Living in a committed relationship without the benefit of marriage creates unique challenges for financial planning.
Many people (including me at the time of this writing) are enjoying long-term committed relationships, without the benefits of being married. If this is you, you have many of the same financial concerns as married couples, but you likely lack many of the legal protections and advantages that they enjoy. I’m devoting this post to some of the money matters you and your partner need to focus on.
First, you need to talk about how you want to manage your finances, discussing each other’s financial goals, objectives, obligations and commitments. It won’t be easy, but it is critical that you are open and honest about everything, including sharing your credit reports and scores, child or spousal support obligations, debts and anything else that could impact your finances as a committed couple. Here are some of the key topics you need to address:
How will you handle household expenses? Will you pool money into one account and pay bills jointly? Or will you divide the bills and keep separate accounts? The latter option helps you to avoid some of the liabilities associated with joint accounts commonly established by married couples. For example, if you and your partner have a joint account, you will both be liable for overdraft fees, even if only one of you bounces checks. Another option is establishing a joint account for common expenses, such as your rent or mortgage and household utilities, and keeping separate accounts for each partner to handle their own personal expenses and purchases.
Will you hold joint credit cards? You can open joint credit accounts, or you can add your partner to an existing account as an authorized user. Keep in mind that with a joint account, you are each fully responsible for the charges made by your partner. Also, if you make a partner an authorized user on your card, you will be liable for their charges as well as yours. This is why being in a serious committed relationship means sharing your respective credit reports and scores. If you have a spotless credit history and your score is above 700, but your partner’s is less than 550, with a spotty credit history, it doesn’t mean you should kick him or her to the curb. But it does mean you need to think twice about establishing joint credit accounts, for both your sakes. More importantly, it’s important that you agree on a plan to end bad financial habits, such as unbudgeted spending, and deal with outstanding debts going forward, so that your creditworthiness improves as individuals and as a couple.
How will you fund your retirement? One of the topics you need to discuss is retirement planning, which will likely be harder for you than it would be for married couples, as neither of you are eligible for spousal benefits from Social Security or traditional pension plans. Options to consider include checking to see if you can name your partner as the beneficiary of your 401(k) or 403(b) retirement account or an Individual Retirement Account. Also, check to see if you can use life insurance to fund your partner’s retirement by purchasing an individual policy and naming your partner as a beneficiary. In any case, don’t try to figure it out on your own; sit down with a qualified tax advisor and a certified financial planner to come up with a retirement funding strategy for both you and your partner. Also, be sure to take into account what happens if you and your partner decide to split up.
Estate planning. If you are relying on one another financially just as a married couple would, what’s your plan if one of you dies or become disabled? The first thing you need to do is to sit down with an experienced estate planning attorney, to help you protect you, your partners, and your respective assets and heirs. This is especially critical for couples with minor children from other relationships. You must execute a will if you want to leave certain property to your partner. Without it, unlike a spouse, your partner has no legal marital right to inherit your estate. Also, consider preparing durable power of attorneys for health care and finances, with each partner naming the other as their representative. Also, check into signing a domestic partner agreement, which can support your will and your partner’s right to jointly held property by stating your wishes and intentions. Finally, be prepared to take immediate action to change your estate plans if you and your partner decide to end your relationship.
If you and your partner are not open and honest when talking about financial issues—or worse, you avoid discussing money altogether, then you both need to ask: How committed is this committed relationship? If your relationship has not reached the point of complete honesty, trust, dependability and accountability to one another, take my advice:
Keep your finances separate; this includes bank accounts and credit cards.
Do not cosign for anything, including cars or other major purchases. Do not buy or lease property, including a home mortgage, jointly.
Do not loan each other money without a written agreement spelling out repayment terms, with signatures from both partners. Consider any monies shared outside such an agreement to be gifts or part of the shared expenses of your relationship, with no expectation of repayment. If you can’t afford to make such gifts, do not do so in the name of love.
Romantic? Maybe not. But following this advice is for your mutual protection while you’re together and to make things easier should you go your separate ways.