Moving in with your significant other is an exciting step that comes with all kinds of benefits and compromises — including working out the household budget and savings plan. On one hand, you'll save money on rent and utilities if you split the bills. But when you're splitting bills with your boyfriend or girlfriend, husband or wife, you'll also have to explain why you bought another pair of sneakers when the car needs new tires.
The way you spend money directly affects your partner's financial well-being and vice versa, so it's important to create a financial plan to share expenses and still save money even if you live paycheck to paycheck.
Here are 10 steps you should take as you set up your budget as a couple.
1. Disclose Your Income, Assets and Debts
Honesty is the best policy when it comes to sharing what you have and what you owe, but 13 percent of the general population and 30 percent of millennials keep financial secrets from their significant others, according to the TD Bank Love and Money Survey 2017. Thirty-five percent of secretive respondents kept mum about a bank account, and 23 percent failed to disclose significant credit card debt.
Financial dishonesty is problematic for a lot of reasons, not the least of which is that you can't create a budget or set financial goals for the future unless you know where you stand. Opening up about your finances can be scary and embarrassing, but it also signifies a milestone in your relationship where you both acknowledge and accept shared responsibility for your finances.
2. Establish Your Priorities
Where do you want to be in five years? In 10 years? Future goals are important to discuss with your partner because they provide a roadmap for establishing financial priorities. Here are some possible goals to consider:
- Go back to school
- Start a passion project
- Change careers
- Open a business
- Have children
- Retire early
3. Set Financial Goals
A good savings plan should include predetermined contribution amounts from each paycheck toward long- and short-term savings goals. An example of a short-term goal is taking a $1,200 vacation in the next year, which means you'll need to save $100 per month. Long-term goals include saving for retirement, a house or college tuition, which are big-ticket items that require more money and more discipline. Writing down goals makes it easier to review your progress.
Paying off high-interest debt should be a top priority. In addition to enhancing your financial security, eliminating interest payments will free up money you can devote to other goals.
4. Decide How to Split Expenses
Couples with similar incomes might just split expenses 50-50, but things get more complicated when one partner earns significantly more than the other. In these cases, go for an equitable split over an equal one.
An equitable split might mean that you and your spouse or significant other contribute the same percentage of your paychecks, rather than the same dollar amount, to the household budget. When the lower-earning partner also works fewer hours, a fair arrangement might be for that individual to take on a larger share of domestic responsibilities to make up the difference.
5. Open Joint Bank Accounts
Although there's nothing wrong with keeping your own bank accounts, it can be helpful for you and your partner to open a joint account from which you'll pay all the regular household bills. Also consider opening a joint savings account for your common goals such as buying a home and deciding to take a vacation.
Reserve your individual accounts for a specific amount of money you agree to deposit each month and spend as you see fit. These accounts might pay for your hobbies, personal luxuries or just-for-fun purchases you can't justify taking out of your joint account.
6. Make a Couples Budget
Now that your finances are no longer exclusively your own, it's time to trade in your solo budgets for a new couple's budget to guide your spending and saving. A logical first step is taking a month to record all your income and spending — literally every cent that comes in or goes out.
At the end of the month, review your spending to determine how much money you need for essential expenses like housing, utilities, grocery budget, commuting costs and insurance. Then look at unnecessary spending on things like entertainment and clothing, and decide how much your budget allows you to spend on these nonessential items. Finally, factor in savings and any discretionary funds you'll contribute to your individual spending accounts.
Mobile budgeting tools like Home Budget With Sync, Spendee and Dollarbird make it easy to track your purchases and expenses and set payment reminders. These apps let you and your partner share and synchronize your accounts so that you both have 24/7 access to your account and budget information.
One popular technique for saving and budgeting is the envelope system, which involves putting cash in envelopes designated for different types of spending, such as clothing or food. Once the money is gone, it's gone. You can set up this type of system within your joint bank account if your bank offers a family budget planner like the one PNC includes with its Virtual Wallet accounts.
See Also: 9 Easy-to-Use Budget Templates
7. Decide How to Handle Large Purchases and Windfalls
Devise a plan for how to spend — or save — tax refunds, job bonuses, inheritances and other windfall income. If you use it wisely, these large cash infusions are a relatively painless way to advance your financial goals even while setting aside some money to enjoy together.
An Ameriprise Financial study found that 34 percent of married couples disagree about major purchases, highlighting the importance of setting limits on discretionary spending. The couples who gave their finance-related communication high marks were also the couples who set limits on how much they could spend without discussing the purchase with their partner.
8. Build Up Emergency Savings
An emergency fund helps you avoid sinking deep into debt over unforeseen circumstances, whether they be major events — like job loss or an extended illness — or temporary setbacks, like a major car or home repair. Dual-income couples need three months' worth of living expenses saved, according to personal finance expert Dave Ramsey. Single-income couples and couples with a self-employed partner should save even more by banking six months' worth of living expenses.
Build up your emergency fund quickly with regular contributions to a savings account earmarked for this purpose. Replace withdrawals as soon you can to ensure the money is always there when you need it.
9. Take Advantage of Couples Perks
Switching from individual health, car and homeowner or renters insurance to family plans can lower your rates and free up more money for saving. You can also mix and match employer benefits to maximize their value and reduce your tax liability. You might even get a "marriage bonus" at tax time, especially if there's a disparity between your income and your partner's income.
Unmarried couples have their own perks, like those who are in higher tax brackets and avoid the penalty imposed on married taxpayers whose incomes exceed specific limits. You might also pay less tax on Social Security benefits, and you retain the ability to divide expenses in a way that reduces your total tax liability. For example, the higher-earning partner might take on the mortgage to get the mortgage-interest and property-tax deductions, reported Kiplinger.
The most important thing you can do to make sure money doesn't take a toll on your relationship is to communicate openly and honestly about your feelings. Remember, your relationship with money is based on a lifetime of experience — which might be very different from your partner's experience. It's important to acknowledge and respect those differences and learn from each other.
Talking about money isn't only good for your finances; it promotes a healthy relationship, too. TD Bank's 2017 Love & Money Survey found that happy couples are 22 percent more likely than unhappy couples to discuss finances at least once a month.
Consider scheduling date nights to go over your budget, evaluate your spending and savings, and discuss the next steps to move closer to your goals. When your budget becomes shaky, simply re-evaluate your financial situation and make some changes. Instead of allowing money matters to overwhelm you, use them to create a stronger bond with your partner by working as a team and facing challenges together.