This is the second part of an article that talks about the three approaches available for combining your finances. Last month’s article discussed keeping finances separate and partially combining finances (hybrid approach). This month we’ll wrap up this discussion by talking about completely combing your finances and we’ll also give you some information on separating your finances should that become necessary. Let’s get back to our discussion.
Completely Combined Finances. Completely combined finances in marriage involve pooling all income and expenses into joint accounts and sharing financial responsibilities equally. Completely combining finances can foster unity, transparency and collaboration in managing a couple’s financial life. However, it requires a high level of trust, communication and agreement on financial priorities and habits. Couples considering this approach should ensure they have a solid foundation of mutual understanding and a shared vision for their financial future. Regular financial check-ins and open discussions can help maintain harmony and address any emerging issues.
Pros
- Simplicity and Streamlined Management
- Unified Finances: Easier to manage finances with a single set of accounts.
- Simplified Budgeting: Creating and adhering to a budget is simpler when all income and expenses are combined.
- Increased Transparency and Trust
- Full Visibility: Both partners have complete visibility into all financial activities.
- Trust Building: Full transparency can enhance trust and partnership.
- Shared Financial Goals
- Unified Objectives: Easier to set and achieve shared financial goals, such as saving for a house, retirement or vacations.
- Collaborative Planning: Joint decision-making can lead to more cohesive financial planning.
- Equal Responsibility
- Shared Burden: Both partners equally share financial responsibilities, reducing the burden on any one person.
- Mutual Support: Allows for mutual support in managing finances and tackling financial challenges.
- Emergency Preparedness
- Combined Resources: Pooling resources can provide a stronger safety net in case of emergencies.
- Joint Savings: Easier to build a comprehensive emergency fund and save for future needs.
- Potential Financial Benefits
- Better Rates: Combined finances can sometimes lead to better mortgage rates, credit card terms and other financial benefits.
- Joint Tax Benefits: Possible tax advantages from filing jointly, depending on the jurisdiction.
Cons
- Loss of Financial Independence
- Autonomy: Individual financial autonomy is significantly reduced.
- Personal Spending: Personal spending decisions might require consultation and agreement.
- Potential for Conflict
- Spending Disagreements: Differences in spending habits and financial priorities can lead to conflicts.
- Financial Control: One partner might feel dominated if there is an imbalance in financial control or decision-making.
- Vulnerability to Financial Mistakes
- Shared Risk: One partner’s financial mistakes or mismanagement can directly impact the other.
- Debt Issues: Joint liability for debts means one partner’s debt can become a shared burden.
- Income Disparities
- Fairness Concerns: Significant income disparities can lead to feelings of inequality or resentment.
- Contribution Imbalance: The partner earning more may feel they are contributing disproportionately.
- Complicated Separation
- Dividing Assets: In case of separation or divorce, untangling completely combined finances can be complex and contentious.
- Legal Implications: Legal processes may be more involved when all finances are intertwined.
You’ve made great progress once you and your significant other have agreed on how you want to approach your finances! There are still many details to be discussed including budgeting and, if your finances are partially or completely separated, how to contribute to joint expenses. This is especially true if one of you earns a lot more than the other or has much higher debt.
There’s also the matter of thinking through separation should it occur. A lawyer is important to understand this and the rules vary from state to state. There are three concepts that are essential for you to understand here.
- No-Fault Divorce. A no-fault divorce is a type of divorce in which the spouse filing for divorce does not have to prove any wrongdoing or fault on the part of the other spouse. Instead, the filing spouse only needs to state that the marriage has irretrievably broken down or that there are irreconcilable differences, meaning that the marriage cannot be saved and there is no reasonable expectation of reconciliation. In this situation, the court does not consider the behavior of either spouse when making financial decisions. Colorado is a no-fault state.
- Community property. Community property refers to a legal framework used in some states to determine how property and debts are divided between spouses during a divorce. Under community property laws, most property acquired during the marriage is considered jointly owned by both spouses and is typically divided equally upon divorce. Colorado is not a community property state. It is an equitable distribution state.
- Prenuptial Agreements. A prenuptial agreement (often called a prenup) is a legally binding contract created by two individuals before they get married. The purpose of a prenup is to establish the property and financial rights of each spouse in the event of a divorce or the death of one of the spouses. Importantly, a prenup can override community property laws in a divorce, even in states that follow community property laws. A prenup is a contract between future spouses that can address issues like property division, alimony and debt. If a prenup is valid and doesn’t violate state or federal law, a judge will likely accept it as proof that the couple agreed to a different split of their assets than the default 50/50 split in community property states.
So, in summary, a series of open and empathetic conversations about how to handle finances when you are getting married or forming some other kind of committed relationship is essential. We can help you work through this process, or discuss any other financial matters, in a no-charge, no-obligation initial meeting. Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.