Five Questions to Ask Before Combining Finances
Getting married is said to be the second most legally significant event in a person’s life; the first being death, and estate planning.
For couples who are engaged or recently married, combining finances can be tricky. It essentially means you’ll be sharing money, property, assets, and all forms of debt. If one of you spends irresponsibly, the other will be responsible to help pay for it. In the eyes of a lender and the government, you will be a single entity.
FYI: Each partner keeps a separate credit score, but your spouse’s score can have a big impact on your financial options (i.e. home mortgage rates).
Before you have “the talk” I think it’s important that you and your partner agree to keep criticism to a minimum. Money is a touchy subject, and nearly everyone has made financial blunders.
Whether you’re engaged, married, or planning ahead, here are five things to consider before combining finances.
#1. What Does Money Mean To You?
Before getting into details about how you spend or your perspective on saving, talk about what money means to you emotionally.
On a scale from 1 to 10, how risk averse are you?
- 1 = type of person who does not like to borrow at all
- 10 = okay taking on financial risk (ex: an entrepreneur).
If you have different opinions, does it make sense if you had a separate account? Would you feel betrayed if your partner ever hid a purchase from you?
You’d be surprised by how emotionally charged the topic of money can be, especially when it comes to a relationship. This is why it’s important to unpack all that emotional baggage first, before getting into the intimate details of it. You might also want to discuss how your parents spent and saved money.
Once you have an understanding on how each of you feels about family money, you’ll be in a better position to create a budgeting structure that works.
#2. What Is Your Financial History?
There are a ton of variables when it comes to knowing a person’s financial habits, and timing is perhaps the biggest factor. A new graduate won’t have the same perspective as someone who’s been in the workforce for a decade. Other major factors include income level, amount of debt, lifestyle, children, and current assets.
If your financial history is more checkered, the money subject can be a bit challenging. Bad spending habits, different income levels, student loans, credit card debt, homes and mortgage loans – these are all topics that should be explored. All the facts come out when you combine finances, so it makes sense to be as honest as possible.
Married couples do not have a joint FICO Score. Each partner has an individual score. However, when you’re married, your partner’s credit score and spending habits will have a big impact on yours.
#3. What Are Your Money Habits?
One partner may have a preference for expensive vacations, while another might like to do stay-cations and save up for early retirement. Maybe one of you likes to invest in the stock market, and the other would rather keep it all in a low-risk mutual fund.
Whatever your money habits are, there’s a good chance that you and your spouse won’t see eye-to-eye on everything. It helps to assign responsibility based on each other’s strengths.
Here’s some questions to ask.
- Have you ever forgotten to pay a bill in the past year?
- Are you a spontaneous spender?
- Did you shop around for your home mortgage or take the lowest down payment?
- How many credit cards do you have vs. your spouse?
- Do you balance your checkbook each month?
- How much do you think should be in an “emergency fund”?
Whether it’s irresponsible spending, failure to stick to your monthly budget, or not keeping track of payments, we each have our strengths and weaknesses.
Life experiences matter too. Maybe you or your spouse were financially irresponsible in your 20’s, and had to dig yourself out of debt in your 30’s. Or maybe you were laid off during the mortgage crisis. Big events like this heavily influence a person’s outlook and money habits.
As you discuss budgeting and finance preferences, it’s suggested that you each of you list your strengths and weaknesses.
#4. How Do You Like To Spend Money?
When it comes to money, it’s easy to focus on the big picture vs. small, every day expenses. This is why setting a weekly and monthly budget is crucial. Make a list of all your expenses and separate them into three categories.
- Required expense: monthly mortgage payment, student loan payment, internet bill, house utilities, car payments, etc.
- Medium expense: work clothes, cable tv, winter jacket, dinner with friends, social events
- Luxury expense: Starbucks coffee, sports tickets, house cleaner, doggy daycare
Agreeing to a budget means that each partner is financially held accountable. You might not get all the allowances you like, but as you know, relationships are all about give-and-take.
Staying out of debt and saving for the future removes the financial stress that a lot of marriages struggle with.
#5. What Are Your Long-Term Goals?
It’s very easy to assume that you and your spouse are on the same page when it comes to long-term financial goals. People have differing preferences toward the percentage of income they want to save, the number of children they want to have, the size of the home, renting vs. buying a home, and everything else you can think of.
I would recommend that you create a timeline in five-year intervals. In the next five years what major events or expenses do you expect? In the next ten years? Twenty?
- Having children (and how many?)
- Will you have to pay for college tuition?
- Do you have elderly parents and will you have to support them financially?
- Dogs have indirect costs – pet bills, electric boundary fence, dog kennels, etc.
Also talk about how you’d go about combining your accounts and assets.
- How will you divide your bank accounts?
- Have you been saving for retirement?
- Do you want to create an emergency fund in case you’re laid off or have a sudden medical expense?
- Would your parents loan you money if you needed it?
Fully understanding your partner, their financial perspectives, and goals might also be an indicator if you’re compatible in the long-run. Each marriage is its own scenario when it comes to personal finance.
Some of the questions may not seem relevant now, but it’s important to discuss so that neither of you is caught off-guard.