Opening a Joint Bank Account & Merging Finances After Marriage – Pros & Cons
Creating, managing, and sticking to a household budget requires a good deal of time and mental energy, even if you live by yourself and don’t have expensive tastes. You need to account for your monthly rent or mortgage, keep up on those insurance payments, stay current on your credit card balances, and remember to keep your pantry well-stocked with groceries. And after all that, you’ve got to make sure you have enough left over to keep your emergency reserve and long-term savings funded.
Of course, when you throw another person into the mix, the picture gets even more complicated. Every couple has its own unique set of financial considerations, whether it’s one partner’s crushing student debt load or the other’s costly fashion or home improvement habits. To reduce the complexity and increase the transparency of the household budgeting process, many committed couples – legally married spouses and domestic partners alike – choose to merge their finances and open joint bank accounts.
However, the undertaking comes with some significant drawbacks – and in some cases it can be downright counterproductive. Here’s a look at the pros and cons of throwing in your financial lot with your partner or spouse, as well as some alternatives to a total or near-total monetary merge.
Most couples who commit to a total financial merge maintain joint checking accounts and savings accounts. The checking account is typically used for depositing paychecks, paying recurring bills, and handling day-to-day spending. The savings account is for longer-term goals, such as home improvement projects and vacations, and may also function as an emergency reserve if there isn’t a separate savings account devoted solely to this purpose.
Having a single long-term savings account makes it easier to ensure that you and your partner pay your respective fair shares toward future goals. If you both earn roughly the same amount, simply contribute an equal, agreed-upon amount per month or paycheck. If one earns much more than the other, contribute an equal percentage – for instance, 5% or 10% per person, per month or paycheck.
You can use your long-term savings account both for shared goals, such as a vacation taken together, and personal purchases, such as a spa day with your friends or a new set of golf clubs. Ensure that your shared savings usage remains equitable by discussing any planned personal purchases in advance.
Merging your household’s finances makes budgeting – and spending within the constraints of your budget – much simpler. When one account receives the entirety of your household’s income, and remits all its day-to-day and recurring expenses, it’s much harder to miss a payment out of forgetfulness or lack of organization.
Since a single joint account’s average balance is usually higher than that of separate accounts, overdrafts, minimum balance charges, and failed payments are less likely. It’s also easier to identify anomalies with recurring expenses (such as an unusually high water or gas bill) in a timely fashion.
While the phrase “trust, but verify” wasn’t coined with domestic relations in mind, it certainly applies. Merged finances are certainly more transparent than separate finances, since it’s much more difficult to hide splurges and impulse purchases in a joint account. This is particularly true in the age of online banking, when uncovering budget-busting outlays is as simple as logging into your account page.
While financial literacy is clearly a virtue, it’s undeniable that some people simply aren’t that familiar with financial concepts – or, frankly, aren’t that comfortable with the idea of actively budgeting and managing money. Partners who shy away from taking ownership of their personal finances or simply don’t feel up to the task shouldn’t be afraid to give up the reins to their more capable counterparts. In this case, merging your household’s finances and having one partner take the lead makes sense.
However, it’s best in these situations for the less savvy partner to have some small money responsibilities and be aware of what various joint accounts the couple has, such as retirement, savings, and brokerage accounts. If something happens to the money-savvy partner (or in the case of divorce), this information is essential to a smooth transition of responsibility.
Though merged finances allow the more literate partner to take control of the household’s budgeting and spending in the short-term, they do create a growth opportunity for the less experienced partner. The more savvy partner can show the other how the bank’s bill pay system works, explain itemized charges on the utility invoice, and reveal how to stretch your dollars further by couponing.
Lifting the veil on your household’s finances and demonstrating how these concepts work is virtually assured to boost your partner’s comfort and familiarity with money matters. Over time, budgeting and money management may even become enjoyable.
Merged bank accounts usually have bigger balances than separate accounts. This, coupled with the likelihood that one partner will have better credit than the other, may redound to your benefit when the time comes to apply for an unsecured personal loan or credit card. Most lenders (including credit card issuers) reserve their most attractive loan rates and terms for borrowers with excellent credit and ample income.
