Financial Poise
A bride and groom make heart hands, symbolizing their decision to open a joint account

Money Basics Series — Part 5: Is Your Relationship Ready for a Joint Account?

Personal Finance Fundamentals Every Adult Should Know

How do two people bring their separate selves and lives together? You may have guessed by the theme of this series that the answer is related to money.

A joint account is a way for couples, whether married or dating, to share finances through a single bank account. However, it may not be the right decision for every couple, especially if each partner has a different outlook on money and how to spend it. If you have followed previous installments on budgeting and debt, then you already have a good sense of where you are in your financial journey.

For many, talking about money and finances is somehow taboo and not addressed until after the “joint” financial commitment is made. The discussion about your individual money habits and goals needs to take place, at length, well in advance of the time you decide to put all of your income (and savings) into a joint account.

When I offer this suggestion, I am often met with the response that it doesn’t matter, because the parties are young, in love and “have nothing.” I appreciate the sentiment, and the low bank account, but if you want to see your money thrive and your wealth increase, you must have this discussion before you unite your bank accounts. Just because you have no money today, certainly doesn’t mean you want to keep it that way.

Charlene’s Story: Red Flags for Dinner

“I met this great guy. He is well-spoken, educated, good looking and athletic.  As soon as I met him, we had a connection and sparks were flying. As we are getting to know each other, he has been honest, too. Thus came the disclosure that he is in transition, job-wise. Translation, unemployed.

“The thought of getting involved with an unemployed 50-something took my breath away a bit at first, but here is an opportunity to find love and begin an exciting new relationship. Unemployment is a part of life, and I am of the firm belief that when one door closes another, better one, will open.”

These were the words of Charlene, a client who consults with me about her own financial issues, and recently, about the internal conflict she is facing. While unemployed, Great Guy spends his money in ways she finds reckless, which worries her. He lives in an opulent apartment, belongs to an exclusive golf club and drives a luxury automobile.

Despite being unemployed, Great Guy frequently goes out to costly meals, live performances, social events and shopping sprees. He is a snob when it comes to chain restaurants (who doesn’t like The Cheesecake Factory?), so dinners out are never inexpensive.

When he does buy groceries, Great Guy goes to the ultra chic, expensive supermarkets and purchases top label products. To the contrary, Charlene spends her money on a tight budget, always looking for ways to have fun and enjoy life on the cheap.

So far, a joint account is not looking like it will be in their future.

Taking a Sober Look at His Bank Account and Spending Habits

The evidence presented would lead me to believe that although her friend is currently out of work, he has likely saved throughout his working life and is solid enough to weather this unemployment blip. Yet, red flags fly when Charlene discloses that he questions the economics of spending/investing money to enhance and elevate his employment marketability. Equally disconcerting, Charlene reveals, have been his cavalier statements that he intends to work into his 70s or beyond.

This is the condensed version of Charlene and Great Guy’s date last week.  They started with lunch. She suggested the local diner. He chose a trendy place in town.  When the check arrived, he pulled for his wallet, but knowing an expensive day (by his invitation) was ahead, Charlene jumped in and paid. The check and tip came to $60, maybe twice what the diner would have cost.

At the end of their day in the city, after his money (or credit, she doesn’t know) was generously spent on transportation, drinks and show tickets, they went to dinner at a highfalutin restaurant. The entree prices ranged from $28 to $78.  Charlene ordered the lowest-priced pasta dish and drank tap water. To her surprise (and a little horror), he ordered several liquor beverages, an appetizer, entree, side vegetable, desert and coffee.

Having “The Money Conversation”

Not surprisingly, the cost of the dinner was astronomical. Charlene winced when her friend mentioned the tip alone was not much less than the price of the outrageous blue plate specials at breakfast.

This week, Great Guy invited Charlene out to yet another expensive dinner. Instead, she invited him to her place where she plans to cook a delicious dinner that will certainly be more economical.

Charlene has only known Great Guy for about a month, so is she justified in asking him what his actual situation (money-in-the-bank-wise) is, or is that none of her business? The question in her mind is: Does Great Guy have $2 million in savings or $200,000 (or $20,000 or $2,000)?

While it may be none of her business (and maybe he will lie anyway), for her peace of mind she needs to know if he is being responsible, making wise decisions and not wasting a significant portion of his resources living a lifestyle that he can ill afford. To me, it is a question of compatibility and aligned money values.

After much discussion and contemplation, Charlene has indicated that she is determined to ask her friend these burning questions on their next date. So, I guess Charlene’s homemade dinner will be quite telling. After opening this can of beans, Charlene may be eating her chili solo, or she may be setting the foundation of a solid relationship with her Great Guy where money issues, truths and values are on the table, ready to be analyzed and fully digested.

You Should at Least Agree About Finances

Two people who join in life using money as the means to accomplish their goals must have a solid agreement about how they are going to save and spend their income, especially if they plan to open a joint account.

Most readers understand that if they share a joint account, each joint owner has full access to the entire amount on deposit, not just 50%. So, right off the bat, you are giving your partner carte blanche—complete freedom to act as he or she wishes—to your income. That in itself is a huge show of trust, which is admirable and sets the stage for both honesty and vulnerability. Unfortunately, even those with the best of intentions often have different ideas about what they are working to accomplish. In fact, most people have not identified any specific goals for their money.

