwhile, each person also has a separate account for personal expenses.

Maintain more than one account

Cathy Curtis, a financial planner based in Oakland, Calif., specializes in working with women. She also advises clients to set up a hierarchy of accounts.

“If both are working, then a joint checking, joint savings and joint investment account should be established, but each person also has separate accounts owned individually,” she says. “Each person contributes monthly to the checking account proportionately depending on salary/income.  Short term goals will be funded by the savings account — and each person can contribute to this proportionately as well.  If there is money left after funding the checking, short-term savings and individual retirements accounts, then the joint investment account can be funded as well. If a couple comes into the marriage or partnership with assets, I believe in keeping them separate and adding each other as beneficiaries.”

A fee-only financial advisor in Kirkland, Wash., Brian D. Gawthrop takes the organization of a couple’s finances one step farther:

“Create a balance sheet and cash flow statement (budget) for each person individually,” Gawthrop advises. “Then create a joint one and look at the overlaps and synergies. And be aware of your state’s laws regarding joint assets. Community property states like Washington allow you to keep assets separate if you need to, but you have to be very intentional about it.”

Separate but equal

Cathy Curtis believes that separate accounts are critical.

“Especially for women, I believe it’s really important to have separate accounts and maintain a separate financial identity even in marriage,” she says. “If anything should happen to the marriage, it will be easier for her to get back on her own feet. In addition, money is powerful. Whoever controls it in a relationship, tends to make the other feel less powerful. Lastly, no one wants their personal spending to be scrutinized by their partner. By having a separate account, each can buy things they want that may not be on the other’s priority list. It really doesn’t matter as long as the joint goals are being funded.”

Divvy up debt

Jennerjohn also says it’s very important to keep debts brought into the marriage (such as car loans, student loans, and credit card balances) separate, and each member of the couple is responsible for handling these obligations from their own personal pool of money.

Gawthrop agrees, and adds an important consideration: “Don’t consolidate student loan debt into a shared loan like a home equity line. It sounds grim, but if the borrower of a student loan dies, so does the loan. You don’t want to be saddled with your dead spouse’s $100k student loan debt.”

He also believes that Inheritances should be held separately and used at the beneficiary’s discretion.

Define long-term goals

When couples consider funding long-term goals, Gawthrop says the discussion shouldn’t be about retirement, as usually defined.

“Don’t call it retirement. That is what your parents and grandparents are dealing with. Call it financial independence, where you can work if you want to — not that you have to,” Gawthrop says.

“Younger folks today are probably going to work much longer, have multiple careers, and will want to lead productive and engaged lives well past age 65,” agrees Jennerjohn. “I think that coaching younger couples about their human capital — their ability to work, earn a living, be engaged in life — and lifestyle is perhaps even more important than planning for some sort of abrupt, planned career end with a set amount of money in the bank.  So I think that young couples need to plan for life in increments, and be much more flexible in their goals.”