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Rules for tying the (financial) knot

Friday, September 03, 2010

A recent poll found that 34% of young Canadian couples keep their bank accounts, investments, and retirement savings completely separate. Only 10% reported that all accounts were jointly held. This in part is a natural progression for women, who have become more sophisticated with money as they have become more integrated in the workforce. It also has to do with both partners wanting to keep some of their financial independence.

Obviously people don’t all make the same salary, so they usually split expenses in one of two ways. First, the larger income earner pays the mortgage or food, and the person with the lower income might pay utilities, cable, childcare, gas, and other regular smaller household bills. The other method is to pay larger bills on a percentage basis according to income.

If separation of accounts is something that you are have in place now or are thinking about doing, there are a few very important details you need to be aware of;

Goal setting. One of the most critical fiscal items for a couple’s financial success is the setting of major goals and working as a team to accomplish those goals. These could be saving for a down payment, taking the family to Disneyland, buying a cabin at the lake, or when/how to pay down the mortgage. You simply can’t get where you want to go if one person is behind the plan and the other isn’t. A suggestion is to make a three- to five-year grid and write down what you wish to buy or do in that time frame along with approximate costs. For example, in 2011 you will expand the deck and create your outdoor living space. In 2012, you will go to Costa Rica for three weeks and increase your RRSP contributions. In 2013, you will buy a new car.

Try and arrange it so that major expenditures are spread out as evenly as possible, which will reduce any debt carryover. Now you have a road map, which will act to help you achieve what you have laid out. Once or twice a year, revisit the road map to ensure you’re on track and make any necessary adjustments.

Debt disclosure. Debt, like stress, is a silent killer. Stress can kill you physically; debt can kill, or damage, your relationship. If you are in a relationship that you wish to take to the next step (moving in or getting married), have the “financial conversation” right away. You don’t want to get married and later hear, “By the way, I have $50,000 in student loans, a $20,000 credit line debt, and no home equity because I’ve used my home like an ATM.” That would definitely be tough for any relationship to overcome. Both partners would have to limit fun stuff for several years to get back on track, and that just isn’t fair on the one who kept his or her finances in order.

It’s very easy these days to get credit if you work and make decent money. Credit card companies love clients who rack up the cards and pay only the 19% annual interest rate every month. You are very profitable for them, but not so good if you are in a relationship and trying to reach goals that you set.

It’s a different scenario if you have a partner whom you live with, whether married or common-law, and you run up credit card debt while your partner plays by the rules. This type of problem has brought more than one couple into the divorce courts. We have to learn the difference between needs and wants and act accordingly. You can’t get that deck built or go to Costa Rica if John has reached his $6,000 credit card limit. You can hide or juggle debt for a period of time, but it will eventually come crashing down on top of you, and you’ll be fortunate to keep your relationship intact.

Don’t spend more than you make. Sounds simple, but it isn’t. This one is for everybody. If you want a new car but can’t afford the monthly payments, you need to save more or buy a cheaper vehicle. Avoid using home equity. Remortgaging your home is almost always a poor financial decision and will probably put you in a position where you may be forced to work past age 65, with financial independence permanently beyond reach.

Never get joint credit. Experts have seen more people hurt from joint credit than anything else.

Finally, couples with complex pre-existing financial or debt problems can always benefit from objective, third-party counselling from an accredited financial advisor. And that’s probably your best investment of all.



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