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Article written by Chris Coulter
Before I embarked upon my first marriage, we rented a house. My access to credit was fairly limited so, I didn’t have any real debt. I’d just bought into my first business, but didn’t have a ton of retained earnings/money, unless you consider sweat equity an asset. And of course, we had a dog!
I didn’t have many assets, but I didn’t have many liabilities either.
After getting married, spouses typically consolidate expenses, and most couples have two incomes to work with. However, more money can lead to more problems.
Let’s say a couple purchases a home. That can also mean they have access to more credit, especially with the increasing price of housing, and the rising value of the equity in the home. Some take advantage of this home equity to access a line of credit, which many use to supplement their incomes. This is one of the chief reasons why the average Canadian owes about $1.70 for every dollar of income he or she earns per year, after taxes.
Money trouble can and often does contribute to the breakdown of a relationship, and divorce can lead to more debt. If your new partner is in this position, you might be on the fence about whether it’s really a good idea to combine finances. That’s okay. Just remember that you need to have a frank and transparent conversation with him or her before jumping in with both feet.
Yes, it probably will be awkward, but we have to be aware of our own financial picture as well as our new partner’s.
While only you can make the decision as to whether you should combine assets with your new partner, these guidelines can help you make an informed choice.
1. Establish A Budget
Chances are that your new partner, if not in a great financial place, never operated financially with a budget. Budgets become the ground rules for moving forward to ensure you’re in wealth accumulation versus debt management mode.
2. List Your Personal Balance Sheet
Your partner’s financial picture may not be pretty, but at least you’ll know what you’re dealing with. It’s an awful surprise to find out that your credit has been affected by your new partner, or even worse, to have someone else’s creditors coming after you.
3. Establish Some Shared Financial Goals
Presumably, if you’re considering any kind of union with your new partner, you’re doing so for more than financial reasons. When we start seeing someone, we don’t necessarily know their entire picture, financial or otherwise. As I remind myself and my clients, current state does not always equal future state, but change doesn’t just happen. It usually starts with altering your patterns and your behaviours. Establishing some future goals as a couple puts less emphasis on the past and more on the future.
4. Work With An Objective Third Party
Talking about finances can add a lot of stress to a relationship. Financial stress is one of the main reasons why relationships don’t last. If you’re the financially responsible one, you don’t want to be seen as pontificating about the merits of being financial responsible, or consequences of being financially irresponsible. By working with a third-party financial advisor, you can steer the relationship onto a better financial road without coming across as preaching.
5. Set Up A Shared Bank Account For Expenses
If you do make the decision to combine assets, merge them slowly. Behaviours don’t change overnight. By establishing a single bank account that pays for shared expenses, you both have visibility and accountability to one another to ensure bills get paid. You can always monitor money on a month-to-month basis and see how things are progressing. Over time, you can always add more assets into the mix, while maintaining the ability to reassess on a regular basis.
I have friends who are in strong and loving relationships. They have a shared bank account, and separate bank accounts. For them, it works. You need to establish what will work for you.
Conclusion
We don’t always choose who we fall in love with. Not every relationship starts with complete financial transparency. But running blindly into a situation before understanding each other’s financial past can put the future of the relationship in harm’s way. By agreeing to discuss our financial past, regardless of how good or bad it may look, you are starting the relationship on the right foot.