Avoid Financial Problems in Your Relationship (Part 2)
Is your partner a financial match? Find out this two-part series starring Carol Pepper and Camilla Webster, authors of The Seven Pearls of Financial Wisdom.
If you’re in a committed relationship, but have been dancing around the topic of money, it’s time to get real.
This week is the second episode in our two-part series starring special guest, Carol Pepper and Camilla Webster, who wrote The Seven Pearls of Financial Wisdom: A Woman's Guide to Enjoying Wealth and Power.
If you haven’t yet, check out part 1 of the series now!
Today, Carol and Camilla will discuss the 5 topics that you must hash out with your partner so you have full financial disclosure. This information will give you confidence in your relationship and, most importantly, increase the odds that you stay a couple for life.
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*** Exclusive Excerpt from The Seven Pearls of Financial Wisdom,
by Carol Pepper and Camilla Webster ***
Once you decide to become a committed couple, you need to begin working toward full financial disclosure.
If you have decided to invest more time and effort into developing a relationship with someone, it is time to begin to dig deeper into all areas, including finances. Although there is no right timetable for getting information, we are assuming that by the time you are ready to talk about living together or getting married, you should also be disclosing more specific personal financial information.
There are five areas in particular you need to discuss: income, financial obligations, credit ratings, financial goals, and the handling of joint finances. We know this is not easy stuff—it is so much more fun to look at apartments together rather than credit ratings—but it is essential that you know what kind of person you are moving in with before you do so.
It is even more crucial before you tie the knot—you may become legally responsible for your husband’s obligations, so you need to know exactly what his financial picture is like before you decide to take it on. You need to decide how much both of you want to commingle your finances before you merge households.
What should you do if your man refuses to participate in financial disclosure before making a serious commitment? We know men who croon that all will be revealed “after the wedding.” We seriously advise against marrying or moving in with someone who will not disclose financial information to you.
His stonewalling is a very big red flag. He may be a chauvinist who thinks women are either incapable of understanding family finances or have no right to the information; ask yourself if you want to live with this type of person. Read Innocent Spouse, a memoir by Carol Ross Joynt, who was saddled by huge debts she had no idea existed after her husband’s untimely demise.
If he refuses to disclose financial information, your man may be a con artist who does not want you to see the evidence of his financial misdemeanors, or he may have given you a false name and actually cannot produce a credit report under that name.
He may be a control freak who will make your life miserable and who will never treat you like a full partner—you may not want to live under the “rule” of a petty Attila the Hun. He may be extremely wealthy but living beyond his means and not want you to really know about his multiple lawsuits, alimony payments, and other financial obligations.
Knowledge is power, and without knowledge you should not commit to moving forward into a situation where you share living arrangements and financial obligations. Continue to date if you like, but don’t commit financially to a man who won’t share information with you.
Take a Look at Joint Income
In order to decide how to split expenses when you decide to live together or get married, it is essential to understand how much money each person makes. For couples who work at salaried jobs, this is not difficult to verify—just show each other a pay stub.
For business owners, the question is much more fluid—many business expenses, such as travel or home-office rent, reduce taxable income but improve after-tax cash flow. You need to sit down with each other and share realistic numbers based on the last couple of years.
For wealthy men and women, income may include proceeds from investment portfolios, family trusts, and dividend checks in addition to, or in lieu of, a salary. However, a wealthy person may have no control over trust disbursements, for example, so he or she may have less financial flexibility than an entrepreneur.
Once numbers are disclosed, you may be surprised to find out that you are among the 22 percent of all American women who out earn their husbands; the number is 25 percent if your husband does not have a college degree.
If you are under the age of thirty, are single and childless, and live in a major city, you probably earn quite a bit more than the men in your town—17 percent more if you are in New York City, 12 percent more in Los Angeles, and 15 percent more in San Diego, for example.
Now that you understand who has the greater earning power, it is time to look at financial obligations, so there is a true picture of net cash available.
Examine Financial Obligations
If either of you has ongoing financial obligations, these will reduce the amount of cash available to fund joint expenses. Financial obligations in the early years usually include school debt, car payments, and credit-card bills.
In later years, obligations include the support of your children, any child support or alimony payments if you are divorced, and mortgage payments on properties you own. If you have experienced financial difficulties, you may also be responsible for past-due medical bills, tax installment payments, or payouts under bankruptcy or other creditor agreements.
A simple list of your financial obligations should be shared with your mate, so that both of you understand where all the cash is going.
