When a couple decides to merge finances, they might not be on an even playing field. One partner may have significant debt, while the other may have little or none.
In this “Financially Savvy Female” column, we’re chatting with Jane Voorhees, CFP, director of financial planning at ALINE Wealth, about what to do if you are bringing your debt into a relationship, or how to handle it if your partner has more debt than you.
What advice would you give to a couple who is merging finances with very different amounts of personal debt?
Merging finances can be very tricky for any couple in any situation. If the playing field is uneven, it can be especially difficult. Talking about money and finances can be intimidating, but it is a super important conversation to have with your partner. In a situation where one person has significant debt or one makes notably more than the other, I would advise speaking with a financial therapist. Having an independent, experienced party to guide the conversation can relieve a huge amount of awkwardness and help guide the conversation in a healthy manner.
Hopefully, by the time a couple reaches the merging decision, they have an idea of each other’s “money personality.” Are they a spender, saver or debtor? A spender wants to have the latest thing out there — they think more about their present than their future. A saver is the opposite — they tend to worry more about the future and would rather have money in the bank than have the latest trending item. Debtors don’t worry about money and usually spend more than they earn, racking up credit card balances or loans. Knowing your partner’s tendencies can help you navigate the money conversation.
Should the debt burden be held solely by the person who has the debt?
I would not advise one party to take on another’s debt, especially if it is a large debt. It just does not make sense to make yourself liable for paying another person’s debt. Down the road, you could find yourself in a situation where you are entirely responsible for paying the debt, and you may not even be in a relationship anymore. Furthermore, you could wind up doing some serious damage to your credit score.
If one partner makes more than the other, should they pay more of the debt burden, regardless of whose debt it is?
Every couple’s situation is different, but it’s important to consider some basics when making a plan to pay off debt. How was the debt acquired? Has the debt owner been making regular and on-time payments? What is the interest rate? How much do they have in emergency funds? How much do they have left over after paying their monthly bills? Are they able to save money for their future? Do they each contribute to individual retirement plans?
Answering these questions can help each partner determine their priorities. The non-debt holder may feel strongly about saving for the future and could resent being expected to pay more of a debt burden that they did not incur just because they might have higher income. The couple needs to put these questions out there and answer them honestly to flesh out anything that might lead to potential conflict in the future. They need to be able to discuss the issue and come to an agreement that they can both live with. Money and debt are not easy issues to discuss, but having an open conversation now can help ward off pain in the future.
When making a plan as a couple to pay off the debt, what variables should be considered? How can they come up with a plan that feels fair to both parties?
I recommend that couples create a joint budget worksheet detailing their monthly living expenses, separated between non-discretionary and discretionary expenses. To start, leave off any large individual debt. This will give them a picture of their basic joint financial responsibilities. Does their combined take-home pay cover these expenses easily? How much is left after paying their bills? Are they going to be able to jointly save for their future? Then look at any individual debt. How do these payments fit into the joint budget? Also, look at what each person takes home. Is it roughly equal or does one take home a lot more than the other? Does the debt holder make more or less than the other partner? They also need to look at their larger financial picture. Are they saving for a house, a wedding or a baby? Do they have the same financial priorities? All these things are important to discuss before making any financial commitments.
Also, remember to step back and look at how this conversation is progressing. Is each party contributing equally to the discussion? Are the parties mostly in agreement about their priorities? Have there been any points of contention for either party? Any disagreements or arguments? If so, I would highly recommend speaking to a financial therapist or a pre-marriage counselor to help foster healthy financial conversations.
Unfortunately, there is no simple one-size-fits-all answer. Every couple is in a unique relationship and situation. The one common denominator is that financial success starts with honest and open money discussions.
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