Moving in Together
Moving in together is a big deal. Unlike previous generations that waited until after the wedding to start a household, nowadays more people are moving in before the “I do’s.” Cohabitation can take a lot of different forms, from leasing an apartment and splitting the expenses, to buying a home together, to even sharing a house with a bunch of roommates. Whatever form it takes, both partners need to commit to open communication and compromise to make things work. You will be spending a lot more time together!
Take a look your individual financial lives first
After you have been on your own for a while, it is likely that you have developed a system for managing your finances, including paying bills and managing your money. Your partner probably has his or her own unique way of managing personal finances as well. Some people have a more formal system, while others perform regular “mental accounting;” making sure that their bills get paid and generally tracking how much money they have and how much they owe. When you put the two of you together, you may find that your styles synch up quite well or clash monumentally. The most important factor is that the system you develop works for each of you.
Time to lay your cards on the table
Before you move in together, it is important to understand how your partner manages money. Having money conversations can be difficult for some people, especially if they have ugly money memories in their past. But, before you consider combining your finances with your significant other, it is necessary to have a conversation about money, however difficult it might be. You will both need to share your attitudes towards money and how you manage your funds from month to month. You should also discuss your income and spending habits as well as the information in your personal balance sheet, i.e. your assets (savings, investments, etc.) and liabilities (student loans, auto loans, credit card balances, etc.). Taking a look at your credit reports is not a bad idea either as it paints a picture of your past borrowing behavior. If you see a number of debt obligations on your partner’s credit report, don’t take on the ownership of them, even if you plan to help them pay for them from your combined cash flow. If you are the co-owner of a debt, delinquencies will impact both of your credit scores, not just the original borrower. It's the same for co-signing a loan; by doing so you are promising to repay 100 percent of the loan if your partner is unable to do so.
During this crucial discussion you may learn that one of you loves to manage finances while the other would rather have a root canal. One partner can then take over the monthly finances while the other is saved from that dreaded chore, right? Not so fast. It is very important that both of you has a clear understanding of the household finances and knows what is coming in and going out, both for future planning purposes and in case of an emergency. Both partners also need to have access to all accounts through user names and passwords.
While having conversations about money might reveal some truths that you wanted to keep to yourself, in the long run coming clean about your money personality will help the two of you create a united front, and may even strengthen your relationship.
Where do you go from here?
Renting an apartment or owning a home brings with it a certain sense of freedom that is hard to duplicate. But what happens when you want to move in together? What was roomy and spacious for one person (and his or her stuff) may feel downright claustrophobic once your partner and his or her belongings move in. In this situation it really comes down to two choices: lose the stuff or move to gain more space. If you had both been maintaining apartments then you most likely have duplicates of couches, beds and coffee makers. Compare what you have and keep the nicer, newer model. Craigslist, Ebay and good old fashioned yard sales are easy ways to sell your stuff and make some extra money in the process. But what if with all this downsizing there is still not enough room to truly co-habitate comfortably? For relationship harmony it might make more sense to move to a place that you can both comfortably call home.
Once you have discussed your finances, including your monthly income and debt, you should have a better idea of the type of housing you will be able to afford. If you are considering buying a home, rather than renting, and you are not married, you’ll need to think about a legal arrangement that protects and benefits both people. When a married couple divorces, their assets are divided in legal proceedings, but unmarried couples have no standard process to help them if they split up while sharing the ownership of a house. A legally binding partnership agreement can be drafted by a real estate attorney and can protect each partner in the event that the relationship comes to an end.
But what if one of you already owns a home and the other is planning to move in? Again, think about who is taking responsibility of the asset and who will retain it if the relationship ends. A partnership agreement can protect the member of the couple that does not own the home, helping him/her to recoup any contributions they made to the mortgage once they move out. Another alternative is to put both people on the title of the property so that you both have the benefits of owning this asset.
Managing Income and Expenses
Once you decide on a place to live together, you’ll have to figure out how much of your finances you’ll want to combine. If you are not married, experts advise that you keep separate accounts…at least at the beginning. If the situation changes and you decide to go your separate ways, your individual finances will remain intact. Conversely, financial advisors recommend that married couples completely join their financial lives through shared checking and savings accounts, as well as investments, since they are building a lifelong relationship together. But there are different variations on this theme and each couple needs to have a system that works for them.
Regardless of whether or not you combine your accounts, you will still have to figure out how to pay your bills. One way is to simply split the household expenses down the middle; each person contributes 50 percent of the costs and retains the remainder of their income. While this may make you feel more like roommates than life partners, it is a simple solution.
Another method is more proportional, where each member of the household contributes a percentage of their income into a joint account to pay for household expenses while the remainder stays in their own bank accounts to use as they please. For example, if Ann makes $40,000 and Bill makes $60,000, making a total of $100,000 in combined income, Ann will contribute to 40 percent of the household’s expenses (rent, utilities, groceries, etc.) and Bill will contribute 60 percent towards the payments. While this makes sense on paper, each partner needs to be comfortable with the uneven contribution toward household expenses.
A third way that couples can manage their finances is to completely co-mingle their funds in shared accounts (checking, saving, a household credit card) and pay all bills out of those shared accounts. Neither person reserves any income for him or herself and instead funds are available to both at any time. Couples who choose this strategy may want to designate a dollar amount above which one will go to the other with a purchase to discuss. Many financial planners will recommend this method to married couples as it leads to a shared financial outlook and fosters the “all-in” approach that is consistent with a lifelong relationship.
Regardless of which method you decide upon, be open to tweaking or changing your method going forward. Hold household meetings on a regular basis to check in on expenses and discuss your common financial goals. Circumstances may change and you want your financial management strategy to work for you at all of the different stages of your relationship.