Relationships can be tough. Managing your finances can be tough. Combine the two and many couples find themselves in a bit of a pickle! Today’s we’ll have a look at the important things to do for your finances in any relationship, and then some specific examples in order to try to determine how you should manage your finances in a relationship.
Divorce Rates And Finances
This is a rough estimate and varies depending on country, religion, age, education, pre-marital cohabitation and no end of other things. However, whilst it varies, the general average figure is usually around this 50% mark. So, yeah, relationships are tough!
Researchers have also determined the most common reasons people gave as being a major contributing factor towards their divorces. They can be split as follows:
- Lack of commitment (73%)
- Arguing too much (56%)
- Infidelity (55%)
- Marrying too young (46%)
- Unrealistic expectations (45%)
- Lack of equality in the relationship (44%)
- Lack of preparation for marriage (41%)
- Abuse (29%)
Although “finances” is not a specific option in this research, we can clearly see that money and finances could be an underlying factor in almost all of the above.
A separate study from Kansas State University (looking at 4,500 couples) concluded that “arguments about money are by far the top predictor of divorce”.
However, the most interesting part of this research suggests that it is arguments about money from any point in the relationship (either pre or post marriage) which suggests the high divorce rate. “It doesn’t matter how long ago it was, but when they were first together and already arguing about money, there is a good chance they are going to have poor relationship satisfaction.”
So, it doesn’t matter what stage of your relationship that you are at – it’s time to discuss those finances!
Communication Is Key
We will shortly discuss some examples, rules and tips for managing your finances in a relationship. However, none of it will matter if you forget the most vital part of all: TO TALK!
The single most important factor in successfully managing money in a relationship is communication. This helps with almost all of the related issues regarding control, trust, equality, etc. If you can both have open, honest and thorough communication (where you are both active participants in the discussion and in the corresponding decision making), then managing your finances in a relationship becomes a whole lot easier.
What’s the best way to do this? Well, it may sound a little silly, but I have found (both through personal experience and with talking to friends) that having a specific time set aside to discuss money and finances on a regular basis is a great idea. Call it your “money date”. Ours happens on the first Friday night of every month (or as near to if other plans clash) and it involves myself and my partner, a bottle of red wine and a load of Excel spreadsheets!
How you do this is up to you? However, set aside the time and put it in the diary. Otherwise, it’ll get put off and you’ll find that you aren’t talking about your finances as often as you should.
Why is it important to have time set aside to talk about money? Well, in this scenario, whatever the topic, it will be a discussion. The vast majority of the “money date” will involve agreeing on financial matters (like budgets) and looking towards a more positive future together.
However, if your only communication comes ad-hoc, it will always be due to something that has just come to your attention, which will usually be a negative thing. For example, your partner has spent more than you think they should on something – argument. It’s not often that you’ll be toasting each other on the household budget if you leave these discussions to chance.
So, plan your communication and it will be a lot more positive. Then, the topic of finances attaches itself to this positive feeling and it all becomes much more pleasant.
How Should We Manage Our Finances In A Relationship?
This is a question that every single couple will face at some point, and the most commonly asked question is whether we are “ready” to combine our finances.
The answer depends heavily on whether you are married. Now, I’m not a religious person and have no interest in whether you want to get married or not. However, from a financial standpoint there is a significant difference between couples within and out of marriage, and that is the law.
For married couples, there is a financial framework which goes some way to decide how your net worth would be divided if the relationship was to fail (divorce). However, no such thing exists for non-married couples.
Therefore, I would recommend the following:
For married couples: combine your finances into one. All decisions should be made together (no decision is made final if you cannot agree) and you can manage all your money, net worth, etc as if it belonged to one single entity (“Mr & Mrs X”). This ensures that all actions are taken to benefit the marriage, rather than the individuals within and should help resolve many common money problems. Remember: COMMUNICATE….TOGETHER…
For non-married couples: do not combine your finances. You are each free to make your own financial decisions and should manage and track your finances separately. Try to avoid joint purchases where possible (especially on large items like houses). However, you should still discuss your finances together. This part is no different to the married couple. You should still discuss every in and out of your finances together and you should also agree on all the decisions that you are individually taking.
Many people see this approach as lacking commitment for the non-married couple. Absolutely not. You are still just as committed together, and you still maintain the same level of trust, equality and all the other factors which a healthy relationship requires. It’s just that your numbers are managed on two spreadsheets and you have no assets or liabilities in the name of “partner X and partner Y”.
However, this can lead to many more questions. I will address some common ones below, but if you have any others, please leave a comment and I’ll be more than happy to answer them individually.
Split On Cost vs Split On Income
Everyone’s financial situation is different, but when you start in a relationship, you and your partner’s social lives and lifestyles collide. This can often lead to a problem.
Let’s imagine that two people enter a relationship. Partner X has no debt, significant savings and an income of £170,000 per year. Partner Y on the other hand earns £30,000 a year and is desperately trying to tackle their own commercial and student debt.
As per our recommendation above, we suggest that each partner continues to manage their own finances. Both partners will probably has some form of resentment if the finances were combined instantly and partner X paid off partner Y’s loans.
However, by keeping their finances separate, they might now face an issue with lifestyle. For instance, partner Y cannot afford the expensive meals which partner X tends to indulge in. Equally, partner X may not wish to holiday in Butlins because that is all partner Y can afford.
So, splitting expenses based on cost may not be a viable option for all couples. Instead, it may be more appropriate for the couples to split all costs based on their income. Their total income is £200,000 and this is split 85%/15%.
Therefore, if they go out for a meal which costs £100, then partner X would pay £85 and partner Y would pay £15.
Again, this might not work for all couples and you may find an agreement somewhere in between. In fact, it doesn’t matter what you agree upon, as long as you do AGREE on it before the event. If both halves of the couple are happy with the split upfront, then this will inevitably avoid conflict later down the road.
How To Split Housing Costs
A common example, which will usually crop up at one point in a relationship, is over housing costs. If you are renting, this is easy. You simply split the housing (and all related expenses) in line with your split that you have agreed in the previous section.
But, what if one of you owns a property which the other partner moves into. Well, many combine the property and the mortgage into joint names. Again, we wouldn’t recommend this as (until you are married) you are effectively business partners in a property investment, and its often not wise to mix business and pleasure.
Instead, we would recommend that you leave the legal structure as it was and you reach an agreement on housing costs. The most sensible method is for the partner who does not own the property to pay 50% (or the aforementioned agreed split percentage) of all pure expenses. This is any outgoings that decrease your net worth (council tax, house repairs, interest on the mortgage, etc). However, this would not include any payments on the capital amount of the mortgage, renovations to the property which add value, etc.
This is the fairest solution to both parties and means that, if the worst was to happen and the couple were to split up, the non-homeowner moves out having effectively paid their rent and the homeowner still has the property as before.
If this solution doesn’t work for you, that’s not the end of the world. But, find a solution that you can both justify as being fair, that you both agree upon and that you have both discussed and debated with equal input!
So, What Are You Waiting For?
Get that “money date” set up, pour a couple of glasses of wine (or beer, or orange cordial) and get talking. If you don’t, you could all too easily end up as a statistic it those divorce rates!