I remember once reading a book describing marriage and the joining of two people’s finances, and they summarized the process as “1+1 = 1.”
Personally, I took this description as having two meanings, one figurative and one literal.
- On the figurative side, I took it to mean that there might not be a set and/or mathematical approach to combining personal finances for marriage (i.e. it’s likely to be a little different for every specific situation).
- On the literal side, I took it to mean that there really is no way to maintain two completely separate finances during marriage, no matter how hard you try.
So, having established this, I wanted to share with you all how my wife and I (got married in Sep 2014) have, in my opinion, successfully combined our finances over the past ~ 1.25 years. My hope is that a couple of the lessons learned and strategies can potentially help you in your current or future marital finances. Enjoy!
Step 1 – Put a Legal Agreement In Place (Pre- or Post-Nuptial, often called a “Pre-Nup”) If There Is Significant Financial Inequality Coming In To The Marriage
For young folks looking to get married right out of college or graduate school, it is often the case that both individuals are living paycheck to paycheck, have debts, and don’t have any significant savings to report. If this is the case, and both individuals are on approximately equal financial terms coming in to a marriage, a pre-nup is nice to have, but not crucial.
However, if one person has significantly more savings than the other, or even if one person has large amounts of debt whereas the other is debt free, it’s a good idea to put some sort of agreement in place.
For my wife and I, a pre-nup made a lot of sense, so we proceeded to obtain one.
Online Free Template or Lawyer?
Being the cheapskate I am, I first looked online for free template documents for pre-nups so that I could save on lawyer fees. However, once I read that agreements drawn up individually (without the help of legal counsel) often don’t hold up in court, I decided it wasn’t worth the risk, and proceeded to engage legal counsel for my wife and I.
One thing we learned, which we didn’t know at first, was that each party going in to the agreement has to have their own separate legal counsel in order to maintain objectivity. Of course, this also increases the cost, but is a move that makes sense. In the end, I obtained a family lawyer referred to me by my accountant, and my wife obtained a lawyer that we knew through a local social group and other friends.
With all the back and forth between lawyers, my wife, and myself, it took longer than we expected to get the agreement finalized. When everything was signed, it was actually a POST-nuptial agreement, meaning that we signed it after our wedding and honeymoon. However, according to my lawyer, he said that a post-nuptial agreement is still perfectly legal and enforceable.
What does the post-nuptial agreement provide?
In a nutshell, our post-nuptial agreement makes it so that all debts and assets are SEPARATE, unless we make a conscious decision to make it a joint account and put both our names on it. What this means is that all IRAs, 401ks, savings accounts, checking accounts are separate, except for the ones that we created to be joint accounts.
How much did this whole process cost my wife and I?
In the end, the cost was a little more significant than I expected, but that was only because I didn’t realize all of the complexities and considerations that go in to this type of document. My family lawyer charged the majority of the total cost (around $2,200), since he drafted the document. My wife’s lawyer gave us an awesome “family and friends” rate, which took the cost up to around $2,500 total.
Step 2 – Pay Off Any High-Interest (Credit Card) Debts
Remember that marriage finance equation I mentioned before, where 1 + 1 = 1? It very much applied in our case, as our marital agreement made it so that I wasn’t legally responsible for my wife’s existing credit card debt. However, let’s get real here! No matter how much you want to deny it, YOU are marrying that credit card debt too!
In actuality during marriage, our paychecks each month will be combined, and the joint money will either go to 1) savings/spending or 2) paying the monthly credit card balance, which is a terrible use of money since a lot of the money goes to pay interest, not principal.
So, if one party of the marriage has a some cash sitting an account, it’s only logical to use this cash to pay off the other person’s credit card debt. This is exacting what was hard for me to eventually come to terms with during the joining of our finances. However, it was definitely the best financial decision.
Step 3 – Set Up Joint Accounts Needed
For my wife and I, it made a lot of sense to have at least a couple joint accounts. We decided to have 1 – joint checking account, and 2 – joint savings accounts. We placed both of these accounts with Ally Bank online, since they offer some of the best interest rates around and other favorable terms.
For us, the way we operate is that we each receive our income in to separate Paypal and Bank of America checking accounts at first, and then transfer our remaining money to the joint checking account for paying bills, savings, etc.
Step 4 – Setting Up Your Investment Strategy
Per our post-nuptial agreement, my wife and I maintain separate accounts for the ones which are not specifically “joint” and have both our names on them. Because of this, we maintain and track two sets of 70% equity / 30% fixed income asset allocations, separately.
- For my wife, she does not have any desire to be actively involved in managing her asset allocation. As such, we use a low-cost lifecycle Vanguard index fund, called the Vanguard Target Retirement Date 2025 fund. It maintains a 30% fixed income, 70% equity asset allocation for her, so she doesn’t have to worry about rebalancing.
- For me, I love tracking my asset allocation and rebalancing when needed, so I take a more active approach to passive index fund investing and invest in individual Vanguard index fund for the various share classes, bonds, and international markets. You can read more about my investing strategy here.
From there, we then try to invest an equal amount of contributions to each of our separate IRAs, 401ks, etc accounts throughout the year.
Next Steps
So there you have it, the 4 “initial” steps my wife and I took over the past year or so in order to get our finances combined.
For next steps, I do need to start doing a better job of reviewing my Value Based Financial Planning and goals, as we have been so busy over the past year with the wedding, graduating, new job, baby, and moving to Colorado that I haven’t been able to do that as much as I’d like. Of course now, I will need to involve my wife in that process. Should be fun!
How about you all? What were the main steps / barriers / hurdles / challenges you faced when combining your finances for marriage?
Share your experiences by commenting below!
***Photo courtesy of https://www.flickr.com/photos/kumon/43128198/
