Dear Carrie: My girlfriend and I are both financially stable, and each of us owns our own home. We have decided to move in together and are planning to live in her house. Could you give us some money management tips on how best to handle our finances at this point in our relationship? — A Reader
Dear Reader: Moving in together is a big emotional step. It’s also potentially a big financial step — which can impact a relationship positively or negatively, depending on how open each partner is about money.
In a situation such as yours, in which each partner is financially independent, you may not be too concerned about who’s picking up the tab for dinner, but shared daily living expenses — as well as big issues regarding such things as mortgages, large purchases, vacations and future plans — could cause problems.
There’s no single recommended way to handle your finances. The details will vary for each couple. The most important thing is that you agree upfront on how to handle them. So before you take your togetherness to the next level, I’d make a date to talk through how financially close you want to be.
Start With the Living Arrangements
Because you’ll be moving in to your girlfriend’s house — and assuming she has a mortgage — the first question is how you’ll contribute to the monthly payment. Will you initially pay the equivalent of rent? If so, how will you determine what’s fair?
The issue here is that by paying rent, you’re contributing to the mortgage without having any ownership in the property. If you were to continue to live together long term, at what point would you want a share of ownership? And what percentage of ownership? It’s easy as time goes on to say “our house,” but for it to legally belong to both of you, the title needs to be in both of your names. Otherwise, you could quite literally be left out in the cold should the relationship end.
On your side, what will you do with the house you own? Will you rent it? Sell it? If you sell, you could possibly invest some of the proceeds in your girlfriend’s house, therefore increasing your share of ownership in her home. There again, the title would have to be legally changed. (Note: If you decide to sell your house, think about completing the sale within the next three years. Otherwise, you would potentially forfeit your homeowner capital gains tax exclusion. Check with your tax adviser for details.)
I’m not trying to make it more complicated than it needs to be, but there’s a lot to think about. A home is often an individual’s greatest asset, so it’s important for the two of you to agree on these things sooner rather than later.
Discuss Big-Ticket Items
Living together often means investing in major purchases for your home from time to time — appliances, entertainment systems, furniture. Talk about how you’ll handle these potential costs. Will you share them equally? Each pay for different items? Again, there’s no right or wrong way to go about it. But it will make it a lot easier when the time comes if you have an idea in advance of how you’ll handle these expenses.
Likewise with such things as entertainment and vacations. There’s no harm in treating each other, but make sure you have a mutual understanding about the things you want to do. Agree on a savings and cost-sharing plan so that neither of you always feels obligated to cover for the other.
Drill Down to the Day-to-Day Stuff
Sharing a home also means sharing the ongoing costs, such as utilities, cable, Internet, cleaning services, groceries — all the daily expenses that can add up quickly. Figure out how you’ll divide these costs. One approach is to come up with a monthly household budget and then each contribute an equal amount. If one of you earns more than the other, that person could offer to cover a greater percentage of the bills. Once again, the main point is to be fair.
To make things easier for both of you, consider opening a joint account for everyday living expenses. That way, even if one of you is primarily responsible for handling the bills, each of you has access to the account. A joint account would also allow you to comfortably put certain recurring bills on auto-pay.
Keep an Eye on the Future
In the early days of living together, it’s probably wisest to keep the majority of your finances separate. As your relationship continues or should you marry, you can decide how much you want to share. Some couples — especially those who join their lives when they’re already financially established — set up a “yours, mine and ours” system, allowing them to keep their accumulated assets separate while combining their incomes and sharing expenses.
Down the road, I would also suggest that the two of you meet with a financial adviser. An objective and knowledgeable third party can help you understand your options and create a framework that is fair to both of you.
I’m a firm believer in financial independence for everyone at every stage of life. But that doesn’t mean you can’t work together to achieve your dreams. At this point, take it a step at a time. Just be sure to discuss each step in advance so you know it’s fair to both of you — and that you’re both headed in the same direction.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER ™ is president of the Charles Schwab Foundation and author of “It Pays to Talk.” You can e-mail Carrie at askcarrie@schwab.com.