Planning your finances when you’re in a relationship
Combining finances when you get into a relationship can be a tricky topic to approach. Here are my tips for the journey through getting together, to buying a home together and then teaching your kids how to manage their money effectively.
- What’s the best way for couples to combine their finances while minimising conflict?
- The Bank Account System
- Buying a home
- Giving your children an education in money
What’s the best way for couples to combine their finances while minimising conflict?
Talk, talk, talk! The key to any relationship is communication and open discussion.
Ask yourself ‘what’s important to you in life?’ and also ask ‘what’s important to you about money?’ That will tell you your values round life and money and if your values are aligned, you have confidence and contentment.
The second thing to do is plan your finances as couple is make sure your visions of what you want the future to look like is similar. Those visions are never going to be identical, but it’s important there’s some alignment. For example, ask yourselves: ‘Do we both plan to work until retirement age?’ If one of you thinks you’ll retire at 40 and travel the world but your partner has the vision of working until 67 with a large, happy family, then you need to have a serious chat!
Systems that can help
First, it’s important that each individual writes down their compelling vision and goals, and then the couple discusses them. Check that those visions are aligned, that there’s a future vision to work with. Then once you’ve done that you need to have discussions about how you’re going to manage money, you can do this either jointly or individually.
I’ve seen both systems work. In my relationship we manage it jointly, it’s one big pot, because money itself is not one of our highest values. It’s important, but it’s not at the top. For some people, money is a very high value and they want to control it, and therefore they may want to manage their money independently.
Whether you have one bills account and everything goes into the pot and you pay bills together, or whether you manage it individually, you’ve got to ask the question: what’s going to work best for us?
You’ve almost got to go to the lowest common denominator because you don’t want to be butting against values, going against each other. You want to make sure things are working smoothly – life is too important to be worrying or arguing about money.
The Bank Account 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 the system works is to have your salaries 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.
One of those payments to each of you will also be a WAM payment – your Walk About Money, your daily spending money. You pay this to yourself on a weekly basis on a Wednesday, and that funds all your variable spending, from coffee to haircuts and everything else. In a couple, you each have your own WAM account. I think that’s important, whether you manage your money jointly or independently, because it avoids conflict; you don’t want your partner saying, ‘Wow you spent a lot of money on that, wasted a lot of money on that’. It’s not for someone to decide for somebody else what’s important, but it’s important top have a plan in place so that things work smoothly.
Typically in a relationship you have a spender and a saver, that’s generally how it works out. Sometimes they’re both spenders, and that can be a challenge! But the Bank Account System will really help you both manage your money.
What’s the advantage of the system for couples?
Since being children, we’re given routines of what to do. It’s ingrained in us to get up and go to school, to behave a certain way at school and then work, to be there on time. As much as we might not like to say it, we’re creatures of routine and habit. Some of us like variety more than others of course, but the Bank Account System gives us some structure around our money; it says ‘These are the money rules’. It automates all your payments so we take emotion out of our spending. And then we give ourselves an amount each week that we can go and enjoy, that’s our variety.
There are six broad human needs according to psychology and certainty is one of them. The Bank Account System gives us that. Variety is another, and the WAM gives us that variety – as long as we don’t take out debt.
Buying a home
Go back to the compelling vision, the plan – is the plan to have a family? If so, what’s the plan with working, are both of you going back to work or is one going to stay home? If one is staying home, how can you manage on one income? Make decisions before the event occurs. If the intention is for one to stay home, then you’ll be living off one salary – so why not try and do that now? Test pilot living off one salary and save all of the other salary. That’s one option.
The other is to look at your spending. List all your expenditures in a month. Then for each, ask: Do you want it, do you need it, can you get it for less? Can you cut any fat off the bone of your expenditure? Can you pay off debt faster using the Snowball system? How can you maximise your income, can you do overtime, get commission, do a second job in your spare time such as network marketing? It’s also never been easier to sell things, you can take a few photos on your phone and list things on any number of sites. Get creative, think carefully – how can you earn more money to get the deposit together?
