Thursday, July 2, 2015

Do Joint Expenses Require Joint Accounts?

You may have heard people off-handedly quote, “What’s yours is mine, and what’s mine is mine,” which is a humorous way of saying, “Everything belongs to me.”   When the discussion is about money, the ultimate strategy is to work together towards shared goals.  Many newlywed couples or common-law partners who initially believe that all the money should be combined may find their partners don’t agree.  Finding the “perfect” solution, if there is such a thing, should be the game plan in order to avoid disagreements.

The above Cash Management Map shared in the previous blog, Why Do I Need a Budget, looks like the perfect fit for a couple with joint incomes.  From an ideal financial planning strategy, the combined incomes flow to one common account and are then distributed to fund savings, debt, and lifestyle expenses.  The map looks easy and appears quite simple to follow. However, the strategy may be unrealistic for some.  The tricky part then is finding a strategy that will work.        

Alternate Solutions

If you are not in favor of combining your incomes when sharing household expenses, here are some alternate solutions.

(1)   Nothing has to change. 

Before you entered into a relationship, you both paid monthly rent and utility payments.  Set-up a jointly-held "house expense account"; deposit your usual monthly amount; and then treat the excess cash as "savings" towards your future home purchase. If you purchased a home together and are currently managing mortgage payments, then the excess money could be used for future home renovations.  

(2)   Share expenses equally.  

Add monthly expenses:  rent and utility bills.  (Include estimated groceries and other household expense such as toilet paper and light bulbs.)  Set-up a jointly-held "house expense account" and pay all related expenses from this account.   If your intentions are to eventually own a home together, then you may individually or jointly deposit money into a “house savings”.

(3)   Split expenses according to your income.  

Add monthly expenses: rent, utility bills and other items which should be paid jointly.  Determine the percentage each should pay according to monthly income.  If one person earns more money, then he/she contributes more to the monthly expenses.  Use a joint account for the monthly deposits and set up automatic payments for the expenses (i.e. rent, utility bills). If the intentions are to buy a house, as suggested previously, deposit money into an individual or joint savings account.   

For example:

Tom and Marie determine their monthly costs are $1,500.    If Tom's income is $3,000/monthly; and Marie’s is $2,000/monthly.  Their combined income is $5,000 ($3,000+$2,000). 
Tom's share of the costs is 60% ($3,000/$5000) and Marie's is 40% ($2,000/$5,000). Therefore, Tom pays $900 (60% x $1,500) and Marie pays $600 (40% x $1,500).  

The top three suggestions are provided for your consideration.  In the end, you must do what works best for you.  Both may choose to contribute to the shelter (housing) costs since you were already doing so.  However, couples are also know to divvy the expenses and can reach a satisfactory decision on who’s responsible for specific expenses. 

Everything Else 

If only things were that simple.  When you track expenses, your list isn’t confined to only home-related expenses.  Food, gifts, entertainment, travel and vacation are among the extras.  Now what?  If you have resolved to handle your personal expenses and opt to take turns paying for vacations, then you achieve the same results as though you had a joint account. 
What’s the difference between keeping your money separate or in a joint account? I believe everyone appreciates having control over the money they earn. They don’t mind paying for personal items, vacations, or insurance premiums.  The fact is individual accounts (or accounts held jointly only for the estate planning) are managed more effectively by one person.  One client shared, “I want to be sure there’s enough money in the account when I pay for something.” 

However you choose to operate your accounts as a couple, you need to identify both your personal and joint goals.  If you don’t take this step together, it’s the same as flying a plane with one engine.  You may not arrive at your destination.  Bounce ideas off each other to determine the best method to share expenses.  Having a heart-to-heart conversation will ensure you are on the same track. Being honest is the only way to prevent the arguments which happen so often over money.    

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