Should you Combine Finances and Collaborate on Financial Decisions?
Conversations about debt, budgeting, or investment strategies typically aren't great first-date material. It isn't romantic to ask a potential partner about their 401(k) contributions or to grill them about their debt tolerance. Save these talks for later when the relationship is well established and you're becoming increasingly part of each other's lives.
But what if those conversations never happen?
What if you end up marrying this person, sharing a household, having children, and filing jointly on tax returns every year…but you've never taken the time to sit down and discuss your finances in any depth?
This communication gap happens far more frequently than you might realize. People can live together for years without discussing their investment philosophies or debt tolerance. They can live alongside someone for decades and never truly know their thoughts on money management or financial goals.
Having honest, open conversations about finances and collaborating on financial decisions is critical. Even if you're not married, talking about money is essential. Sharing your views on your finances is vital for building trust and understanding between two people and paving the way for a strong and healthy relationship. Money is the foundation of many major decisions you'll make together, such as sending your kids to college, buying that lake house, planning vacations, and strategizing for retirement, so having a shared understanding will help you prepare for those eventualities and make decisions that best suit you both.
Let's discuss why and how to share financial information, make unified financial decisions, and combine finances with your significant other. Failing to do so could be incredibly costly.
Starting with the Basics
It's a good idea to start discussing money and financial considerations early in a relationship. If you’re sharing a living space, discussing items such as the electric bill, paying for groceries, or how often it makes sense to splurge on food delivery services or nice restaurants is essential. Who will pay the rent each month? Who will manage the bills? Does it make sense to split things 50/50, or is someone making significantly more money and is, therefore, willing to contribute a bit more each month?
Though it may be uncomfortable at first, at some point, you will also want to begin talking about your financial goals. Are you both saving for retirement? When it comes to investing, who owns what stocks and mutual funds? What is each person's retirement plan?
It's possible that one or both of you do not have a plan. Not having a plan is certainly not unusual, and it's nothing to be ashamed of. What it does mean, however, is that one or both of you must build your financial literacy. Plenty of books and websites can help with this, and you could seek guidance from a trustworthy financial advisor.
Remember, conversations about finances don't have to be adversarial or contentious. It's best to treat these conversations as opportunities to learn more about each other and to understand each other's perspectives. Your joint financial journey will be much smoother if both of you are on the same page.
Sharing Financial Information
When you create a shared financial plan, it's important to ensure both of you have the same access to financial information. Share bank account particulars, credit card balances, retirement account data, and other financial information that is relevant to your life together.
Sharing these sensitive details involves significant trust and can test your relationship. What if you discover your significant other is deeply in debt? Or their spending habits or retirement goals do not align with your own?
I think it's important to take a leap of faith. You will discover these details one way or another, so why not discuss them early on? For example, I once worked with a husband and wife with very different spending ideas. The wife was relatively frugal and put a lot of thought into her financial decisions. The husband, on the other hand, was more of a spendthrift. He enjoyed nice clothing and thought nothing about dropping $1,000 on a new suit. His spending habits caused a lot of tension in the relationship, and it was apparent that this couple had never bothered to sit down and plan a monthly budget that worked for both of them.
Another source of tension is debt. When you marry someone, you also take on your partner's debt through student loans, car payments, or credit card debt. When you share financial obligations, you must also share a plan to pay off that debt. That's where open, candid conversations come into play. If you don't discuss these things with your significant other, they may cause trouble in the future.
How Combining/Collaborating Saves Money
I've talked with many couples who have taken the "silo" approach to finances during their entire relationship. They have each tended to their own assets, conducted their own planning, and not bothered to check in to see what the other person was doing.
This kind of independent planning can be inefficient and costly. It's often less expensive and more productive to work together. For example, can you make strategic charitable contributions that will come with tax benefits? Can you engage in joint estate planning? Or make income tax-planning decisions that will benefit you both?
It can also make sense to combine assets—shared bank accounts, investment funds, or owning a home together—to save on taxes and other costs. For example, when both partners save for retirement, they can often benefit from so-called "economies of scale." A couple's assets can be combined, which often results in reduced fees. Furthermore, a financial advisor can often provide more comprehensive planning and advice when working with both of you.
Another reason to work together? Create a balanced and strategic financial plan. If both people in a relationship have made high-risk investment choices, that doesn't create balance, and it certainly doesn't create much of a safety net. If both people had put the bulk of their assets in FTX, the cryptocurrency company that went belly-up in November, 2022, they would be in a world of trouble right now. There's no guarantee that the folks who invested in FTX will get all or any of their money back.
A Few Tips
The essence of my advice boils down to a few simple steps:
- Be Communicative About Finances
It's beneficial for couples to communicate openly and often about their financial situation and goals. If either or both parties need clarification about their financial picture or need to learn how to define their financial future, it's a good idea to seek counsel from a trusted, fee-only financial advisor.
- Combine Planning and Assets
A silo approach to financial planning can be inefficient or even harmful. Whenever possible, engage in joint planning. In some cases, it also makes sense to combine assets--talk to a financial advisor to understand when combining finances makes sense.
- Regularly Check-In
Financial situations and goals can change over time, so regularly check in with your loved one about these topics. Even though I work as a financial advisor, my wife and I schedule an annual meeting with our financial advisor to discuss financial circumstances, plans, and aspirations. When someone else asks the questions, what can bubble up to the surface is amazing. I might think we agreed to buy a retirement home in Florida, for example, when my wife has the impression that this is just a passing fancy. Sitting down with a financial advisor can help you and your partner to clarify your goals and dreams.
- Work with a Trusted Financial Advisor
Finally, I can't emphasize how important it is to find a financial advisor you trust. At its core, joint financial planning is a relationship. It should be a dialogue that helps you understand each other's financial situation, needs, and mutual goals and dreams. A financial advisor can be an invaluable partner in this process, so choose someone who understands the importance of communication, trust, and collaboration.
Sharing financial information with your significant other can seem intimidating, but it doesn't have to be. Take a leap of faith and have open and honest conversations about finances while defining your goals. If you align your financial visions, you'll be more likely to achieve your dreams. Additionally, combining planning and assets can make sense and save you money in the long run. Work with a financial advisor to get the best advice and support, and ensure you regularly check in on each other's financial situation. Collaboration is the name of the game.
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