Perhaps the most dramatic downside of merged household finances is the potential for your partner’s irresponsible or ill-advised behavior to cause financial loss or credit damage. Partners who make large purchases without consulting their better halves can quickly deplete a joint checking account or max out a shared credit card, even if the more responsible partner keeps close watch. If your relationship hits the rocks, the risk of ill-advised, on-the-fly purchases is likely to increase.
Partners who use shared accounts as collateral for personal loans or other obligations create a risk of financial loss and credit damage. Since the collateral is held jointly, a default affects the responsible partner’s credit as well – possibly long after the relationship ends.
If you and your partner have reasonably similar earning power, managing jointly held finances is likely to be a straightforward task. Since you each contribute a roughly equal amount, you’re basically sharing your household’s expenses equally.
Things may not be so easy when one partner earns more than the other. In financially unequal relationships, tension often builds over time – sometimes eroding the partnership’s very foundations. Whether the situation comes to a head or not depends to a great degree on the partners’ personalities, shared outlook, and respective responsibilities.
If the higher-earning partner is genuinely okay with the lower-earning (or nonworking) partner contributing less to the household’s finances, the household can remain conflict-free indefinitely. For instance, the higher-earning partner understands that the other has made career sacrifices to spend time with the children.
On the other hand, the higher-earning partner may come to resent the other – perhaps gradually and without fully realizing it. This can have a corrosive influence on the relationship as a whole and threaten the stability of the household.
However, it’s often the case that the lower-earning partner ends up with a disproportionate share of the household’s non-financial responsibilities: childcare, home maintenance, social planning, and the like. This can negate the breadwinner’s argument: “I work harder and earn more, so I should have more say over how the household is run.” If it seems likely that your household will remain financially unequal for the considerable future, consider dividing domestic responsibilities such that both partners contribute equally – or at least agree that the other is contributing a fair amount.
Like an account ledger riddled with ill-advised purchases, transparency and privacy are hard to reconcile. If you prefer not to feel as if your spouse is peering over your shoulder whenever you’re browsing Amazon.com or reaching for a pricey personal care product, totally merging your household’s finances isn’t the best course of action.
Making and managing a household budget involves a good deal of time and effort – at least a few hours per month, perhaps more. Even if you’re financially literate and perfectly capable of handling money matters, you might not be chomping at the bit to do so. Ditto for your partner.
In a financially fit household, someone has to do this work. However, if both partners have tons of non-financial obligations to worry about, sharing the workload is likely the best way to go. And if there’s a significant gap in financial knowledge or comfort at the outset of the relationship, it’s likely in the more savvy partner’s interest to draw the less savvy partner into the process over time and perhaps eventually distribute tasks equally.
The potential for miscommunication arises when both partners have substantial independence and leeway when it comes to making big purchasing decisions. Coupled with carelessness, financial miscommunication or lack of communication can have uncomfortable, often lasting drawbacks, including overdrafts, interest charges and late payment fees, and damaged credit.
Problems most often occur on the heels of two or more large purchases made within a short time frame. This could be as simple as your partner using a joint debit card to buy a whole bunch of supplies for your pending home improvement project without realizing that your monthly mortgage payment, which you set up without bothering to notify your partner, had just auto-debited from the same account. Neither of you is liable to be happy about the resultant transaction failure, overdraft fee, or budget crunch.
In a more elaborate scenario involving loose credit card use, months of carried balances, interest charges, and possibly late fees or even credit damage could easily result.
The most straightforward way to avoid this is simply to set a limit – based on your household’s overall budget, account balances, and personal preferences – on the size of unconsulted purchases. Above this limit, the partner who wishes to make the purchase must notify the other and demonstrate how the purchase fits into the short- or long-term budget without dramatically affecting other needs and goals. Some couples go further and require all sizable purchases to be planned and budgeted for ahead of time.
Ultimately, these solutions aren’t infallible. Dishonesty defeats the purpose of consultation and budgeting, while a major unexpected expense not covered by an emergency reserve or long-term savings can upend best-laid plans, even when both partners are totally honest and diligent about communication.
