Hooking up … financially

You haven’t seen your partner fully naked until you’ve seen their credit reports (‘show me yours and I’ll show you mine’).

In my seminars on personal finance, I often remark that people are more comfortable talking about sex with friends and colleagues than they are talking about personal finances. So, it doesn’t surprise me that so many couples avoid having meaningful conversations about comingled finances. I expect part of the reason stems from the nature of casual cohabitation. The decision to live together may be a gradual one, so there isn’t one event (such as a marriage ceremony) signaling that the couple is officially joined at the wallet. Talking about finances, both one’s history and future expectations, can seem like an even bigger (and more intimate) step than moving in together. Neither partner wants to raise the issue for fear of the seriousness it suggests and the ensuing awkwardness.

These are nonetheless terrible reasons to avoid the conversation. Most couples eventually do talk about finances – when they are in a financial crisis (and this is truly a bummer, as financial disputes are the leading predictor of divorce). Needless to say, the reason why many couples argue so much over finances has something to do with the fact that they are only starting to broach the issue when the pressure is on.

At Community Ladders, we work with couples all the time. Financial management with one person can be quite challenging, but doing it with two people is significantly more so, both in terms of expectations and implementation. Every couple is unique, but here are four things we typically do with couples in the first 6 months:

1) Budget using personal slush funds – Budgeting is one of the most difficult and individualized things we do with members, and it usually takes months of trying out different techniques to find a method that a member can instinctively stick to. The odds of getting two people to find success with exactly the same method is rare. So, instead, we create three accounts – a joint account for joint expenses and a personal ‘slush fund’ for each person. The idea of the slush fund is that each person still has some money set aside that is their ‘own’ that they can use as s/he sees fit. This helps limit resentment in the budgeting process. In order to cut back, people can reduce their personal slush funds using the budgeting technique(s) that works best for them. We also do some budgeting around joint items, but this process tends to proceed more smoothly once we’ve set up the personal slush funds successfully.

2) A third party to prompt questions and provide accountability – I’ve had couples regularly mention that financial conversations between them are much more frequent and productive because they are using my questions and suggested steps to frame the conversation. It’s not just one person asking a question of the other, but rather a discussion of a third party’s take on the family’s finances. While this is obviously within the context of a C-L advising relationship, non-members may be able to replicate this by using a book on couples’ finance that has specific discussion prompts. The main point to remember is that ‘neutral prompts’ from a third party will often be more effective at generating open dialogue than pointed questions from one’s partner.

3) Full transparency about history – I’ve worked with several couples with very uneven debt burdens coming into a marriage.  We can generally work through most issues, and create a step-by-step plan. The only time I’ve seen this become difficult is when one party downplayed their debt or ‘forgot’ to mention it. As with most things, sunshine is the best disinfectant … and the sooner, the better.

4) Clear expectations and a discussion of fairness – This point is straight-forward, but I can count on one hand the number of couples I’ve seen that have actually had this conversation.  Many couples (including, sadly, my wife and I) think they’ve had the conversation, but really just glossed over it, or remember it ‘differently’. Partners need to be clear on their financial expectations of each other and the family unit. In a similar vein, each partner needs to clearly indicate what they think is, and is not, fair in terms of contribution levels to joint expenses and savings for the future. To not have this conversation is to risk anger and resentment down the road.

This blog entry is turning into a novelette, so I’ll stop here.  Couples are unique in their needs and what approach works best, but these four guidelines have served Community Ladders’ couples well so far.

In February, Community Ladders will be running a special for couples (details to come later this month). Send an e-mail today to couple@comlad.com to reserve your spot on the waitlist.      

Bill Varettoni is a financial planner and the founder of Community Ladders.