Money and your relationship

It's easy to let your heart make decisions in a romantic relationship, but it's important to take the time to talk about financial topics too.

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Finances for couples: 6 essential talks

Money may be the last thing on your mind in the exciting early days of a relationship. But it can make sense to think about practical matters before taking any big steps like moving in together. Married couples have legal rights and protections that couples who live together don't have. If you don't plan to marry, you may need to take extra steps to establish your rights and protect what you build together.

Income and debt
Talking about how much you earn can be a sensitive topic. And so is debt—like student loans, credit cards, or car loans. But in order to make decisions together, it's important to be clear about how much money you have coming in and how much goes out to pay debt. Income could potentially include more than base salary. In some cases, you may want to consider the value of other types of compensation, for instance employee stock purchase plans. Evaluating your financial pictures holistically can help you decide how to split shared expenses and save for the future.

Splitting expenses
Decide how to run the finances in your household early on. It can help smooth monthly bills and provide consistency as you plan for the future. Consider talking about financial responsibilities and bill payment to come up with a strategy that works for you.

Saving for the future
When married couples divorce, part of the divorce settlement often involves splitting retirement accounts. Unmarried couples have no legal mechanism to help ensure an equitable split.

So it may be important for each person in the relationship to save for retirement on their own. But it's also important to talk about saving and investing. Consider discussing how much of your income is being saved for retirement—and how much you may be able to save for future goals like vacations, buying a house, a wedding, or having children.

Ownership of assets
Consider the assets each of you bring into the relationship. It may also be helpful to talk about what would happen to joint purchases in the event of a breakup. Another consideration may be gifts or inheritances one partner receives. In some cases, bonuses or equity compensation may be on the table. Here's another potential wrinkle: Some states recognize common-law marriages and may impose community property law. That means that even if a couple doesn't get "officially" married, after living together for a certain period of time, the state law may declare them married by common law. If things don't work out, assets acquired during the "marriage" would be split jointly at the time of separation, regardless of the legal ownership at the time. An attorney can best explain the state laws that may apply.

"What if…" scenarios
Marriage confers certain rights if one partner gets sick or dies. Living together doesn't. So it could make sense to get some legal documents in place to help protect each other in a worst-case scenario. For instance, owning property and accounts together can help ensure that no one is locked out if one partner dies suddenly. Jointly titled property, bank accounts, and investment accounts titled as "joint tenants with rights of survivorship" will generally pass to the surviving owner.

Consider a written agreement
It may be a good idea to consider putting together a written agreement, similar to a prenuptial agreement. It could include anything from bill payment to the division of property in case things don't work out. To help ensure that both parties are protected and that any tax implications have been considered, it may be a good idea to check with an attorney too.

Legal documents couples should consider

Advance health care directives, also called living wills, outline a person's wishes for treatment if incapacitated. They typically accompany a durable power of attorney for health care or health care proxy.

A durable power of attorney for finances lets you choose an agent to make financial decisions and pay bills for you if you can't.

A will is a legal document that can set forth your wishes on such topics as the distribution of your assets and the care of any minor children when you die.

Giving someone a power of attorney for your health care (multi-state guide and form)
This free multi-state form from the American Bar Association can help you appoint a health care agent. Go to the American Bar Association

Advance directive forms
AARP offers links to free, state-specific, advance directive forms. Your state form may allow you to include instructions for health care and appoint a health care agent. Go to AARP

Guide to combining finances (or not)

Splitting expenses and saving for shared goals can be key financial pieces of a cohabiting relationship. There are essentially 3 ways to go when it comes to coordinating your money: keeping separate accounts and finding a way to equitably divide shared costs and savings; partially combining finances to cover household bills, shared expenses, and shared savings; and completely combining finances and using joint accounts for spending and saving (except for retirement).

Entirely separate

  • Pros: Each person gets to keep their own money and manage it.
  • Cons: It takes ongoing effort to make sure expenses and savings are split equitably.

Partially separate/partially combined

  • Pros: Household bills and joint expenses can be budgeted for; easy to track payments for joint expenses; partners have some autonomy for personal spending and saving.
  • Cons: Requires some math upfront to understand how much money each partner should contribute to the household finances.

Entirely combined

  • Pros: Convenient to pay bills and track spending and saving; owning bank and investment accounts jointly can be an easy estate planning move.
  • Cons: Spending habits may not always line up; one partner may have more debt; can be messy to untangle.

Paying off debt as a couple

Acting as a team to spend less than you earn and prioritize debt repayment can help you get back to even financial footing. Before putting everything into your debt paydown plan, consider reviewing your saving.

If you have access, it can be a good idea to use a flexible spending account or a health savings account if you have a high-deductible health plan. Those accounts let you pay for medical bills using pre-tax money.1

If you have a workplace savings plan and get a match from your employer, try to save at least enough to get the full match from your employer—it's like "free money."2

To make sure you're able to keep prioritizing debt payments over time, set aside some cash to cover emergencies. Then consider tackling debts in a methodical order.

High-interest credit card balances
If you have multiple credit card balances, you could consolidate them into one loan or transfer the balance to one card if you can get a good interest rate.

Alternatively, you could use the snowball or avalanche method to put extra payments toward one balance at a time (while paying the minimum or more on other cards). With the snowball method you would start putting extra payments toward the lowest balance card to get it quickly paid off. Once it’s paid off, you can direct the payments that were going to that card to the next lowest balance along with any extra payments you can afford.

With the avalanche method, you would start aggressively paying off the card with the highest interest rate. After you pay it off, you can put those payments toward the loan with the next highest interest rate. This method can save you the most money in the long run because you're chipping away at the most expensive loans first.

Paying off high-interest student debt
In general, it is a good idea to pay down student debt above 8% interest as a rough rule of thumb. You may be able to deduct the interest on a student loan—but only up to $2,500 a year.

Government student loans, car loans, and mortgages
Pay the monthly minimum on federal student loans, car loans, and mortgages while paying off higher interest debt. These loans have lower interest rates, and some offer tax benefits. That's why it generally makes sense to make only the minimum monthly payments on them. For instance, mortgage interest is deductible for federal tax purposes.

Setting short- and long-term financial goals

Goals don't have to be financial but many of life's big goals do tend to have a financial element. Take vacations, for instance. Taking a trip together can be the first big test of a relationship but getting there may take some planning and saving.

Some big goals couples plan for together include buying a house, a wedding, or starting a family. In the long term, couples may save for a child's education or plan retirement saving and investing as a household.

Acting as a team and getting things accomplished can strengthen your relationship and help you grow together. It can also emphasize your shared values and goals. After all, you only have so much money and time. There's an opportunity cost associated with pursuing one goal over another—so setting goals with your partner is a way of affirming your commitment.

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