Joined-up thinking: couples and finances
Money, like a relationship, is a very emotional thing. Put the two together and you’ve either got sweet sailing or stormy waters ahead.
Discussing your thoughts and rules around money is important as a couple. You need to develop together in a financial sense as well as an emotional one. Based on over 20 years of working with couples and their finances, here are some tips on navigating the journey together.
When is the right time to discuss money in a relationship? Nobody can tell you when you’re ready – everyone is different and we all grow up with different values.
I think the right stage is usually the point at which you start doing more committed things together, which generally involve larger sums of money. For many couples that will start with going on holiday, which can be the perfect opportunity to start discussing how you each manage your money, whether you use credit cards to pay and how you handle those.
For others the conversation might become more serious when buying a home together, where there will naturally be a more formal conversation around finances.
Whenever the right time is, don’t allow money to come in the way of your relationship – it’s just the oil that makes things run more smoothly.
We all have different visions of where our life is going and how we’ll finance getting there. Even our interpretations of the same thing can be very different, for example what retirement looks like. You’ve got to consider what you each think the future will bring.
What are your values and belief around money? If you have kids, will one of you be taking time off work to stay at home? Is your vision that you’ll dedicate your lives to your careers or other passions, or are you looking to retire as soon as possible so you can travel the world?
The biggest arguments tend to come when your values aren’t aligned. If one of you enjoys spending and the other sees money as building your future freedom, then when the spender comes back from a shopping spree the other will see that as impacting their freedom. And vice versa too of course: the spender feels their own enjoyment of money is being challenged.
The key is communication: talk openly, honestly and without judgement and try and see things from the other person’s point of view.
The Bank Accounts System
This is a great system for couples which automates and takes routine thought out of daily money decisions.
If you manage your money jointly, the way it works is to have your income paid into a joint Bills Account, regardless of who earns what. From that account each month you’ll have direct debits or regular payments going out to meet all your fixed payments, things like utilities, rent or mortgage, life insurance and so on. You should also have a payment into a savings account.
In addition, set up another weekly payment, which is to each of you – this is your WAM or Walk About Money, your daily spending money. It funds all your variable spending, from coffee to haircuts and dinners out. Agree how much each of you will get as your WAM, it very well may be different.
If you each have your own WAM account, it avoids conflict; you don’t want your partner saying, ‘Wow, you wasted a lot of money on that’. It’s not for someone else to decide what’s important to you, so having this system in place ensures things work smoothly.
However, if you wish to manage your finances separately, the system works the same, with a little additional step. Your income is first paid into an account in your sole name, and from this account you pay the amount agreed, into your Joint Bills account.
I have clients successfully manage their money both ways, it’s not for someone else to tell you what’s right or wrong, it’s what works for relationship.
Should a person with no debt take on the debt of their partner? Everyone has their own views on this, but try flipping it on its head: if that same person was left a large inheritance or won the lottery, would the partner expect it to be shared?
If we’re willing to share our life and money together, then debt should probably be treated the same way as money received – as long as you are both in it for the long-term. If you’re not committed to the relationship then it’s probably not a good idea to combine finances; you need to be all-in.
If you struggle with your financial management then take on good money habits from your partner and grow together as a couple, securing your future and keeping out of debt once it’s gone.
Buying a home
When you’re ready to take the step of buying a place together, start saving individually. If you’re planning to purchase at least 12 months into the future and are aged between 18 and 40, the best place to save is in a Lifetime ISA (LISA). This allows each of you to save upto £4,000 in a tax year, and you’ll receive a 25% government bonus on your contributions at the end of each month.
You can only open a LISA as an individual and not as a couple, so by starting one each you’ll both get the bonuses towards your home purchase. This is also useful should the worst happen and you decide you don’t want to move in together any more: the money is only in your name.
As you look towards your future together, consider ‘equalising your estate’ – having a similar value of assets and income in each partner’s name.
If one of you has a particularly large pension, then it can be worth building up the other to a similar level. If, in retirement, you have one person with so much income that they’re paying higher or additional rate tax, and the other with the state pension as their only income, the latter is not even covering their personal allowance when it comes to tax. Equalising the combined retirement income is more tax-efficient as a couple.
The sticking point can be that, in general, the person with the larger retirement pot is a higher earner now and is paying more tax today. It’s another example of why communication is all-important in your joint decision-making.
Breaking up: see the bigger picture
Money can get messy when a relationship breaks down. Ideally, you want to both think about the bigger picture and trying to find a scenario where there’s a win-win for both parties.
Fast-forward 10 years, past the phase where the break-up hurts the most: does this money and its stress really matter in the bigger picture?
Try to focus on the future and realise that a deal, even if it’s not the perfect one for you, will free you from the worries of the settlement and allow you to return your focus to your future.