Budgeting for Couples
Pay off debt – Save money - Avoid Future Debt.
By Renauld Smith
Industry Veteran & Executive Director of IAPDA
Creating a budget for couples can be challenging as both partners individual goals need to be considered when developing a financial plan.
As for some of us life plans these days follow the old-fashioned typical path to a nuclear family. But for others, there is a path with a different direction when standard money management strategies may not apply.
The most common questions for couples are answered below.
Joint or Separate?
Joint
The most important question for couples is whether to have separate or joint accounts when planning for the future. A joint account is exactly as it sounds, you share bank accounts, tax filing and loan applications. About 43% of couples who are married, in a civil partnership or living together have joint assets.
Both partners will continue to have individual credit scores, but each will benefit equally in good times and suffer the same fate if problems arise.
Separate
There are many factors that can lead to the decision to separate finances such as, premarital debts, one partner makes significantly more money or even premarital savings.
Premarital debts such as student loans, credit card debt, alimony and/or child support could make a joint bank account vulnerable to a partner’s creditors.
Premarital savings in a joint account will be considered marital property which includes any inheritance as well. Any savings transferred to a joint account may give your partner a claim to these funds in the event of a divorce.
Separate finances can be useful if a bad situation arises. if one partner develops credit issues the other can step in and qualify for any needed financing.
Which is best?
When choosing to keep your accounts and finances separate, couples can still work together at a common financial goal.
Individual accounts can be a key ingredient for a harmonious partnership, but that doesn't mean there shouldn’t be a joint bank account for shared bills and household purchases. A joint savings account for vacations and other shared goals is another consideration.
Deciding on an approach that works requires couples to take the time to communicate clearly to find the best path forward.
Rent or Own?
When couples are just starting out it’s very common to rent before buying as many will need time to afford the upfront cost of homeownership. Some may be in a situation where both are homeowners with an existing mortgage deciding whether to add a partner to a mortgage or start fresh with a new home.
If the decision is made to purchase a first home, depending on individual credit scores it may be best to use one person’s credit to qualify if the other partner’s credit will only hinder the process. Down the road once both partners are credit worthy it may be advantages to purchase together.
Individual circumstances will determine which is the best option as there is no right or wrong answer. The most important thing to remember is that good communication is necessary when making this decision.
Children or No Children?
It costs on the average about $300,000 to raise a child from birth to 18 years of age graduating high school. Then of course there’s advanced education that’s an additional cost. As a couple you need to have the children conversation early to begin saving for the new member or members of the family.
As a parent it’s most important to start saving as soon as possible to be able to build a reserve account if something happens. Remember, budgeting gets more difficult with each additional child as there will be less funds available for retirement.
If you decide not have children, it will be easier to prepare for the future however, you’ll need to make sure your retirement planning is robust. Dual income, no kid households will not have any children to lean on if the retirement savings come up short.
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