How to get on the same financial page and avoid debt in your relationship

Money is one of the leading causes of relationship conflict. As Licensed Insolvency Trustees, we see all too often the toll joining finances can take on couples — and individuals who have since left a financially irresponsible spouse but can’t seem to shake the debt it left behind. 

It’s heartbreaking to see hope, admiration, and optimism of love give way to anger, betrayal and distrust. But the good news is it doesn’t have to end that way. Following are several straightforward steps every couple can take to successfully blend their finances, work collaboratively toward their goals, and enjoy long and fruitful partnerships.

Keep some finances separate

Co-habiting couples typically have a lot of shared costs. Each person is responsible for their share of the rent/mortgage, utilities, groceries, insurance, property taxes, maintenance, etc. The typical conversation around how to manage these costs fairly and evenly usually lands at one of two conclusions:

  1. Divide the expenses so each partner is responsible for a roughly even share
  2. Pool funds in a joint bank account and pay expenses from there

From a logistical standpoint, the second option often seems the most frictionless — and has long been the default mode for many households — but it’s not without its drawbacks. Namely, how do you decide when and where either partner can spend money from the joint account for discretionary or non-essential purchases? This can lead to conflict and several serious financial pitfalls.

Most joint accounts are ‘one signature required’ by default. That means either partner may access all the money in the account at any time. If one person decides to drain the shared funds on an ill-advised spending spree, both partners suffer the consequences of not being able to pay their monthly expenses.

The best solution to this problem is to keep some of your finances separate, as outlined below:

  1. Open a joint chequing account for your regular monthly expenses (e.g. housing, utilities, insurance, emergency savings, etc.).
  2. Each partner transfers an agreed amount into the joint account every month or every paycheque to cover their portion of the shared costs.
  3. Automate monthly transactions (e.g. utility payments, etc.) as much as possible to ensure they’re paid on time and in full every month, and neither partner assumes a greater burden managing the family finances.
  4. Keep individual accounts for all discretionary spending and individual savings goals.

If one (or both) partners struggle with impulsive and/or compulsive spending, consider requiring two signatures to withdraw funds from the joint account. This will force you both to get on the same page around shared financial decisions and prevent one of you from sabotaging your shared financial goals.

Minimize the number of joint debts

Some joint debts are almost unavoidable — advisable, even — in a relationship. A mortgage, for example, should be in the names of both spouses as both marriage law and common law view real property as a shared asset. Both of you are dually responsible for the debt, and you are both entitled to an equal share of the proceeds if or when you sell the property (e.g. separation or divorce).

On the other hand, there is little value in joining other debts like credit cards and lines of credit. Unlike a joint chequing account, which risks either partner overspending money you do have, joint credit risks overspending money you don’t.

Contrary to common belief, marriage and common law do not extend to non-mortgage debts. If one partner defaults on or files an insolvency (e.g. Bankruptcy, Consumer Proposal) involving a non-mortgage debt for which they are the sole signatory, the debt does not transfer to the other partner. However, if the same partner were to default on or file an insolvency involving a non-mortgage debt they shared jointly with their spouse, responsibility for payments would transfer to the other partner — which often results in the second person needing to file a Bankruptcy or Consumer Proposal as well.

Co-signing vs. authorized user

Confusion often arises around the difference between jointly held debts (co-signed), and authorized users of a credit account. This is important to understand because it can have significant consequences for one or both individuals.

As above, in a co-signed debt, both partners share equal legal responsibility for repaying the outstanding balance. Creditors may pursue either individual for payment. Court judgements and wage garnishment orders can apply to both individuals. And if one partner files an insolvency, responsibility for the debt shifts to the non-insolvent partner unless they file an insolvency too.

Conversely, an authorized user may access credit but responsibility for the debt rests solely with the account owner. An authorized user is not legally obligated to repay debts they accumulate on accounts they’re authorized to use (though, hopefully they still feel morally obligated to do so), and creditors cannot pursue them for payment if the account owner defaults.

The best way to know whether you or your partner is a co-signer or authorized user is to speak with the lender directly. Though a good rule of thumb is co-signers must both sign the credit agreement (hence the term), while the account owner can typically add an authorized user verbally.

There are few situations where it’s advisable to co-sign for or add authorized users to a credit card or line of credit. The benefits of convenience, a better interest rate, more points, or a higher credit amount rarely outweigh the possibility one or both partner’s bad financial habits may adversely impact the other. 

Communicate clearly and openly

It’s no coincidence the term ‘partner’ has become increasingly commonplace in recent years. Afterall, what makes a partnership work, if not communication, collaboration, and a commitment to shared responsibilities — both financially and emotionally?

Many people grew up in environments that saw money as the root of all evil and/or discouraged discussing financial matters in polite company. No surprise, then, that these people also struggle to talk about money — even with the person they’ve agreed to share the most intimate aspects of their lives.

But not talking about money doesn’t reduce its impact on your life. In fact, it’s often the opposite: ignoring money issues or denying they exist often makes problems worse and prevents couples from acting until things reach a boiling point.

Following are some topics you and your partner should be willing to discuss frankly, frequently, and (most important) non-judgementally:

How much does each of you earn?

 

It’s not a competition, but you can’t set realistic expectations and long-term goals — much less empathise with one another — unless you know what each of you is financially capable of.

 

How will you divide the financial responsibilities in the relationship?

50/50 might be reasonable if you both make comparable income. Other couples choose to divide proportionate to income and other household responsibilities. As unromantic as it sounds, consider putting this in writing.

 

How much does each of you typically spend on non-essential expenses?

You’re each entitled to spend your discretionary income as you see fit, provided you’re honouring your commitment above. But being transparent about your financial priorities can go a long way to preventing conflict / resentment down the line.

 

What issues or challenges has each of you previously had with spending, saving, debt, etc.?

 

The past certainty doesn’t dictate the future. However, you both deserve to know what kind of financial baggage each person is brining into the relationship. Honesty breeds trust and trust breeds honesty.

 

What are your biggest financial fears or concerns?

 

Are you concerned about losing your job and not being able to pay the mortgage? Maybe you grew up in a low income or debt-burdened household. Helping your partner understand your worries (and vice versa) builds trust and helps reduce potential conflict.

 

What are each of your short-, medium-, and long-term goals?

 

Align yourselves on common goals like buying a house, retiring early, saving for emergencies, etc. and how each of you will contribute to achieving them. Be supportive of individual goals, too — especially if they require sacrifices or compromises on the other person’s behalf.

 

How do you each hold yourselves and each other financially accountable?

 

Set time aside to regularly review your budget, track your spending, evaluate your savings progress, and discuss challenges you’re having both collectively and individually. Create a system where you can address concerns and get the support you need to be financially successful.

 

These conversations can initially be unsettling and will often lead to conflict. But, so will being on different pages. The sooner you identify and correct misalignments the less likely they are to become financially unsustainable or emotionally irreconcilable. 

Know when to ask for help

The most effective partners trust each other both to do the right thing and to provide good constructive feedback. If you or your spouse find it difficult to communicate about and take steps to proactively manage money in your relationship, it may be a sign of deeper issues. In such cases it may be time to speak with a financial and/or relationship counselor to prevent unmanageable debt from taking a starring role in your relationship.

If you’ve reached a point where debt is taking over your relationship and your life, contact a Licensed Insolvency Trustee for a Free Confidential Consultation. They can help identify your challenges, clarify who’s responsible for what, and outline options to help you both get the financial fresh start you need and deserve.