United we stand and divided we fall is a common phrase that can be applied to many of life’s challenges, whether it’s team sports, a political cause, or even in a marriage.
But when it comes to managing your finances, while managing everything jointly works for some, unity may not always be the right arrangement. In fact, maintaining separate financial accounts may provide you and your partner with additional financial freedom and protections.
What’s the best way for you and your partner to co-mingle your household finances? The answer often depends on your life stage and your personal preferences.
His, Hers, and House Accounts
One way to divide your financial lives is by setting up “his, hers, and house” accounts. The house account allows you to split the cost of household bills evenly (or in a way that is proportional to each partner’s income). This account would cover expenses related to your mortgage, food, insurance, utilities, and other day-to-day expenses.
You could then each set up individual accounts that you can use to pay for your own personal indulgences. If one partner likes to ski and the other really enjoys shopping for shoes, separate accounts allow you to each enjoy these pleasures guilt-free and without having to ask your partner’s permission. Just remember to not go overboard. When you’re married, your spending also affects your partner.
Second Marriages and Blended Families
If this is your first marriage, matters should theoretically be less complicated. You don’t have to worry about alimony, child support, or estate planning complications. While you may be tempted to pool all of your income and assets into a joint account, there are additional reasons to maintain some financial independence.
For example, it’s important for everyone to build a strong credit score. If you are only listed as an additional cardholder on your spouse’s accounts, his or her bad behavior could hurt your credit score. If you end up divorced or widowed, a strong credit history will help you get on your financial feet. Therefore, each partner should open credit cards in his or her own name and pay them off on time to build a solid credit history.
If one partner has children or an ex-spouse from a previous marriage, there’s even more reason to maintain some financial separation. The partner who was not previously married may not want to have his or her earnings going to pay for alimony or child support. Those expenses can be managed separately.
Managing Inherited Assets
Blended families require more planning, especially when it comes to managing inheritances and ensuring children from a previous marriage are treated fairly. If you were to inherit money and deposit those funds into a joint account, they would become joint marital property. If you had children from a previous marriage and had intended to pass those assets on to them when you die, your spouse—who is a joint owner of the account—could prevent that from happening. And if you were to divorce, your spouse may be entitled to half of the account’s assets—including your inheritance.
There are no hard and fast rules when it comes to merging finances. But understanding what each partner brings to the relationship in terms of debts, assets and income and having open and honest conversations can help ensure that financial disagreements do not become a problem in your relationship.
When it comes to some of the finer points of how to title and manage certain assets and liabilities, you may want to talk to your financial advisor, accountant and/or lawyer about your personal circumstances to avoid future problems.