shadow

Yours, mine and ours

Mineyoursours(web)As a relationship progresses, it’s natural to begin sharing goals and dreams. But once a couple is sharing a home, sharing finances doesn’t always come naturally. This is why a conversation about finances is of considerable importance – open and honest communication between partners can help establish a positive financial foundation for the long run.

Here are a few key points that can help guide the discussion:

Check your status
A good place for a couple to start is by learning about each other’s financial situation. What does each partner earn? What savings has each accumulated? What financial obligations does each partner have? And while not always easy, it’s also important to talk about debt and past credit issues. The idea is to understand challenges early on and begin working towards financial goals as a couple.

Build a budget
Establishing a budget as a couple can help ensure household expenses are covered and that there are enough funds for other living necessities. One way to do this is by breaking down expenses into main categories like household costs (e.g., rent or mortgage, utilities, groceries), and personal expenses (such as haircuts, clothes and gym memberships).

Along with everyday costs, a budget should include money for longer-term goals, such as debt repayment, insurance protection or retirement savings. An advisor can be a valuable resource in allocating an appropriate amount for these items and suggesting strategies to help achieve these goals more effectively. If there are debts, for example, consolidating may make repayment more manageable. To boost retirement savings, a couple may be able to take advantage of a spousal Registered Retirement Savings Plan and save on taxes. Having a well-thought-out budget is an important part of building a financial future together.

Develop a plan
Once a budget has been created, the next step is to work through how each budget item will be addressed. Various approaches are possible, including:

Centralize. Some couples opt to combine their earnings into one pot that is used to pay for all household expenses and any discretionary spending (joint and personal). It’s the simplest way to handle joint finances, but it also means discretionary expenses are laid bare for both to see.

Split and pool. Other couples maintain separate bank accounts and direct a monthly amount into a joint account to cover household and joint discretionary expenses. The amount pooled can be based on a percentage of earnings if one spouse (1) earns less than the other.

Spend one, save the other. In this approach, one spouse’s income is used for all living expenses while the other’s is saved. This can work particularly well if one spouse has a variable income, or is one already owns and covers the expense for the home.

Consider a household CFO
Ideally, a couple reviews their finances together regularly, but it may also be helpful to delegate one person to pay the bills. One partner may be a better number cruncher, or may simple have more time to out towards the task.

Review your insurance needs
Protection requirements can change significantly in the transition from being single to cohabiting. An advisor can help assess a couple’s best options for coverage, such as life, critical illness and disability insurance, or even term insurance, especially if they are relying on both of their incomes to cover monthly expenses and maintain their lifestyle.

Update or establish an estate plan
Partners bringing estate plans into a partnership will want to look at what combined plan may make sense and ensure that it evolves to meet the needs of the relationship and any dependent children. This update may involve reviewing the beneficiary of any insurance policies, investments or other legal documents to ensure the legacy is passed on as the partner(s) intended. If no estate plan exists, an advisor can help out one in place.

Don’t forget the tax
There can be taxation impacts when a couple’s finances come together, including eligibility to claim medical expenses, public transit costs and charitable contributions. It’s a good idea to talk to an accountant or tax specialist to discover what tax saving opportunities may be available.

Just like other aspects of sharing in a relationship, merging finances effectively takes good communication and planning. Speak with an advisor to look at what financial strategies can best benefit your partnership based on your combined plans and goals.

(1) Throughout this article, “spouse” also includes common-law partner as defined in the Income Tax Act (Canada).

Source: Solutions Magazine MK2908E Spring 2016