By Ashlee Ogrzewalla, CFP®, CFDA®, Vice President and Manager of Financial Planning & Marketing
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Some couples keep their money separate to avoid future risks or disagreements. In contrast, others strongly support a joint financial front to strengthen their bond. Which type of couple are you?
The Benefits of Separate Bank Accounts
There are several expert articles on how best to handle money in a committed relationship. Many experts believe that couples should keep their money matters separate, whether they’re dating or married, to avoid financial quarrels. This can be achieved by avoiding a joint bank account or other forms of shared finances.
A couple utilizing this approach will typically maintain separate bank accounts, split household expenses and manage debts based on who incurred them. Even with this approach, it is important to budget, plan for and discuss together how the household expenses with be handled. For example, is everything split equally or proportionally on income earned? What will be done if there is an emergency, such a new appliance that has to be purchased or plumbing costs to repair a leaky pipe?
Separate accounts are popular, especially for those who have been taught to be financially independent or have witnessed their parents struggle through a divorce due to financial issues. Indeed, maintaining individual accounts can help prevent financial disputes between couples tremendously.
The Benefits of a Joint Account
Combining finances is particularly beneficial in marriages that involve children or jointly owned property, as each partner will likely require the other to manage some of the day-to-day expenses.
Combining accounts can actualize goals that are otherwise unattainable when one person makes significantly more money than the other. It can also be easier to track household finances if all spending is from one account. Additionally, joint accounts can contribute to a greater sense of shared finances and a sense of being a financial team between couples.
Of course, this doesn’t mean that joint accounts are right for all couples. You may recognize the importance of working together toward your joint financial goals but wish to retain your independence.
The Effects of Having Someone Else’s Name on Your Account
When you put someone else’s name on your bank account, your money may be inadvertently exposed to their creditors, although many states have protection laws in place to prevent this from happening. Regardless of which state you live in, though, joint accounts can be drained by either party at any time without the other’s consent.
Working Together, Independently
It’s essential to determine if you and your partner are financially compatible before combining your accounts. Once you’ve discussed your partner’s financial habits and savings goals with them and determined that you’re compatible enough to combine households, you can proceed to the mechanics of your financial union.
Suppose you and your partner want to live together but have determined it would be best to keep your bank accounts separate. In that case, working together and independently could be mutually beneficial. As a couple, you could work out a joint budget strategy that includes maximizing your retirement accounts and saving for future purchases, among other goals. You can each save half your target amount in separate accounts. Then, you can divide up the rest of your expenses to match your individual incomes.
If you do open a joint bank account, maintain a small balance, and consider it to be an emergency account. You can use it temporarily if one of your individual accounts or debit cards is compromised. You may also use this account to save for near-term expenses, such as a sofa or vacation.
This “separate, but more or less equal” approach to banking has two significant added benefits:
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- First, it’s preferable to avoid simply throwing everything into a joint bank account. It will prompt you to discuss money regularly and seriously examine your spending, saving and investing goals. This will make it easier to stay on a budget and to recognize when you’re going off track.
- Second, this ensures that both partners are equipped to handle family finances in the event that one of you is unable to do so.
Which Approach Is the Best Idea for You?
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- Before opening a joint account, you should have a thorough conversation with your partner about each of your liabilities. These could include credit cards, payday loans, taxes, student loans or other types of debt.
- Additionally, consider whether you will invest together or separately. And how will you handle making significant financial decisions, such as paying for your mortgage? Will you split household purchases and divide your monthly bills into two?
- You could also opt for a compromise, keeping your own account in which you retain the majority of your funds and opening a joint account into which you transfer a small amount of money to manage monthly expenses. This way, you can mutually contribute toward the bills and get used to each other’s financial habits while minimizing risk.
Many experts recommend that couples have a joint bank account where a portion of both paychecks is deposited, as well as a separate account for each individual to do with as they please, allowing couples to avoid fighting over who spent money on what.
Final Thoughts on Joint vs. Separate Bank Accounts
Addressing all facets of your budget will ensure that you and your partner are aligned. This can help you determine the best decision for your money. Ultimately, each partner will need to conduct their own research on the benefits of joint versus separate bank accounts. Your financial advisor can be a great resource in helping you determine what makes the most sense for your particular situation.
Important Disclosures: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards & Co. is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.