To start, my intent is not to judge anyone’s relationship choice. Each person needs to choose the relationship structure that works for them. The challenge is that what makes sense from a financial standpoint may or may not be the same as what makes sense from a relationship standpoint. Additionally, for those that choose to live in a couple or group, from a financial standpoint it does not matter if it is a romantic relationship or not. For example, if you choose to buy a house with four friends, it is no different from a polycule buying a house.
Financial planning as a single person can be simple, but there are special considerations for your estate planning, living will, and will. The bonus of being single is that you do not have to worry about anyone else’s goals, wants, and needs. You get to choose your own future. The downside is that you do not have anyone to provide accountability and to be a backup.
If you are single, I encourage you to find an accountability partner for your finances. An accountability partner’s job is to call you on your BS and provide perspective. We can all get stuck in our own heads, and the results can be self-defeating. Set up a regular cadence (maybe once a month) to meet, have a drink (virtually is fine), and provide accountability for each other. It needs to be someone you are comfortable sharing your finances with, both good and bad. You aren’t providing each other financial advice but providing a sounding board and they must be comfortable calling you out.
The bigger challenge as a single person is finding someone you trust with your health and money if you cannot make decisions. Some people use friends or family, while others pay for a professional, fiduciary, trustee. A trustee is someone who is required to execute your wishes and you pay them for that service. The bonus of a trustee is that you know your wishes will be followed and you do not need to rely on or impose on a family or friend. Look for a local trustee, often offered by local banks or attorneys, and don’t be afraid to try out a few.
Once you have decided who will make decisions for you, make sure you update your living will, will, and durable power of attorney (POA). Your trustee should have a copy of these documents and they should be updated regularly. You will also want to provide an “in case I die file” which has all of your account information. The time to get this all done is now. Also, make sure you update all of your retirement accounts, life insurance, and the like to reflect your beneficiaries.
Financial planning for couples is going to change based upon if you are married or not, and if you are combining your finances. It does not matter what you call each other, but it does matter if you are legally married.
Should you get married?
I’m not going to try to answer if you as an individual should get married, but being married does have some financial and legal benefits (and drawbacks):
- All too many people get married as it may be the only way to go on their spouse’s health insurance. Some employers are starting to offer healthcare benefits to long-term couples who aren’t married, but in most cases you need to be married for spousal benefits.
- You may save (or pay more) on taxes by being married. Depending on your incomes, you may save taxes by being married, or pay more. It is a bit of a challenge to predict without reviewing both of your taxes individually and then doing a mock combined tax (both Federal and State). Keep in mind that once you are married, you have to file as married, even if you file married filing as single.
- Your credit together as a married couple may be better or worse. For example, if you are looking to buy a house, you would normally use your combined incomes to qualify for things like Debt to Income, but most lenders will use the lower credit score between the two of you.
- You have more flexibility with gifting and estate taxes. There is unlimited gifting between married spouses, while the normal gift limit is $16,000 per year (in 2022). Also as a married couple, you have a combined estate tax exemption of $24.12 million (2022).
- Being married helps with medical directives (if you want it to). Most healthcare organizations will look to a spouse to make decisions if you are incapacitated (unless otherwise documented).
- A special note about community states: 9 states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) are community property states. If you live in one of those states, be sure to look up how that impacts your planning, but the general concept is that anything you gain during the marriage is the property of both people, no matter who bought it.
No matter whether you decide to get legally married or not, when you are a couple, your choices are to combine your finances, keep everything separate, or do some hybrid. Here are some considerations for each:
Combined finances (1 financial plan):
If you decide to combine your finances, make sure you are either legally married or have a partnership agreement and appropriate wills/documentation in place. If you are not married, a partnership agreement should be sure to outline exactly what you are doing financially together, and how to deal with the 5 Ds: Disinterest, Divorce, Drugs, Disability, and Death. For example, if you are not married and bought a house together and one of you passes, you now may own a house with your inlaws, or even worse, not own a house at all. For Childfree people, you want to add on a plan for the 6th D: Diapers (what happens if someone changes their mind?).
The bonus of combined finances is that you are working together on the same set of goals. Your goals can be whatever you want, but it can be a challenge to make sure you are both on the same page. What happens if one person has the goal to retire at 50, but the other person never wants to retire? The key to combining finances is to discuss your goals and values around money upfront. Start with your goals and then make sure your tactics match.
In combined finances, the bonus is that you can both own all of the accounts together, and if one of you passes, you do not need a complex probate or will process (in most states). Married couples often end up with a simple “I Love You” will, where everything passes to their spouse. Just make sure you have agreed upon what happens if you both pass and have a plan for both who will be the executor of your will and who will make decisions for you if you are incapacitated.
The downside of combined finances is that it requires a lot of trust and communication. If you have combined accounts, keep in mind that at any time either of you can take everything out (you own everything together). While you may have your own retirement accounts or similar, make sure you know what your spouse can and cannot do. The key is to make sure you are always working on everything together, and while one person might physically pay the bills, you both need to know what is budgeted and what your plan is.