My suggestion is not complicated, and it doesn’t take an economics degree. It does take time and focus. Make it a priority to discuss money matters. Specifically, do you have the same goals? Are you both willing to agree to a set amount to spend for needs and wants? Do you have a defined savings plan?

Discuss Pre-Relationship Debt

The first thing you want to tackle is an understanding of the pre-relationship debt. If you are coming into the relationship with debt, take account of what that debt represents (credit cards, student loans, auto loans, etc.) and how long it is going to take to pay off that debt. If you are the one with the debt, do you expect your partner to share in those payments once you join your money? Or do you expect that for every payment made to reduce your pre-relationship debt, he or she will withdraw an equal amount for “whatever”?  Similarly, if you come to the relationship debt-free, are you okay with your income going to pay the other’s pre-relationship debt? You can see how this becomes complicated and can easily result in resentment.

Do Your Financial Needs Include a Joint Account?

Once you have a plan in place to address the pre-relationship debt, you will want to focus on your “needs.”

Housing

Housing is often where the majority of your income goes, whether in the form of purchasing a residence or rental payments. Together you should look at your net income (the amount of the two paychecks) and determine what percentage will be allocated to your residential living. Make sure that you include not only the rental/mortgage payment, but also the related costs, including electricity, gas, water, insurance, maintenance, phone, internet, cable, etc. Recognize, before you commit, how much of your income will go to those expenses, and always add in a buffer, because there will be hidden costs that were not considered in the calculation.

The standard rule for lenders is that your monthly housing payment (principal, interest, taxes and insurance) should not take up more than 28% of your income before taxes. Many people are fooled into thinking since they are eligible to obtain a high mortgage based on those percentages, they can get a bigger/better house. Please note, however, the lender is not looking at your expenses and your future goals, it is in the business of making money, by taking yours. I provide this information only as a guideline and recommend that you make sure to keep your housing expenses well below the guidelines. Most importantly, I am recommending that you both look at the costs and agree, together, how much of your joint income will be allocated for this “needed” expense.

Transportation

The second largest “needs-based” expense for Americans is transportation. How much of your income are you going to allocate to transportation? If you are going to purchase a car (or two), research and discuss what amount are you willing to spend on monthly payments, insurance, maintenance and gas. Again, build in a reserve for the unexpected (especially if you choose to have a high deductible).

Daily Expenses

Finally, consider jointly, the needs-based costs you will incur for food, clothing, health care (including policy premiums, co-pays and prescription drugs) and other insurance (life, disability). Are you willing to jointly share these costs? If you have a joint account, you will be doing exactly that. What percentage of your income are you both willing to allocate to these costs? Where will the funds come from if you exceed the allotted amount in a given month?

The “needs” part of this analysis is the easy part. Now for the “wants.” Are you and your partner in agreement as to what percentage of your income will be saved and what will be spent on discretionary expenses?

The Golden Rule: Pay Yourself First

Pay yourself first. Saving is pivotal to your financial success and personal well-being. How much of your income are you going to save? What vehicles are you going to use for your savings?  How are you going to diversify? Research and develop a joint plan that you can work together to achieve. Watching your money grow is a lot easier to do than tearing each other apart when credit card bills for unexpected or unsanctioned expenses arrive.

Next, you need to discuss and agree to a plan as to what amount each party is entitled to use for personal items, gifts and expenditures.  Perhaps one party has an expensive hobby, or an ongoing commitment such as a child from another relationship. How will it work if one party is spending and the other party is not, or there is a discrepancy in spending habits?  In the beginning it may not seem to matter, but in the long run, these types of issues can easily become a major source of angst and irritation. If you discuss these issues before joining your money, you may save yourself a lot of money and a lot of heartaches.

If you are already financially tied together, it is not too late to address these same issues. Every couple should make time to have “money dates.” This should be a designated time – maybe once a month – to review your finances, to authentically look at where your money is going and to analyze your plans for the future. Whether your goals are the same or they differ greatly, if you are invested together, you need to have a plan that works for both parties. Communication and a plan, at any time, are the keys to money success and peaceful living.

Alternatives to the Joint Account

Now, perhaps Charlene and Great Guy have a productive conversation about money. Perhaps Great Guy “sees the light” regarding his spending habits, and Charlene decides to give the relationship a try.

It doesn’t mean that a joint account is the only option.

Charlene and Great Guy can do one of two things:

  1. They can keep separate accounts for the duration of their relationship.
  2. They can link their separate accounts, or link their accounts to a separate joint account.

By linking their accounts, they can maintain their finances separately but still have the option to send each other money. Or, they can individually send money to a separate joint account in order to pay shared bills—without having to give access to their individual accounts.

Sharing financial responsibilities does not mean that you have to give up your own financial independence. By having the money conversation early on in your relationship, you can find the best path forward in your financial journey and avoid difficult arguments down the line.

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Basic Investment Principles 101 – From Asset Allocation to Zero Coupon Bonds and Goal Based Investing – Planning for Key Life Events.]

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