The Ideal Banking Framework
Knowing if and when to join finances with your partner can be difficult questions to answer. And because it is a difficult decision to make, people tend to default to the easiest option. Do nothing and maintain the status quo.
But how we structure our banking can speak volumes about us as individuals, as well as the nature and status of our long-term relationships. The question of whether or not to share joint accounts or maintain finances individually is often swayed by our personal traits and life experience, but it also comes down to an overall measure of how much our life goals are aligned with our partners.
There are many in the financial industry that hold a firm belief that regardless of the length and nature of your relationship with a spouse/partner, that you should always keep your finances separate in order to protect yourself and maintain financial autonomy.
There’s the additional argument that by maintaining your finances independent of each other, it will reduce or prevent squabbles over finances, particularly if you have substantially different spending/savings habits.
The flip side of the argument is that joining finances can allow you to reap huge benefits (when applied correctly). That it has the potential to save you money, accelerate your pursuit of Financial Freedom, and strengthen your overall relationship.
Although it may seem counter intuitive at first blush, its also suggested that maintaining your finances separately actually serves to add fuel to the fire when it comes to financial arguments.
Who pays for dinner this time? But last dinner wasn’t fancy and this dinner is fancy, so does this dinner count for two? If you make twice as much as your partner, should you pay for twice as many dinners? Should you split the rent in way that mirrors your income ratio’s? What if one person can afford the expensive vacation and one can’t?
Some might counter that they just don’t pay attention to those kind of details, so it’s never a problem. But if you aren’t paying attention to those kinds of details, then you aren’t paying attention to your finances. And it’s awfully hard to reach Financial Freedom if you aren’t aware of every incoming and outgoing penny.
The additional problem presented by individual finances is that it removes a layer of accountability. If you can’t actually see the incoming income, or the outgoing expenses, do you really know how your partner is managing their money?
So what is the best way to structure your financial accounts to prevent financial arguments from occurring in the first place, AND also maintain accountability to each other and your goals?
While the real answer always come with an “it depends” given that everyone’s financial situation is different, I’m going to lay out as close to a one size fits all answer as I can get. And it all centers around transparency, accountability, and alignment of goals.
Firstly – I am a strong proponent of joint finances. If you are invested in the relationship and you share life goals with your partner, the fastest way to achieve those goals is to do it together. That includes how you structure your finances.
If you make substantially different incomes, this often results in the higher income earner balking at the prospect of joining finances. But if you are truly committed to making a life together, your respective income levels shouldn’t matter, you are equal partners. I guarantee that you both bring value to the relationship, even if it is not in the form of equivalent incomes.
Secondly, just because you have separate bank accounts doesn’t mean you are protecting yourself from anything. In a marriage or otherwise common-law relationship, odds are you are going to be on the hook for any financial messes your partner may find themselves in.
I would argue that having separate finances actually creates a forum for distrust to breed. You don’t get to see anything your partner is doing with their money, and you have to blindly trust that they are doing what they say when it comes to spending/saving. I don’t blindly trust anyone when it comes to my finances. You shouldn’t either.
Regardless of your personality type, when it comes to our spending and saving habits, even the “rebels” among us must learn to find a way to build in methods of financial accountability, both for our own benefit and that of our partners.
I will agree that having a completely joint banking structure is kind of like spending every minute of every day with each other. Everyone needs a little breathing room from time to time, and similarly, everyone needs a little spending money for which they are accountable only to themselves.
That small slice of autonomy is good for your relationship and your savings goals. It also helps balance discrepancies in spending habits, and sets a firm boundary of what you both believe is reasonable “disposable” cash.
If one person regularly spends, they can spend every dime of their “spending allowance”, while the other person can choose to save it for a rainy day, and no one feels annoyed with the others approach.
Whereas if everything is joint, the non-spender can sometimes be nudged to spend for the sole purpose of rebelling against the spenders habits because they feel they are constantly getting short-changed, and always working harder and sacrificing more to reach the joint financial goals.
So here’s the very basics of a framework that would work for the vast majority of couples.
Share a primary joint account. Have every single penny of incoming income stream into that account. This is the transparency part. You should both be able to see every penny coming into your household. By doing so, you both get to see every penny leaving that account, and you both should know exactly why it’s leaving, and be in agreement on the purpose. There shouldn’t be any suprises.
If you can BOTH easily manage your spending habits, also have a joint credit card. Preferably a high points reward card. Pay for every joint expense possible with that credit card. That means dinner or movies out together, the electric bill, whatever can be paid for on the credit card, do it. Pay it off before it’s due and never carry a balance, but collect every point you can. You might as well, it’s like free money waiting to be collected on money you would have spent anyway.
You should both be reviewing the expenses on the credit card regularly. Get comfortable questioning each other on expenses if you see something you don’t recognize, or that concerns you. It shouldn’t be taboo to talk about these things, and it certainly shouldn’t be viewed as offensive or distrusting by the person being questioned. If you can’t explain it to your partner, you probably shouldn’t have made the purchase.
For every joint expense you can’t put on the credit card (rent, mortgage, car payments etc), set them up to come out of your joint account. (So you can both see them!)
Then open up separate individual accounts. You’ll use these accounts to manage whatever amount you both agree on as individual monthly “spending” cash. You don’t have to spend it, but once it’s in that account it’s yours to do whatever you want with (without having to check-in with your partner). This is your small slice of financial autonomy. It’s important to have, but it’s also important to keep it a small percentage of your overall incomes. Essentially it’s your play money, and the whole point is that it should be such an insignificant amount that neither of you are mad with your partner if they spend it on crap willy nilly. Once it’s out of your joint account, consider it as good as gone.
Investment accounts, particularly tax savings accounts, are by nature associated to a single individual. So joining them may not be feasible. But ensure you both have tax savings accounts open in your name, contribute to the accounts equally, and ensure you review them together on a regular basis.
Even if one partner takes the lead on making investment decisions, both should have a full understanding and input on the decisions being made, as well as the rationale behind them.
By managing your finances in this manner, you will always maintain financial transparency and accountability with your partner.
If you haven’t discussed how your finances are structured with your partner for quite some time, or ever, nows as good a time as any to start. It’s an area well worth some critical analysis and planning.
Doing so will likely result in a substantial increase in your savings, and less arguments along the way.