Separate finances (2 financial plans – roommates)
There are times when both married and non-married couples manage completely separate finances. Even if you manage your finances separately, be aware that being married may mean that in the eyes of the government you may be treated as if you are combined (varies by state).
Truly separate finances are treated as if you are roommates, even if you have been together as a couple forever. You pay your bills, they pay their bills and you may split some bills. The key is that while you are a couple, you are each working on your own financial plan. While it might be nice if your goals are similar, there is no pressure to be in sync. You might discuss where you want to live together as impacts both of you, but you each have your own budget and goals which may not be perfect together.
The bonus of having two separate plans is that it is a lot easier to manage your own finances and you can get away with a bit less communication and trust. Be sure to set good boundaries on what you are willing to share (or not) and how you are willing to help out each other financially (or not). Also, make sure you have good documentation off all shared bills, amounts paid, and expectations. If you are doing two separate plans, and are not married, go back to the section on planning as a single person to make sure you have the appropriate living wills, wills, durable POA, and the like as you are effectively doing single planning near someone else.
Hybrid Finances (3 – Financial Plans, Yours, Mine, and Ours)
While having a hybrid financial plan for a couple might be popular, it is a bit challenging. It is common to find couples that have kind of combined their finances but are still also doing their own thing. There is usually a bit of fear about truly combining finances. I’ve worked with couples who have been married for decades but still haven’t combined their finances. The challenge in a hybrid plan is that while each person may feel like they are working together on the joint plan, they each have their own interpretation of what that means.
Here’s how it usually looks: The couple might have a joint account and plan for big things such as buying a house or travel, but everything else is on their own. The challenge comes when we have different incomes, financial habits, and goals and can’t agree on a joint goal. Together we may want a more expensive house, but individually we may not be willing to make the changes to get to that goal. Communication becomes hard as each person may (or may not) want to share their own personal finances and fights start if we aren’t having open communication and trust.
The reality is that for most couples, they would be better off picking either combined finances or separate finances rather than some mix in between. It is ok if you want to combine your finances or not, but you do need to decide one way or the other. Some people try the hybrid as a way to ease into combined finances but end up more frustrated as it is harder. If you combine your finances you can still budget for fun money, pocket money, or whatever you want to call it that each of you can use however you want. Combined finances does not mean you each lose your individuality, you just need to plan for it.
Group financial plans become very challenging. If you are going to do financial planning with a group of friends or a polycule, I can guarantee it is going to challenge your communication and trust. Effectively you have the same options as a couple (combined, roommates, or hybrid) but with a lot more paperwork.
Combined group finances (1 financial plan)
If you can get your group to do finances completely together, you must have mastered communication and trust. In a group with one financial plan, everyone’s finances are going towards the same goal. You will need some allowances for individual expenditures, but the most important thing is a rock-solid partnership agreement. In addition to the 6 Ds mentioned earlier (Disinterest, Divorce, Drugs, Disability, Death, and Diapers), your partnership agreement may need a structure for a “buy-sell” arrangement. A buy-sell agreement allows you to buy out a member of the group when they leave (or pass). What that means in real language is that you will need to work with both a CERTIFIED FINANCIAL PLANNER™ and an attorney to structure something that is fair for everyone.
While meeting with the attorney for a partnership agreement, get your living wills, wills, and durable POAs in place. Before the document is written up, decide if you are going to appoint someone to make decisions (and a backup) or some type of committee structure. For your living will you will be better off appointing one person to make a decision (which can be different for each of you) as you don’t want a committee deciding at your bedside. I would make sure that every member of your group has both a written and electronic copy of all of the documents readily available.
Effectively if you are a group with one financial plan, you are a business following a business plan. There may be some benefits of forming an LLC for the group and you should consider it. While the business may be owned equally, make sure you have a structure for decision making, especially in consideration of a tie (in a 4 person group).
Separate finances (each person in the group has their own plan)
Separate finances in a group effectively makes you single while living with roommates. Make sure you track any group expense expectations and how and when they were paid. Make sure you have all of the same documentation as a single individual, but you may want to share copies with your group.
Hybrid finances (a factorial number of financial plans, such as 3! (6 plans)
Good luck. I would be hard-pressed to recommend hybrid financial planning to a group. You thought it was difficult to make plans and communicate with a group before, try doing it with a mix of goals and plans. Either combine your finances or keep them separate. While it is technically possible to do a hybrid plan (with a series of partnership agreements or LLCs), the complexity grows exponentially.
Finances and financial fights are the number 1 cause of divorce in the United States. At its core, this is due to trust and communication issues. The key is to decide what goals you want to work together on, and if it is worth the work to combine your finances. Make sure you work with an Advice-Only, Fee-Only, Fiduciary, CERTIFIED FINANCIAL PLANNER™ who is willing to work with you and your family structure. Don’t be surprised if the first discussion is a deep dive into what you want to achieve and how to structure it. If you need a hand, you can schedule a no-cost 60-minute introductory meeting with one of us at https://calendly.com/coachdrjay/childfree