We’re full-swing into wedding season. As you know, I’ve done many segments about budgeting for a wedding or how to negotiate a prenup or even managing finances after divorce, but today I want to focus on newlywed couples as they face the daunting task of merging finances.
So where do we start?
It’s a personal decision figuring out how much of your finances you and your partner want to merge, but hopefully, you’ve come to some sort of agreement about this before the I do’s.
There are many different methods of going about the pooling process. Some couples like keeping everything separate—individual bank accounts for their individual paychecks—and each person is responsible for paying specific household bills. If that works for you, Godspeed, but today we’re talking about merging, which is more common.
You could choose to merge absolutely everything under one joint account or you could go with the three-pot system. In the three-pot system, you keep your individual accounts and open a new joint account. Each person puts a designated percentage of their respective salary or a fixed flat amount into that joint account, and the money goes toward the payment of joint expenses like rent, utilities, and groceries. A lot of couples like this approach because they have their own accounts with their own earnings for discretionary spending.
There is no right or wrong choice here and I leave it to you and your partner (and maybe a good financial planner) to hash out the details. But the common denominator is that you must, always, ALWAYS start with honesty and full disclosure. Do not let a partnership start out with financial secrets. Sit down and have the “money talk.” Come clean about any outstanding credit card debt you may have and devise a plan to pay it off. Be clear with your partner about all your assets and liabilities—and that includes potential future liabilities, like paying for graduate school or caring for an ailing parent.
What if one person has bad credit? Does getting married merge credit reports?
Just getting married doesn’t merge your credit. For instance, a groom’s bad credit doesn’t automatically lower his new bride’s good credit score. Your credit history is your own, and each of you always will have separate credit histories.
But when a couple applies for credit jointly, the lender will consider both of your credit histories. While one person’s history may be squeaky clean, the other’s more blemished credit could cause the couple to be declined or to pay higher interest rates and fees.
This is particularly true when it comes to getting a mortgage. Because a home purchase is such a large debt, both of your credit histories, as well as income and other financial obligations, will be considered to determine if, as a couple, you qualify for the loan.
More important, bad credit could be a red flag for bad financial habits. Be aware that if your mate maxes out or defaults on a joint account, it can damage both of your credit scores and you’d both held responsible for any debts incurred. And going forward, states with community property laws may consider any credit applications or debts incurred during your marriage as joint debt. In cases of bad credit, it’s best to keep at least some finances separate while you work on raising the bad score. Again, Tom, this is where it’s critical to know what you’re getting into. You don’t want to be a case of “till debt do you part.”
Do you have any other specific tips?
My overriding rule is this:
Communicate. This is a partnership, and you are a team. Even if one person manages the bills, the other should know what’s going on. There shouldn’t ever be any surprises, because both you and your partner should be regularly checking in on the state of your financial union.
I think people assign a lot of unnecessary anxiety to the money issue. You may find that it’s actually a lot of fun to join forces. For one thing, two incomes means more money. And more money means you can save more—and splurge more. In addition to that joint account for ordinary expenses, you should have a joint savings account that you both contribute to, thinking about both fun larger expenses (like vacations) and longer-term goals (like homeownership).
Is there a way you can take all this money stuff and make it more relatable?
One thing I’ve found helpful? Figure out your combined “hourly” wage. Take your household income and divide it by 2,000—that’s fifty 40-hour work weeks and it’s the standard number we typically work in a year (because Americans get two weeks of vacation). So, if your household take-home income is $80,000, divide that by 2,000 and you have $40 an hour. That’s your household “hourly wage.”
What I like about this exercise is that it’s easy to crunch the numbers and see exactly how hard (or rather, how long) you’d have to work to earn whatever it is you want to splurge on. For example, if you guys want to buy a $400 tech gizmo, you each would have to work for 10 hours to cover that item.
Twice the sweat-equity means half the work, and that’s when being a member of a “team’ has its advantages. You should both be maxing out your 401(k) plans to the best of your ability and setting aside savings for those big long-term goals (like paying for your kids’ education!) but have a little fun while you’re starting out and set a medium-sized goal for yourselves.
For example: To save for a $2,000 vacation, set aside $42 a week and you can head overseas in a year. But the more you save now, the quicker you can get away! Set aside $84 a week, and you can take that vacation in six months.