Combining finances with your partner might be tricky, as you’re letting each other in to your deepest (or one of them at least!) secrets and trusting them to uphold their end to keep you both secure for the present and future.
When sharing money, it can be hard to get on the same page for spending and saving strategies, and you’ll need to work together to see eye-to-eye and create a plan that is beneficial for both moving forward. Not sure where to start? Here are a few tips for combining finances.
Tip # 1: Before making any moves, sit down with your partner, discuss your respective financial situations with each other, and create a combined budget.
The first step in combining finances with your partner is going over your respective income and expenses and creating a combined budget.
“Remember, combining finances with another person requires a level of trust, and this is the time for you and your partner to be open with each other about your finances,” says Logan Allec, a CPA and owner of the personal finance site Money Done Right.
If you haven’t yet talked with your partner about the $10,000 credit card debt you have or the fact that you find yourself spending a few hundred dollars a month on new skincare products, now is the time to come clean! Once all the “facts” are on the table, you can create a combined budget by determining what your combined after-tax income will be every month, what your combined expenses will be every month, and how much can be saved each month, he explains.
If necessary, use a budgeting tool such as YNAB or Mint to help you create your budget and manage it with ease, he recommends. And you should also have frequent discussions to determine monthly budgets, withdrawals, deposits, and more. Make sure you work fairly as a team to stay up-to-date on each other’s spending and saving habits each month. It’s a great idea to be super transparent and honest here!
Tip # 2: Set up a joint checking account.
In the majority of cases, it’s simpler when combining finances to just have one joint checking account for both you and your partner. “This is the account into which your paychecks will be deposited and from which your living expenses will be paid,” Allec says.
Keep an eye out for new checking account offers, too! You could score a sign-up bonus of around $100-$300 just from opening a new checking account and meeting some basic requirements, such as having your or your partner’s paycheck directly deposited into it. And then you’ll be saving some money together.
Tip # 3: Consider having separate accounts in addition to your joint account.
While it’s probably a good idea for you and your partner to have one joint bank account that is used for the majority of your cash flows as a team, it may not be a bad idea for each of you to have a separate bank account, as well.
“The money in each of these separate accounts can be used however its owner sees fit without any questions asked from the other party. If you and your partner are both comfortable with this idea, allot a certain amount of money — say, $50 a month — to go into each of your separate accounts,” Allec advises.
It can be very freeing knowing that you have a separate bank account with money that you can do whatever you want with, whether that means manicures, a new dress, or a fun girls’ trip—whatever brings you joy as an individual!
Tip # 4: Think before canceling credit cards.
“In a rush to combine finances with each other, many partners make the mistake of canceling one or more of their credit cards in the belief that they and their partner will simply share one credit card account,” Allec says.
This might not be the best idea, though. Here’s why, and bear with me!
“Your utilization rate — which is the ratio of your credit balance to your total credit limit — accounts for 30 percent of your credit score,” he says. So, let’s say you have a total credit balance of $4,000 across all your credit cards, and you have a total credit limit across all of your credit cards of $20,000.
In this case, your total utilization rate is 20 percent, or $4,000 divided by $20,000. Now, what if one of your credit cards has a $10,000 credit limit, and you cancel it? “In this case, your total credit limit across all of your credit cards would go down to $10,000. What would happen to your total utilization rate? It would skyrocket to 40 percent, or $4,000 divided by $10,000, which could adversely affect your credit score,” Allec explains.
Also, if you cancel your oldest credit card, you could negatively affect your length of credit history factor, which accounts for 15 percent of your credit score. Ouch.
Tip # 5: If newly married, consider the tax situation that is best for you.
Many partners combine finances after marriage, and they think it only natural to file taxes jointly with their spouse, as well. “While filing jointly with one’s spouse is probably the right answer for the majority of married couples, it’s not the right answer for everyone,” Allec says.
For example, many borrowers with federal student loans take advantage of income-based repayment plans where their monthly payment is calculated based on how much income they report on their tax return. And under some of these repayment plans, the unpaid student loan balance is forgiven after a certain number of years, he explains.
It may be advantageous to file separately from a spouse so that you can show a lower income amount on your tax return and qualify for a lower monthly payment, too.
Combining finances can be awesome—it’s a huge step in a relationship and it depicts a future for you both. However, be smart. Be open and honest each step of the way with regular discussions to stay on track. In the end, it’ll all be worth it for you to grow as a couple!