In the previous article, Couples Finances: Long-term Relationships, we explained the importance of having a pre-marriage financial conversation in order for both persons to understand each other’s financial health, philosophies, and goals, as well to obtain agreement on certain key decisions. As a reminder, we view a long-term relationship as a commitment to share your life with someone, whether formally or informally. But to keep the description simple, we just refer to both these arrangements broadly as “marriage”.
As part of the discussion on managing personal finances after marriage, we touched on the issue of using joint or separate bank accounts. This is a topic that usually elicits strong opinions from most people, and despite the advice from well-intentioned friends and family, there is no one best way to manage your money after you get married. What works for one couple may not necessarily work for another. Together you will have to decide your approach and this decision will largely depend on your personalities.
In this article we explore the three main approaches.
Separate bank accounts
How does it work?
In this approach both partners maintain their financial affairs separately, usually represented by each person administering his/her finances from a separate bank account. But as you can imagine, they have to work out an arrangement to deal with shared expenses, for example, rent or mortgage payments, household expenses such as utilities, groceries, expenses of children, etc.
The sharing can be done either equally (50:50) or proportionally, where the party who earns more income will pay a greater amount of expenses than the partner who earns less. The proportional sharing allows the partner who earns less to still make a worthwhile contribution to the home, thus maintaining fairness in the relationship. Usually one partner takes responsibility for actually paying the expense and the other partner either reimburses or provides the funds when the expense is due.
Another approach we’ve seen couples use is to allocate specific expenses to each partner to pay. For example, the partner earning the greater income will pay the highest expense (e.g. food), while the other partner covers smaller expenses.
When to use?
Some people view being financially independent as very important and separate bank accounts enable two previously independent people to maintain control over their personal finances, especially their discretionary expenses or “fun money”. This approach also allows the financial “personality” of each person to be maintained. It could be useful in the following situations:
- One partner may be more financially responsible and the other more spendthrift
- One partner may have more debt than the other, or
- Partners may have different spending habits: one may incur significant one-time purchases, while the other makes regular, smaller purchases that add up
Because of the importance of maintaining financial independence, in this arrangement once each partner has fulfilled his/her responsibility for expenses, any surplus funds are theirs to do with as they please i.e. they usually don’t need to consult the other person before spending, saving, investing, etc.
Points to note
It should be said, however, now that you’re committed to each other, complete financial independence from your partner may be difficult to maintain. More often than not, your financial health will be considered jointly, for example, in a mortgage application. As we said in the previous article, your partner’s money problems become yours and vice versa. On the other hand, your partner’s fortunes could also be shared fortunes. Many financial decisions will need to be made jointly, for the benefit of your family as a whole.
Joint bank account
How does it work?
When couples choose to integrate their finances, they usually use a joint bank account to administer their money (both parties being named on the account). Generally, they deposit their salaries and pay all expenses from this account, whether mortgage payments or rent, utilities and child care expenses, or their personal expenses. They also have a combined budget (check out our Budgeting Series, to learn more).
In this case, any income inequality is ignored because all funds are kept in one place. The couple would then allocate an amount that each can spend (an “allowance”, so-to-speak), without having to consult the other partner. Larger purchases, savings targets, retirement plans, etc are all jointly agreed since it is funded from the same pot.
When to use?
This approach works in long-term relationships where:
- Individual financial independence is not a significant motivator for either partner
- There is broad agreement on shared financial goals (for example, buying a home, saving for their children’s education, reducing debt, or saving for retirement)
- Couples have similar spending habits, or no conflict arises about the nature of the differences
- Couples have the same attitude towards debt
Points to note
There are a few advantages and disadvantages of using a joint account. Advantages could be:
- Making payments, depositing and withdrawing money can be more convenient with a joint bank account, because either one of you can do the transaction. Not to mention it is cheaper because there is only one set of banking fees.
- It could eliminate the legal process in the unfortunate event of your partner dying before you. You are automatically the beneficiary of any funds in the account.
- There is greater transparency, as there is little doubt about how much money is available or where it is being spent.
On the other hand, the main disadvantage is the potential for duplicated transactions because either party can make payments and withdraw money from the account. It could lead to problems such as bounced cheques, or inadvertently putting the account into overdraft and incurring charges. For example, if there was $1,000 in the account yesterday, and today one spouse withdraws $500, while the other writes a cheque for $700, the cheque will bounce assuming there are no further deposits by the time it is cashed. But this is usually avoided by proper communication.
We’ve seen some couples choose to have a combination of separate bank accounts and a joint account for meeting shared expenses. This is the essentially the same as having separate accounts, but instead of giving your share of the expense (via cash/cheque) to the partner responsible for paying, the funds are deposited into a joint account (usually a chequing account) and the bill paid from there. Of course, this approach applies when expenses are being shared proportionately but is not necessary when each partner is allocated specific expenses to pay fully.
So from our perspective, using a joint account for proportionally shared expenses really only contributes to improved record keeping (which could be an advantage!). So, are there any circumstances when a combined approach is actually recommended? The one scenario we thought of relates to pre-marriage debt.
Usually some sort of personal guarantee or salary lien is needed by a lender for personal loans. So if you enter the relationship with existing debt, it may be better not to co-mingle funds until the debt is repaid. This avoids the possibility of the lender having access to your partner’s income if repaying the loan becomes problematic.
Which approach is best?
As you could imagine, financial personalities are too diverse for there to be one best approach, and each couple will need to choose the approach that works best for them and their circumstances. But here are a few thoughts:
- Deciding on separate bank accounts could mean complete financial independence, so the approach should be clear from the outset. Any discomfort by either person should be known early.
- As usual, honesty and openness is the best approach.
- Some couples with joint accounts allow one person to “take charge” of their finances, usually the one who has a better understanding of money. While, this approach could make sense, just be aware it could lead to one partner feeling of a sense of dominance or the other feels a loss of independence. Also, the partner who did not take the lead should continue to participate and be knowledgeable of the couples’ financial situation.
- Consider the potential for money decisions to affect the family in non-financial ways.
You’ll notice we haven’t mentioned taxes. It should be noted that sometimes there may be opportunities to take advantage of joint tax planning strategies that lower overall taxes when compared to individual positions. Or the converse could be true.
Tax rules change frequently, so having an advisor help you understand current laws could be useful.
Kerri and I chose the completely joint option, so we have a combined budget, etc. We discuss all major purchases and only go through with them if we both agree. We don’t bother discussing small personal expenses, as these are covered by a personal “allowance”.
We don’t focus on who has the greater income because of the non-financial considerations. Making more income usually means working longer hours, so in the meantime the other person has to bear more responsibility for the household. When children are involved, at least one partner has to be around outside of daycare, which is not “paid” work but very important nonetheless. There are many, many examples like these. Focusing on income could diminish the importance of the myriad non-financial considerations needed for a long-term relationship to be successful.
But as we described above, every relationship is different, so what works for one may not work for another.
Do you have any experiences or advice to share? We’d love to hear your thoughts in the comments below!