Fairly Splitting personal finances and expenses in a relationship
Finding a method of dealing with personal finances is extremely important for keeping a healthy relationship. It has to be a system both parties support or it simply won’t work. There are two steps to building a finance plan for your relationship. First, choosing a system of how your finances will work as a couple, and second, deciding how to fairly split expenses. Lets review some options for different finance systems!
Combined Finances – The first option is the simplest. It is a good option for a couple that have similar wages and spending habits. Combining finances is simply joining the incomes and expenses of both partners. If there is only one earner, both partners still just use the one account.
Semi-Combined Finances – Similar to combining finances, this is where each partner has their own account but both also fund a combined account. The combined account pays the joint expenses whereas the personal accounts are for more personal and discretional purchases. Contribution to the combined account can be different if the earning differential between partners is bigger. This system works well for couples with both similar wages or a gap and couples with similar or different spending habits. Only works for dual income couples.
Separate Finances, Shared Bills – In this system there is no combined account. Finances for each individual are completely separate. Expenses are assigned to one person or the other, and everything else remains separate. To make up for a wage gap, more expenses are assigned to the higher earner. This system works well for couples with both similar wages or a gap and couples with similar or different spending habits. Only works for dual income couples.
Single Earner Allowance – Specifically for a single earning family, the single earner pays all the expenses and gives the other spouse an allowance for discretionary purchases. This system essentially works as the single earner version of the Semi-Combined Finances system. It is also important to have both partners specifically agree to this system because some people can feel degraded, hurt by the value put on them by the allowance or not feel like an equal by having an allowance. BUT it also works well for families with a set budget, and if that budget includes what the other partner can afford to spend on discretionary items, it will be stigmatized as less of an allowance and more of a budgeting value.
These are some of the simpler systems available, each have their own merits and drawbacks. Choose what works best for you and your partner and even try combining different aspects of each to create a more personalized system that works for you. A good system alone will not relieve financial stress in a relationship, however. It is also important to fairly split expenses. Having an unfair balance of expenses is an easy way for resentment to slowly grow in the relationship and that is no good for anybody. So how can you split expenses?
Single earner family – There is no splitting because there is only one income. Easy.
Equal earning family – A family with 2 equal incomes is most likely just to split necessity bills 50/50 and worry about their own (if one member of the couple like satellite radio for example, they will pay for it themselves and not split it). One scenario where necessity bills are not split evenly would be where the Matrimonial home is owned by only one partner and the equity is protected by a prenuptial agreement. We will talk about this later on.
Families with a wage gap – Depending on the significance of the wage gap between partners, different approaches to expense splitting are viable. If the wage gap is relatively small, a simple percentage splitting could work. If partner 1 makes 55% of the household income (after tax) and partner 2 makes 45%, splitting the expenses 55/45 is likely to be pretty fair. If partner 1 makes 75% of the household income and partner 2 makes 25%, this system is less likely to be fair. This is because expenses for necessities do not continue to increase with income, so the higher earning partner will have significantly more money left over after paying bills.
If a family has $4,000 of expenses per month and a combined income of $10,000 per month, this is how the expenses look for partners with a 55%/45% split and a 75%/25% split.
In a 55/45 split, partner 1 makes $5500/month and partner 2 makes $4500/month. Expenses split at 55/45 are $2200 and $1800. Partner 1 is left with $5500-$2200 = $3300 and Partner 2 is left with $4500-$1800 = $2700. This appears fair and both members of the relationship should have a fairly equal standard of living.
In a 75%/25% split, Partner 1 makes $7500/month, and Partner 2 makes $2500/month. Expenses split 75/25 equal $3000/month for Partner 1, and $1000 a month for partner 2. This leaves partner 1 with $7500-$3000 = $4500/month. Partner 2 will be left with $2500-$1000 = $1500/month. A large difference that can eventually cause stress for couples.
For this reason, it is sometimes a better idea for the higher earner to pay more than their percentage of the necessity expenses. If the higher earning partner also likes to do expensive activities that include their partner (like go places for vacation or going out for dinner frequently), it is also worth considering that they cover some or all of those expenses. This is because a lower income partner trying to keep up with the higher earner can stretch their finances quite a bit. Look back at the previous example, the higher earning partner has significantly more free money to do things.
Combined Finances – If the family wants to go the more traditional route of combining finances, everything is combined and there is no need to split expenses.
If the Matrimonial home is owned by only one party – The Matrimonial home being owned by only one partner complicates expenses a little bit. If the value and accruing equity of the home are protected by a prenuptial agreement, it would not be fair to split the mortgage payment 50/50. For the fairest division of expenses, the equity gained from mortgage payments do NOT count as an expense. For example: the mortgage payments were $1500/month and paid down the mortgage $850/month. The actual mortgage expense is $650/month. That means each partner is responsible for $325/month. The owner of the home will also be on the hook for the $850/month since that is equity and not an expense. So the partner who owns the home will be responsible for $1175/month and the partner who does not own the home is responsible for $325/month.
Coming up with a financial system that both partners agree on is extremely important for a healthy relationship. While talking about finances might be uncomfortable, it is necessary and can be very rewarding in the long run.