As an unmarried dual-income couple who entered a relationship on equal financial footing, money doesn’t create much stress in our relationship. We’re more likely to disagree about how high to hang a painting than we are about how much to spend on a vacation. But unmarried couples with disparate incomes may benefit from agreeing on a system that reflects their different capacities to spend and save.
The Legal Difference
The assets and income of a married couple, at least in states like California, are owned equally by each spouse, regardless of whose name is on a brokerage account or paycheck (some exceptions apply). Let’s say Breadwinner Bob and Frugal Frank marry and their 401(k) plans grow to $3M and $1M respectively. If they divorce, each walks away with $2M. Everything they earn, save, and spend affects each person equally. It’s probably why married couples are more likely to quibble over those impulse purchases.
Since unmarried couples don’t have a “we” bucket, legally speaking, from the time things get serious, they must decide how to spend money together. If the lower earner contributes to the relationship more in non-financial ways, or is pressured to spend beyond their means to keep up with their breadwinner partner’s lifestyle, they won’t have any rights to their partner’s wealth if the relationship ends.
Sharing Expenses with Disparate Incomes
What happens when there is a big income gap among partners? Will this create tension in the breadwinner or feelings of inadequacy in the lower earner? Will one partner feel pressured to spend more (or less) to accommodate their partner? And how does a couple split costs when paying for shared experiences that may be more affordable for the higher earner? Breadwinner Bob and Frugal Frank can’t hit The Palm for dinner while Bob eats steak and Frank only has soup.
Joint Bank Accounts
My partner Eddie and I don’t have any joint bank accounts. But there is one exception where this usually makes sense for an unmarried couple – when you own a home together. Since a mortgage payment typically comes from your bank, it’s more practical to have that money transferred from a jointly-owned account so each partner has a clear paper trail to his own name (assuming each partner is itemizing their tax deductions and wants to write off the interest). If you are attempting to have the mortgage interest deducted entirely by the higher-earning partner (to get a larger deduction), please consult with your CPA.
Other fixed expenses you plan to share and pay for directly from your joint bank account (not a credit card) might include property taxes or HOA dues. For example, let’s say you’re sharing these costs equally and you’ll be spending $18,000 for the mortgage, property taxes, and HOA dues. Set up automatic transfers from your checking account at $1,500 per month, then have that bank account pay these expenses directly as they occur.
Joint Credit Cards
Eddie and I love our credit cards. He’s in a serious romance with Delta Airlines and I’m a Chase credit card suitor. We’re not authorized users on each other’s cards because it’s not necessary for us. We’re usually together when joint purchases happen. Do we quibble over who gets to use his card to hog points? Maybe a little, but usually it’s around groceries because my AMEX gets way more points than his card. But I made him a deal: once I get it, I’ll split the cash reward equally and we’ll do something nice with it. Problem solved.
Our Tracker
Eddie and I have opted for a simple Google spreadsheet to track our joint expenses, so we don’t need to fuss with joint credit cards or bank accounts. It’s mostly for utilities, food, household supplies, etc., so it’s easy to stay on top of it. Throughout the year, if one person gets too far ahead of the other, the other partner just plays catch-up (i.e. the one who owes pays for the next round of big-ticket purchases). There are also apps out there that can do this for you, such as Splitwise.
Creating Buckets
If having this conversation with your partner feels migraine-inducing, it probably means it’s a good conversation to have. Why? It’s better than quietly resenting your partner because you don’t want to over- or under-spend to avoid tension. One solution is to agree on which expenses should be shared equally and which should be shared pro-rata based on affordability or income.
The 50/50 Bucket
Where does our lifestyle change the most as we earn more? For me personally, I haven’t noticed much difference in my utilities and grocery spending over the past decade. Figure out what expenses fit that bill for you and just split them evenly. For this bucket, I recommend using a tracker where each partner pays for the expense however they wish, this way you play a game of ‘spending leapfrog’ to always stay close to each other. For example, if Frugal Frank’s name is on all streaming service accounts, he can just add that as a single monthly expense.
50-50 Examples
- Internet
- Utilities and Streaming Services
- Groceries
The Pro-Rata Bucket
These are expenses based on experiences that can’t easily be divided, like living in the same house, flying next to each other on a plane, and ordering from the same menu at a nice restaurant. Some type of agreement can help prevent tension. I’ve observed or experienced relationships where one partner pressures the other to overspend – or is happy to spend more on a reluctant partner who feels like it’s a handout. I also dated someone once who hated to do anything that cost money because he had so little (getting him to dine out or spend money on hotels was like pulling teeth).
So, figure out what is fair for you. Let’s say Bob and Frank agree to a 70/30 split for all expenses that land in this bucket. After agreeing to your formula, start with the big-ticket fixed expenses such as the mortgage, property taxes, and homeowner’s insurance. Each partner can set up automatic monthly transfers into a joint account that will cover those expenses. If it won’t be a total romance killer and you want to split other expenses according to an affordability formula, just use a tracker. For example, if you go to a nice restaurant and Frank pays for the $200 tab, he’ll just add a debit item of $140 (70%).
Your system can be more relaxed if you wish. When I was in my 20s and living with my first partner, I bought lunches, he bought dinners, and I did more of the cooking (which was fine because I love it).
Pro-Rata Examples
- Travel
- Dining Out
- Mortgage
- Property Taxes
- Furnishings
The All-For-Me Bucket
These are expenses you probably won’t feel much peer pressure to significantly change based on your partner’s spending. It’s okay if they shop at Nordstrom and you go to the Gap. Hopefully the wealthier partner is generous enough to treat their partner to some date nights and pedicures. The best part of this bucket is you don’t need to track anything!
All-For-Me Examples
- Car Purchase / Lease
- Car – Other
- Clothes
- Personal Experiences (Massages, Pedicure)
- Charitable Giving
Marriage Someday?
At some point, there can be significant financial benefits from tying the knot. If each partner is listed as the other’s primary beneficiary, you may be able to save a great deal in taxes when you start taking distributions from your portfolios.
Let’s say most of Breadwinner Bob’s wealth is tied up in real estate and an IRA, and Frugal Frank inherits some money just as Bob retires. If they keep their finances separate, Bob would have to sell some real estate or start tapping his IRA to produce the cash flow he needs to cover his share of household expenses. Both scenarios produce lots of taxes.
If they married and deemed all assets to be split 50/50 from Day One, they could approach their joint cash flow needs from a tax-minimization standpoint. They could first draw from Frank’s inheritance money and face virtually no taxes from those withdrawals. If they’re not married though, this could mean financial ruin for Frank if the relationship ended (because he just let Bob draw from his inheritance to cover Bob’s share of joint expenses).
As I wrote in We Married for the Money, there are key financial benefits that can come with a late-in-life marriage, including a potentially larger social security benefit for a lower earner, and lower lifetime income taxes.
We welcome challenging and emotionally difficult money conversations at Abacus. If this topic is causing you stress, we invite you and your partner to reach out to an advisor today.
Happy planning,
Barrett