Few happy couples openly countenance the possibility that their relationship will end at some point. However, with the average American’s lifelong probability of divorce sitting at 42% or higher (per the Institute for Family Studies), divorce is an important contingency to keep in mind. Though the separation rate among unmarried couples is harder to measure, it’s likely even higher than the divorce rate.
Depending on the nature of the divorce, spouses with merged finances risk temporary or permanent financial loss or inconvenience (for instance, one spouse completely liquidating a shared savings account). Unless you can agree with your spouse ahead of time to distribute funds held in joint bank accounts equitably and cancel or transfer jointly held credit cards, the prospect of which is unlikely in an acrimonious environment, the responsibility for doing so falls to a judge or mediator. Separating finances by legal means – particularly if shared securities accounts are involved – can take months and produce further acrimony.
For unmarried couples not involved in a legal domestic partnership, the legal issues surrounding financial separation can be downright murky. Many states recognize verbal contracts between unmarried couples, meaning it’s often one partner’s word against the other’s. In post-separation legal proceedings, one can easily claim – perhaps coherently enough to convince a judge or mediator – that the other agreed to share income and financial assets on a 50-50 basis, when in fact no such thing occurred.
Unmarried couples looking to avoid legal action often sign binding agreements to keep joint property separate, templates of which are readily available online through state attorneys general and private legal help groups. Agreements to keep joint property separate prevent commingling of income and assets by stipulating that all items of value brought into the relationship and subsequently accumulated remain legally attached to their respective owners.
These agreements are most useful for keeping separate valuable property, such as electronics and furniture. However, they’re also enforceable with regard to joint accounts. For example, if your income is responsible for 40% of a joint account’s balance and your partner’s income is responsible for 60%, you both receive a proportional amount of the total account balance when the account is closed at the end of the relationship. However, such an agreement may not prevent one partner from liquidating accounts or running up credit card balances before formal legal separation.
Thanks to the rising cost of college and professional education, it’s increasingly common for young people to begin their adult lives with crushing debt loads. This can cause big problems for committed couples.
If you and your partner both have significant debt, and thus a severely negative household net worth, you’re likely to struggle to find financing for big-ticket purchases, such as a home or a new car. However, you’ll at least be on roughly even footing – neither of you has to feel guilt about your collective financial predicament.
On the other hand, if either you or your partner has a lot of debt while the other does not, jealousy, resentment, and general tension become more likely. Just like breadwinners in relationships marked by unequal earning power, unburdened partners in relationships marked by unequal debt often feel like they’re doing more than their fair share to keep the household’s finances in order.
Partners with lots of debt may find it difficult or impossible to make their agreed-upon contributions into long-term savings accounts and emergency funds, even if those contributions are reduced to make room for monthly debt payments. And unless high-debt partners earn higher salaries, they’re less likely to pay an equitable share of the household’s monthly bills and day-to-day expenses.
Then again, it’s not necessarily fair to resent your partner for investing in an expensive professional degree or racking up credit card debt to launch a new business. As with other marital challenges, the best approach is likely to work with your partner to find a solution – whether that involves investigating income-based repayment options, public service loan forgiveness programs, more drastic steps like credit counseling or filing bankruptcy, or simply muddling through.
If you decide that the cons of merged finances outweigh the pros, or you judge that a total merge simply doesn’t make sense in your situation, choose from these simple alternatives, all of which involve either partial or total financial separation.
Keeping a single joint checking account and separate savings accounts enables you and your partner to share day-to-day and recurring household expenses while maintaining separate long-term savings – and possibly separate short-term funds as well – for yourselves. As with totally merged accounts, this alternative requires regular, equal, or income-proportional deposits sufficient to cover your shared expenses, plus a small buffer (perhaps 10%) to account for unexpected costs every month. You and your partner must determine which expenses you’re sharing, adjusting the deposit amount as needed to reflect changes in your household budget.
