Marriage changes the way you think about money. It encourages you to consider how your spending and savings decisions will impact not just yourself but your partner, too. That’s why so many couples choose to start sharing their finances, merging their accounts, and thinking about money together.
In this article, we’ll help you identify the major areas you and your partner will need to review before you begin sharing finances.
Just as with any financial decision you make, the first place to start is usually always budgeting. If you plan on joining finances with your partner the first thing you’ll want to get on the same page about is how you plan and track your spending habits. Do you share the same priorities when it comes to how and when you spend your money? Do you track the way you spend your money the same way? Do you track your spending at all? There aren’t exactly right or wrong answers to these questions, but if you’re going to pool your finances with another person it’s incredibly important to get on the same page about how your money comes and goes. A significant part of that is agreeing not only on a style of budget, but what you’re budgeting for. That leads us into our next consideration: shared financial goals.
2. Financial goals
When you and your partner sit down to decide on how you’re going to budget, it’s a good idea to start by outlining what you want to achieve together. Doing so provides context, and helps you get a better idea of how your debts and savings can get you closer to your goals.
Couples will generally want to achieve at least one of the following goals:
- Raising a family and helping children pay for school
- Buying a new or used car
For each of these goals, there are timelines, which can help you further organize your priorities by what is most likely to happen first.
- If you just got married and don’t yet have children, you can’t open an RESP to pay for your child’s post-secondary education, which likely won’t be a possibility for 18 more years anyways. You can begin saving for it now, but it’s not essential to your own financial wellbeing.
- Even early retirement will likely be at least a couple decades away, though you can and should begin saving for it now. Because even though it seems like a long ways away, the cost of retirement will likely end up being more expensive than a suburban home for most families and you need to allow time in the market to assist with saving for this goal.
More immediate concerns include buying a new or used car, going on vacation, and homeownership. These goals can be refined by your shared ambitions.
- A new home is one of the biggest and most consequential investments couples can ever make. But within that goal is a great deal of leeway. Are you looking for a modest townhome or a rural household with acres upon acres of backyard? One is likely to cost more than the other; you can adjust your savings goals accordingly. Regardless of what you choose, you can be sure that you’ll be asked to pay 20% as a down payment, or 5% if your mortgage is CMHC-insured. Even as prices climb and fall, detached home prices reliably exceed $1 million in Canada’s most competitive markets. If that’s the kind of home you want, you can reasonably expect that you’ll need to save at least $200,000 towards that goal. This predictability is valuable for financial planning.
- When buying a vehicle, you can choose new or used, domestic or import, luxury or practicality. All these factors and more can influence the amount you and your partner decide to put aside.
- Vacations are similarly flexible. While a trip to Hawaii might be ideal, if it’s outside your budget, you can scale down plans and go somewhere else less expensive.
Once you and your partner have defined your goals, you can prioritize them by affordability and relevance. A list could look like this:
- New/used car
- Raising a family and paying for education
Remember: though it’s important to start your conversation about joining finances with some idea of what you both want, these goals can and should be revised as your financial picture changes.
3. Debt and Credit
Now that you and your partner have outlined where you want your finances to take you, it’s time to look at where it’s gotten you thus far.
Most Canadians carry some form of personal debt. Credit cards, credit lines, mortgages, car loans, and student loans are among the most common forms. They help us achieve our long-term financial goals, while keeping us ready for near-term opportunities and emergencies. But that doesn’t make it any easier to discuss. While debt helps us get places, it can also be a source of anxiety, because they also represent financial commitments. For couples just starting to merge their finances, it’s particularly important to be open and honest about your current debts and borrowing needs.
There are a couple ways you and your partner – and your financial advisor – can start to understand how much debt is too much or just enough:
- Debt-to-income (DTI) ratio: as the name suggests, this is a way of measuring your debt against your total income. You can find your ratio by taking your monthly debt payments and dividing them by your gross monthly income, and then multiplying that amount by 100. The resulting percentage will help you get a better idea of whether or not you can be approved for future loans, like mortgages, that can help move you closer to your financial goals. In general, lenders won’t authorize new loans if your ratio exceeds 41-45%, and it’s advised you keep your ratio below 36%.
- Credit utilization ratio: this helps to calculate how much of your available credit you regularly use, and can be found by tallying up the current balances on all of your “revolving” credit products (like credit cards and credit lines) and dividing that number by the sum of all your revolving credit limits. If the ratio exceeds 30%, you and your partner might have difficulty applying for credit in the future.
- Credit card ratio: this helps you understand how much of your take-home pay is being used to cover minimum payment requirements on your credit card. To calculate the ratio, take your total minimum payments required and divide them by your total monthly income. Then multiply that number by 100. If your percentage is over 10%, you might need to find ways of reducing debt.
When working through these calculations with your partner (and your financial advisor), it’s okay if your scores are outside what is considered a good target range. That just means you have some work to do in order to build stronger credit together. In the short term, you may need to focus on reducing debt and paying off as much as your budget will allow. It’s also important to consider paying off your most expensive debt, like credit cards, that can have interest rates as high as 30%. This could, over time, help you get your ratios in better shape. As you begin to apply for credit together, your consolidated credit scores may prove to be lower, especially if one of you has a higher income or lower levels of debt. Borrowing can be somewhat easier when repayment responsibilities are handled by more than one person.
If one or both of you have good enough scores to take on more credit, there are options to help tackle spousal debt, such as consolidation loans. Speak with your financial advisor to find out if this option is right for you.
4. Savings and Investments
People in relationships rarely make the same amount of money, nor is it often the case that they’re in the exact same place in their careers, so it’s to be expected that one partner might have more saved than the other. That’s okay. Even though it might be hard to discuss, at first, being open and honest about how much you’ve saved can help you and your partner get a better idea of how close you are to achieving your goals together.
For married and common-law couples there are a number of ways you can save towards your goals together:
- Spousal RRSP: just like the standard Registered Retirement Savings Plan (RRSP), this helps you build savings that can be used as income when you’re no longer working. Unlike a standard RRSP, this account allows you to contribute to your spouse’s fund up to your yearly contribution limit. You even qualify for a tax deduction when you participate in the plan. It works best when one partner makes markedly more than the other, and – as is the case with standard RRSPs – lowers that partner’s taxable income for the year, ideal for reaching other goals together.
- Registered Education Savings Plan (RESP): this account helps parents and guardians (the ‘subscribers’) contribute money towards their children’s (‘beneficiaries’) education in a tax-sheltered account, so their earnings can be protected and continue to grow for years. Both partners can be listed as subscribers, as long as they meet certain requirements outlined by the Canada Revenue Agency (CRA), which are outlined on their official website.
- Registered Disability Savings Plan (RDSP): this account helps parents and guardians provide financial security for children who are eligible to receive disability tax credits. Contributions aren’t tax-deductible but they can be continued until the end of the year that the beneficiary turns 59.
Other accounts can help you achieve shared goals:
- Tax Free Savings Account (TFSA)
- Registered Retirement Savings Plan (RRSP)
- Non-registered Investment Accounts
Though usage of these accounts is typically restricted to the person who owns them, it’s important to continue making the most of these opportunities. They can help you build up your own savings, while earning enough for shared goals.