Money is one of the most difficult topics for couples, no matter their age, experience, or social status. Discussing family finances together has many benefits. It is one of the reasons why some long-lasting marriages are stronger than ever even after decades. Open communication will also strengthen the bond with your partner, as you will need to work as a team to face both the good and bad sides of maintaining a house.
Before you start calculating your incomes and expenses, you first need to understand each other’s approach and attitude to money clearly. In this way, if there are any areas where you agree – or disagree, you will be able to spot them right away. There might be things where you can easily reach an agreement and others that will require you to compromise on certain purchases.
No matter at what stage you are in your relationship, there are three important approaches to consider when having money talks. Read below to find out more!
Expendable vs. Discretionary Income
Let us be honest, there is an unavoidable feeling of relief and excitement from seeing your checking account ramping up on payday. But do not let this fool you! This money will probably not sit in the account for too long. That is why you need to consider your income in two ways:
EXPENDABLE: This is the net income that is credited to your account by your employer after all taxes have been deducted. This is also known as Disposable Income.
DISCRETIONARY: This is money that is left AFTER all necessary expenses (rent, mortgage, groceries, health & transportation) have been covered. If you have any bill that is due for payment, this is the time to pay it off. You can then deposit what remains into a savings account, invest it, or use it for a nonessential purchase.
Oftentimes, the necessary expenses are so high that there will be no room for nonessential purchases. So many people get discouraged or disappointed. BUT DON’T LET THIS BRING YOU DOWN! You were able to pay off your bills, and it is very good news! This means that next time around, there will be more chances to have some spare money to splurge – or invest!
In the event of an emergency…
Building an emergency fund is extremely important. Whether you live alone, you are married, or you have children, you must always try your best to put some money aside to cope with unexpected expenses. What is important to remember is there is virtually no way to predict all of life’s situations, whether good or bad. However, a couple should still brainstorm about potential unexpected events and setting aside a sum of money that would cover such an emergency. Emergencies that may arise in an average household are the following:
- Being laid off from a job.
- Injuries (at home or work).
- Car repair/car maintenance.
Emergency funds are necessary, as we all learned during COVID
This question does not have a straightforward answer. The number of emergency funds will STRICTLY depend on your current life situation.
Were you laid off during COVID? If so, chances are that you have developed a healthy fear of NOT having an emergency fund. And if not? You should have one. The first thing to do is to evaluate at what stage of your life you are and then decide on a budget that will make up for your emergency fund. By doing so, you will get a more realistic view of how much money you should have for emergencies. For instance, a fresh graduate who is living in a shared apartment and is looking for their first job will set aside a different amount of emergency money than that of a newlywed couple who has just bought their first home.
Let’s have THE conversation
Talking about money is never easy, and when it is time to discussing with your loved one, it becomes a much bigger challenge. But no matter how uncomfortable it feels, honesty about finances is crucial for a successful relationship. Lying to a spouse or being unclear about how money should be spent will ultimately lead to mistrust or, in worst cases, a divorce. Instead, open conversations are the best way to unpack a couple’s financial baggage, so it does not become a source of contention later on.
Most couples have very different spending philosophies. One of the most important things to discuss is what each other’s money style is going to be as you move forward in your relationship. Instead of quickly criticizing your partner’s spending behavior, try to understand why they spend money the way they do. Is there something they are doing wrong? If so, can you talk through to them to fix such mistakes? By first identifying the triggers, then discussing with them on a deeper level, you will be able to focus on a specific issue rather than judging your partner personally.
Long term goals are romantic <3
There is nothing better than achieving a goal together, especially if it involves the wellbeing of the family. Setting up long-term goals should be part of your early budget conversations, especially if you are ready for a big step with your partner.
The most common long-term goals revolve around buying a house, planning for retirement, or even for a dream vacation. Setting specific goals will stop you from overcoming a budget, and it will make you more disciplined about what to spend and how much to save regularly.
A good idea for your first long-term goals would be to focus on what is urgent: your mortgage and any debt you may have. You should also outline a few goals for your retirement, which you can revise later on as part of your financial plan.
PRO TIP: list your debts based on their interest rates, with the highest on top and the lowest at the bottom, and start paying them off one at a time. Make sure your savings goals are clearly outlined and how you will hit each milestone as a couple.
Finances: Combined or Separate?
One of the biggest topics among new couples is whether to combine finances or living with separate accounts. Although there is no set answer to this question, a few common points can be considered:
Combining finances means that most or all of your money goes into a big pot or joined account. Although both partners can still have their accounts for individual spending, all major income and expenses will mostly be shared. In a prenuptial agreement, combined funds are marital property or in some states, community property.
By choosing this approach, each one will keep their accounts, where they will receive their income. As for the expenses, they are divided among the couple. In some cases, bill payments may be split on a 50/50 basis, while other times, the partner who earns more will take on the biggest portion of the expenses. In a prenup, separate funds that are intended to remain with the spouse whose property they are, are referred to as Separate Property or in some states, non-marital property.
This is the “middle ground”, where a joint account is created for household expenses and other family-related items such as a vacation. At the same time, each partner still keeps their account for their personal spending. In these cases, both members take a portion of the money from the personal account and transfer it into the joint family account. Some couples even decide what percentage should be transferred to the shared account or a set amount. In a prenup, this hybrid/combined account is an option, and would be considered marital or community property.
When deciding how to split the finances, it is very important to discuss openly and that each partner gives their input about how money should be used. Both partners should find an equitable approach that will serve them well in moments of crisis.
Prioritize the household budget!
It can be tempting to buy the latest videogame or the newest piece of make-up on the market. We all have our ways to splurge. However, the financial well-being of the house should be a top priority. You do not need to wait until you have kids to build a “household-first” mindset. This is a great way for couples to take control of what expenses should be prioritized and which ones can wait. It also helps build discipline for when it is time to expand the family.
The first thing to do when brainstorming about household budgets is to follow the 50/30/20 method. Calculate how much you both spend each month on necessary things such as utilities, groceries, rent, insurance, and transportation. Ideally, your essential expenses should not exceed 50% of your take-home income. The next 30% of your budget may be spent on wants, which usually include meals out or entertainment. Beware that if you are not able to fulfill your 50% of essential spending, you should not splurge on these unnecessary wants. Lastly, the 50/30/20 rule states that the final 20% of income will go toward paying off any debt, depositing the rest into savings accounts.
Every time the topic of household budgeting is brought up, you always need to talk about emergency funds as one of the main priorities. If one of you gets sick or loses your job, there always has to be some last-minute money to cope with unexpected circumstances. Once this topic is discussed, you can then aim at short- and long-term financial goals.
So…whether you are into a new relationship or getting ready to walk down the aisle and say I do, always remember two words about marriage and money: never lie. Just like honesty is key to a successful relationship, being on the same page with household finances will make your marriage ten times more successful. Do not let money be the main source of stress in your union. Once you see that it is time to talk about serious topics like combining finances or living life together, the best thing to do is to establish good habits from the beginning and being clear about what you want. Creating a prenuptial agreement allows couples to discuss how they plan to manage finances throughout their marriage, clearing space for an honest, open conversation.
Julia Rodgers is HelloPrenup’s CEO and Co-Founder. She is a Massachusetts family law attorney and true believer in the value of prenuptial agreements. HelloPrenup was created with the goal of automating the prenup process, making it more collaborative, time efficient and cost effective. Julia believes that a healthy marriage is one in which couples can openly communicate about finances and life goals. You can read more about us here Questions? Reach out to Julia directly at [email protected].