For instance, my wife and I have a single joint checking account that covers our shared housing and utility costs, among other expenses. When we purchased our new home, we had to adjust our collective deposit upward to account for a higher mortgage payment.
Even if you don’t share expenses proportionally, a joint checking account is a good vehicle for settling recurring debts. For instance, my wife and I have separate health insurance policies through her employer. Since her employer covers most of her policy’s costs, I pay a much higher premium for my policy. My monthly joint checking deposit includes my full premium cost, so it’s always higher than hers.
Keeping a single joint savings account with separate personal checking accounts is a great option for couples who want to save for shared long-term goals – such as a down payment on a home or the purchase of a new family vehicle – without depositing the lion’s share of their income into jointly held accounts. Couples pursuing this arrangement typically contribute a fixed, proportional amount to the shared savings account – perhaps 5% to 10% of their respective incomes, or more if there’s a major goal on the horizon. They typically pay day-to-day and recurring household expenses out of separately held checking accounts on an equal or proportional basis as well.
This arrangement is less than ideal for couples that don’t share large, long-term goals. Plus, it sometimes produces disagreements over how day-to-day and recurring household expenses are handled.
Couples that feel collective unease about the prospect of having any joint accounts often choose to share key household expenses, such as housing and utility payments. They each pay shorter-term costs out of separate checking accounts and save for longer-term expenses in separate savings accounts.
This is an ideal arrangement for partners wary of fully committing to a domestic relationship, as it’s much easier to disentangle (provided there’s an accompanying agreement to keep joint property separate) if things ever go south. It’s also useful when one partner claims a disproportionate share of the couple’s assets and income, a situation that can produce tension in relationships with totally merged finances.
For example, my wife and I are friends with an unmarried but committed couple. The title and mortgage to the house in which they live is in one partner’s name. They each pay recurring housing costs, including utilities and property taxes, equally out of separately held accounts. However, if they break up at some point in the future, the homeowner will undoubtedly keep the property and leave the non-homeowner to find other accommodations.
Total financial separation is definitely a viable option, even in marriages marked by complete trust and fluid communication. Total separation involves no joint accounts and, to the extent possible, no direct sharing of household expenses.
In practice, some de facto expense sharing is required to ensure equitability and defuse financial tension. One sloppy way to do this, assuming roughly equal incomes, is to take turns paying for roughly equivalent expenses – such as monthly utility bills or occasional restaurant meals. Online money management tools like Mint make this arrangement more fair and precise.
When it comes to big-ticket household expenses and shared goals, couples with totally separate finances often delegate responsibility for a particular expense to a single partner, who’s responsible for paying it until further notice. For instance, a former coworker of mine was always responsible for paying the mortgage, property taxes, and homeowners insurance. His wife was always responsible for the couple’s childcare expenses. They seemed okay with the split, though it probably helped that their housing and childcare costs were roughly equivalent and they both had similar incomes.
Before the pastor at my then-fiancee’s hometown church agreed to perform our wedding ceremony, he asked us to sit down with him for what he termed an “interview.” Worried that the conversation would dwell on touchy issues of faith and morality, I went in with great skepticism.
However, the meeting was actually starkly practical. We spent at least a quarter of the time discussing financial issues, such as how we’d share household expenses and our respective approaches to spending and saving.
Our pastor was particularly insistent that we open a joint bank account to handle shared expenses, outlining the risks of “financial infidelity” and clandestine purchases with such specificity that I was certain he’d had a traumatic experience at some point in the past. (I didn’t ask.)
After the awkwardness subsided, I was grateful that he had taken the time to provide a plain-language explanation for the usefulness of shared spousal finances. While the same logic might not apply in your situation, the concept is certainly worth exploring.
Do you have a joint bank account with your spouse or partner?
Categories: Banking, Family & Home, Marriage, Money Management
Brian Martucci writes about frugal living, entrepreneurship, and innovative ideas. When he’s not interviewing small business owners or investigating time- and money-saving strategies for Money Crashers readers, he’s probably out exploring a new trail or sampling a novel cuisine. Find him on Twitter @Brian_Martucci.
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