Mrs. Frugal Hacker (FH) and I have been keeping our finances separate for years. People find it curious that we do so, and so I'd like to explain our rationale for doing so. As I understand it, most couples mix up their finances as soon as they move in together or get married. Not sure if this is just what happens automatically (because it's easier), or is a conscious decision.
It's quite likely that, given the normal course of things, our finances too would've automatically gotten all mixed up when we got married and moved in together had we not tried to keep things separate deliberately. It was a very proactive and conscious decision by me to keep our individual finances separate and to convince Mrs. FH of the benefits of doing so. It is definitely a lot of ongoing work to keep things separate, but for us, we feel the pros have outweighed the cons. 4 years into our marriage, having the power of hindsight behind us, we are happy to report that we're just so glad that we chose and agreed to keep things separate. It has really worked out for us positively.
Here's our story: We started off by having separate finances before we started dating, and as we started dating, we kept things separate then too. We would just alternate who paid for each dinner date and hoped that this strategy would just even things out. It usually did. When we got married, it was simpler to just keep things that way. Our bank accounts and other financial accounts were already separate, why do more work to merge them together? Neither of us wanted the hassle of making an appointment with our Canadian bankers.
Here's what we mean by keeping finances truly separate (we do all of the below):
- Separate bank account(s)
- Separate credit cards
- Split groceries equally (assuming both partners eat roughly the same)
- Split rent/mortgage/utilities equally or in some "fair" manner
- Separate investment account(s), 401(k)s, and IRAs
- Separate credit scores
- Separate tax refunds, even if filing jointly
- Active spreadsheet to track IOUs between the two partners
- Separate debt accounts, for student debt, auto loans, etc.
- Full, read-only access to each other's accounts, so there's 100% transparency, but 0% control.
My overall conclusion after having thought about this topic for a while is that there is almost no benefit to mixing up a couple's finances. I've heard arguments from both sides, and the ones I've heard for mixing finances are quite weak. It's usually some version of an excuse the person making less money uses to try to "mooch off" the other person in some fashion. In the case where the two partners are making roughly similar incomes (like us), there is absolutely no reason to mix up our finances.
Here are my biggest reasons for why Frugal Hackers HQ keep our finances separate, and recommend other couples to do the same:
- Keeping finances separate is a clear superset of mixing up finances. It's always easy to add numbers up at any point using a spreadsheet, but it's incredibly hard to unwind them after years of inter-twining. You can always choose to mix-up your finances later on in life after having tried keeping them separate for at least a few years. It's not possible (or at least incredibly hard) to undo the tangle later on if you've already started your lives together by mixing up your finances. Note: we still file our taxes together. Keeping finances separate doesn't necessarily mean you file your taxes separately as well. You file them in whatever way reduces your total taxes owed.
- It forces you to live a lifestyle that is the lowest common denominator of the two partners. This has an incredible effect, where it usually ends up with the person making more money live more frugally (relative to their income), thereby increasing his/her savings rate. This happened in our case and I ended up saving a bunch of money without even thinking about it.
- It makes divorce settlements easier. No couple thinks they're going to get divorced when they get married, but the data shows otherwise. Divorce rates are already pretty high, and more interestingly, they are on the rise here in North America. With separate finances, it should theoretically make it easier for the couple to come to a reasonable agreement of how much money/wealth each person should take off the table as they part ways (hopefully amicably).
- If you start with the mindset of keeping finances separate, you're more likely to marry someone with roughly the same age-adjusted income potential as you. I'm a huge believer in equal partnerships and feel like there are multiple advantages to this. It keeps the relationship more balanced, and the couple can agree on splitting household chores more judiciously. It also prevents weird power struggles between the couple because no matter what they say, the partner with the higher income always maintains the power in the relationship.
- It motivates the person making a lower income to play "catch up" because of the inherent friendly competition between the two partners. This was certainly true in our case and ended up being one of the biggest benefits of keeping our finances separate early on in our relationship. Mrs. FH was unhappy about her salary relative to mine and so she worked hard, switched a few companies, pushed herself, and got to a more comparable salary to mine over time. It's entirely possible that she might have just enjoyed her chill, low-paying job for far too long if she did not feel the mild pressure to get ahead. You're more likely to hustle and push yourself if you see your partner make a lot more money for the same effort.
- It ensures that the lower income partner doesn't feel any temptation to "splurge" on frivolous purchases such as jewelry, watches, suits, shoes, etc. just because they feel they're getting some free money indirectly from their spouse. People should have a spending rate that is commensurate (or lower) with their income level regardless of who they are married to. I would never put myself in a situation where I'm making $35k/yr but living like I made $85k/yr. That could really put me in a pickle if my spouse were to randomly ditch me, divorce me, or just pass away in an accident, thereby cutting off that income stream permanently. When you keep your finances separate, the lower income partner sees a direct hit to their savings rate each time they splurge, thereby causing a desirable negative feedback loop.
- Each spouse maintains control and has the independence to do whatever they desire with their hard-earned money without judgement from the other spouse, provided they are okay with the short-term and long-term consequences of doing so. I've found that the more autonomy people have with their hard-earned money, the better they are likely to manage it. The spouse's responsibility is to highlight long-term consequences, not to exercise control, power, or fear.
- My favorite one - keeping finances separate makes financial independence feel like a mutually common goal. If you mix up the two people's finances, it's hard to know for sure which person is dropping the ball by splurging, and it quickly turns into an unproductive blame game. By keeping finances separate, you can easily calculate the savings rate of each partner and maybe even engage in some friendly competition of who can be more frugal.
Perhaps the only cases when it may not make sense to keep finances separate is if you're planning to have a more "traditional" marriage where one person works full-time while the other person stays at home and takes care of the kids, the home, finances, budget, etc. There's not much finances to keep track of for the stay-at-home partner if they have no income (besides the savings from not having to pay for daycare). The other scenario is if one partner makes significantly more than the other partner (like 3x or more). Then too it might not make sense to keep finances separate unless the higher income partner agrees to live a lifestyle that matches the income level of the lower income partner. This could be an insanely quick way to reach financial independence by maximizing the couple's savings rate.
What do you think? Do any of you keep your finances separate from your spouses? How do you keep track of IOUs? (we use a spreadsheet to avoid splitting the check at restaurants each time)