Considering the pressing decisions that newly co-habiting couples or newly-weds have to make, such as whether to redecorate, who does the weekly food shop or how to make children from previous relationships feel 'at home' in this new family, it might be tempting to backburner the choice about whether to merge your financial accounts, keep them separate, or do a combination of both. But this decision will have a far bigger impact on your financial life, so it pays to give it due attention, whether you're a young couple or you're committing to each other later in life.
Ultimately, your determination depends in large part on your individual financial views and habits, so an initial, candid discussion is essential before you delve into the specifics of how you will handle accounts.
Deciding the appropriate degree of account sharing also depends on a number of factors, including your spending habits and your living arrangement. If both of you work and have similar incomes, the decision is much different than if one of you brings in most of the money. Or perhaps one of you has children from a previous relationship, while the other is used to having the freedom to spend 100% of their salary on themselves. If one of you does have children or owns a business, it's advisable to seek legal advice to help you assess your options.
For most couple, the primary decision is how to handle your bank accounts, including current and savings accounts. You have three basic options.
1. Share Everything
This is the "traditional" approach. You can either add each other as co-owners to your existing accounts, or you can open a new account together. Joint accounts are typically set up so that you each have full access to the account, and assets automatically pass to the surviving partner if the other dies.
Sharing all of your accounts can be the most convenient approach, but it works best for people who share similar financial habits and generally agree on spending. Sharing everything might also make sense when one person is the primary earner.
This option doesn't allow for spending without the other person's knowledge, which, from my perspective, reinforces financial openness that should exist already. You should be communicating about spending regularly, especially for big purchases, so starting to share accounts shouldn't be too much of a shock. If one person is very uneasy about the idea of shared accounts, it's important to make sure he or she has aired any underlying anxieties. (Sharing accounts also creates challenges for surprising each other with gifts!)
2. Share Some
Many couples find sharing a portion of their finances to be the most comfortable option, either for the long term or as a way to transition. There are several variations, but a common approach is to create "Yours, Mine, and Ours" accounts. Create one combined bank account for shared expenses like mortgage/rent and utility bills, and keep separate individual accounts for discretionary spending.
This approach enables each of you to have money to spend on your own purchases, without as much anxiety over whether the purchase is something you both want (you could also accomplish this with a simple budget, however).
Not surprisingly, keeping some accounts separate while combining other finances can make things more complicated. You would need to figure out how much each of you would contribute to the shared account each month and which expenses it would cover. Many couples base the amount each contributes on a proportionate percentage of their incomes.
3. Share None
There are some situations when it makes sense to keep your accounts completely separate. If you've been living together for some time without sharing accounts and haven't hit any rough patches, you have the option of simply continuing your current arrangement. Keeping accounts separate is also the way to go if you and your partner want to keep a clear delineation between assets you each brought into the marriage (more on this below).
If you and your spouse keep your accounts separate, you will need to decide who will pay for which expenses. Some couples divide up bills so that each person is responsible for a certain set of payments each month.
Other Assets
In addition to current and savings accounts, you will also need to determine whether to add both your names to other assets, such as property, vehicles, and investment accounts. Adding your partner to the deed of your house or apartment is more complicated than setting up a joint bank account. Check with your mortgage provider, because changing the name on a mortgaged asset can lead to unintended consequences, and your lender may also require additional documents and fees. If you're already considering refinancing, though, it's an opportune time to consider adding your partner to the mortgage and deed.
For your taxable investment accounts, discuss your investment philosophies and determine if it makes sense to share an account. If one of you has a higher risk tolerance, for instance, it may make sense to keep things separate. Although your retirement accounts remain separate, you should develop a retirement plan together. How much is each of you contributing to your company retirement plan and/or ISAs, and what does your combined retirement portfolio's asset allocation look like? (Use Morningstar's Instant X-Ray tool to help you sort this out.) While you're at it, remember to update your beneficiary designations (More on this in this article.)
Legal Considerations & Separation/Divorce
Few couples go into a relationship expecting that they may eventually split up. But given high divorce rates, it's worthwhile giving at least passing consideration to how your assets would be divvied up in the event of a split. That, in turn, could affect how you title your financial assets.
No matter how good you intentions, break-ups are emotional and difficult times and we tend to make bad financial decisions when emotions are involved. Laws governing asset ownership are intricate and should be approached with the help of legal aid. If you're worried about protecting certain assets in the case of a divorce or split, then it's probably a good idea to keep that account or asset in your name only and to not comingle money from the account with joint accounts.
Couples who want to hammer out exactly how assets would be divided in a divorce should meet with a solicitor. Prenuptial agreements are becoming increasingly common, but postnuptial agreements are also an option. Of course, these considerations can hit an emotional nerve, and there is heated debate over whether couples should plan for possible divorce. But when children are involved, particularly if they are children who--genetically, at least--belong to only one half of the couple, it's a good idea to legally define guidelines regarding who would be entitled to what if such a circumstance were to arise.
Read this article for advice on how to invest for retirement following a divorce.
Stay Flexible and Communicate
There isn't one solution that works best for everyone--it's a matter of figuring out what works for you. Regardless of your choice, make sure each person's responsibilities are clearly defined and both parties know where money is coming from and where it's going. Make a list of your monthly financial obligations, including your rent or mortgage, council tax, utility bills, and determine who is responsible for making sure payments are made. Remember to include savings--both for retirement and other goals--as something the two of you must contribute to monthly. It will probably take some experimenting to find a system that suits you, and what works now might not be the best approach later. Remaining flexible and checking in with each other regularly is more important than nailing down a system right away.