It can be helpful to break financial obligations into mandatory and discretionary categories. You may spend a great deal on antique cars or boats, for example—this is really a discretionary obligation, compared to court-mandated child support.
Asking your significant other to share a list of his financial obligations will be a good test—can he produce this list? Can you? If both of you are capable of producing the list, it shows that both of you are aware of and handling your obligations. If he cannot produce a list and is totally disorganized, you need to decide if you want to assume this chore for both of you as a couple or not.
Share Credit Reports
One of the most reliable ways to gauge your potential mate before you move in together is to share credit reports. Credit reports are assembled by ratings agencies, so your man cannot manipulate or hide data—the credit report will tell the unvarnished truth, which can often be an enlightening story.
First, take a look at his overall credit score. Then look at the details—you will be able to see if he has late payments, bankruptcies, or other summary judgments against him. You definitely need to know all the facts before you make a commitment to sign a lease or buy a house together. If your man has a good credit score and pays his bills on time, you can feel more confident in joining your households.
You will also need to come clean and present your own credit report to your partner, so make sure it is accurate. Although you cannot hire “credit doctors” to erase problems, you can improve your score by making all your payments on time—not even one day late—and by never borrowing more than 30 percent of the credit available to you.
Helpful online credit monitoring reports can guide you to ways to improve your own scores. Companies like FICO will send you an e-mail alert if your credit score changes.
Discuss Financial Goals
Now that you have a good handle on income levels, financial obligations, and credit scores, it is time to switch gears and talk about the future—what are your man’s goals?
If he has had financial problems in the past (which you can see plainly from his credit report), how is he working his way out of these problems? Is he expecting you to handle more expenses than you normally would while he digs himself out of a hole? How do you feel about doing that?
Again, this is time to be brutally honest with yourself. If your man does not have a good track record in handling money, you have no evidence that this will change in the future.
If your man is financially responsible, it is still a good idea to discuss financial goals with him. Now that you are a couple, what are his goals? Does he plan to start a company, make partner in a law firm, or work for your business? How much money does he envision going into joint plans versus his personal goals and investments?
If he wants to compete in triathlons around the world, for example, he may need to keep a good deal of his cash flow to meet this goal. It is better that you know this in advance, rather than assuming that you are sharing the same vision of the future.
Your own goals are also important, and you need to express them. If you plan to take on debt to go to business school for an MBA, he needs to know that. If you want to start a family and stop working within two years, this should be openly discussed rather than making it a covert agenda. If you want to sell your business within five years and retire offshore, you need to make sure he is agreeable to that plan.
Discuss How to Handle Joint Finances
Armed with the knowledge gleaned from full disclosure, you can now discuss how to handle financial arrangements after you join households. At this point, you can relax because you have a clear picture of what you are committing to—there are no financial secrets waiting to disrupt you after you have moved in together.
Of course, we hope that you discover that your man is an excellent financial manager. Life is not always perfect, though, and if you have fallen in love with a man who has poor financial management skills but is willing to reform, you may decide to take the risk and move ahead.
In this case, you can protect yourself by making sure you do not expose yourself to his potential pitfalls. Make sure you do not open any joint accounts, either checking or credit, for at least two years. If you plan to marry, seriously consider a prenuptial agreement (see below). Better yet, consider getting engaged and living together, or sharing joint finances for at least a year, before you marry.
Do not enter into a lease agreement that you could not afford to carry on your income alone. Do not put his name on a mortgage or on a property deed, especially if you are providing all the funding.
If you lend him money, or agree to pay off his bills, make sure all your agreements about repayment are documented in writing. This way, if he disappoints you and remains a financial disaster, you can extricate yourself with minimal financial damage to yourself.
If your man is a good financial manager, on the other hand, it will be easy to create financial arrangements that suit you both. A good way to start is to have one joint checking account with two debit cards for joint expenses, while the rest of your finances are maintained separately.
Both of you can contribute proportionally to the joint account.
For example, if you make $100,000 per year and your man makes $50,000 per year, you may agree that you will pay two-thirds of the joint expenses while he pays one-third. If one of you has a private company, as described above, it may take a bit more analysis to figure out a fair way to split expenses.
After a year or so, you may also want to have a joint savings account to which you can both make contributions—this is ideal for major joint expenses that require advance planning, such as a house or an expensive vacation. As trust grows over time, you can share more.
Carol and Camilla, thanks for your relationship insight! It was great to have you on the Money Girl podcast.
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