Finally, there are certain products out there too: the Help to Buy ISA and the Lifetime ISA (LISA). Those are two products from HMRC that give you a bonus on your money to help you raise a deposit for a home. My preference of the two is the LISA, which gives you a 25% bonus on any money you deposit up to £4,000, which is paid at the end of the tax year in April. That’s up to £1,000 on top of your own savings, and you can both do this individually to add £2,000 over the year.
It’s all about asking yourself good questions: have a plan, decide what your future together looks like, decide whether you’re going to manage money jointly or individually and then get creative to raise as much money as you can.
Giving your children an education in money
After a couple has a child or children, what’s the right approach to money management for kids, which we don’t get taught in school?
The first thing to do is for you both to make a will, and potentially get power of attorneys. These sound like boring documents that aren’t helping us achieve our money goals, but if trouble strikes your family you’ll be so glad you have them in place.
Then when it comes to your children, it’s up to you to teach them how to organise their finances, how to budget, and help them be ready to go from piggy bank to high street bank.
When it comes to pocket money, decide if you want to reward your children for tasks or not. It’s my belief that money doesn’t just come to you, you have to work for it, so for me that’s a value I try to instil in my children.
We have a series of tasks, things like emptying the rubbish, keeping the house tidy, and that’s how they earn their money each month. We link their payment to their age: £2 for each year of their age, and we pay it to a pre-paid card – NOT a credit card! – but like a debit card for children. We use Osper, there are others out there too.
The reason we use a pre-paid card rather than cash is because I was getting into debt with my kids! I often didn’t have any cash on me when it came to pocket money day and would have to tell them I owed them, and getting into debt is not the lesson I wanted to teach them! As with everything money-related, I wanted to make it easy and automate it as much as possible.
I also wanted to teach them that cards aren’t necessarily bad, it’s all about how you manage them. I don’t want to take something away from them that they’re going to be exposed to when they’re older; I don’t want them to be excited about getting a credit card at 18. I want them to think that’s nothing new or different, that they’re still going to stay within spending parameters and not get into debt.
As a general rule, we buy their ‘needs’ and they buy their ‘wants’. So things for school is a need and we’ll buy that, a comic or sweets is a want and they’ll buy that.
We then have parameters; we’ll let them buy anything they want if it costs less than their age in years, but if it’s more than that we want them to check in with us. So when they’re 11, if they want to buy something for £20 we’ll ask them to check with us first. We’ll ask if they’ve shopped around to get the best deal, tried to find it cheaper somewhere else, and whether they really need and want it. Sometimes we’ll ask them to sleep on it and if they still want it the next day, they’ll buy it.
This way, we’re teaching them to make good decisions with money, as opposed to encouraging them spend their money on anything and everything they think they want. We’re linking their payment with work, so they’ve earned the money; we’re linking their money to age, so they know as they get older they’ll get paid a little bit more money (and we add in some extra activities that they have to do too); and we’re also linking their spending to their age so that there’s some discretion, they don’t just go off and waste money.
Finally, we also like to encourage them to think about saving as they get older. My son is 13 and in four or five years he’s going to want a car. So we’ve said to him that we’ll match whatever he saves towards that. That encourages him to think about the future, about saving and earning money now for his wants in the future, fostering longer-term planning. It’s all about setting them up to be money-savvy as adults.
Any parent can do this. The amounts are unimportant, you can give £1 per year of age, 10p, 50p, the amount is irrelevant; it’s about having a structure to give your children the techniques and skills to manage money properly.
It doesn’t matter how good or bad you, the parent, are with money – you can change how good your kids are with it. Change the way it has been in the past. Just because you’re not good with money, you can instil different values in your children.
If parents are separated then it’s important to have a lot of discussions about money with the children, and with each other for the greater good. Be a bit more open, explain what’s going on if one of the parties is giving a lot of money but the other can’t; help them understand and make sure money and love are not linked. The child will get different influences on both sides, so have more communication.
Family finances don’t have to be a bone of contention – communication lies at the heart of making them simpler and more manageable.
Those are my tips for couples to make their financial planning harmonious. In short:
- Be clear on your goals, on what you both want
- Have a structure, use the Bank Account System
- Consider the pocket money system to help your children learn
- When you get together, and especially when you have children, make a will and get power of attorneys in place