When you are living together but not married, you may want to think twice before you combine finances. You do not have the same protections as if you were married. Until you get married, you should keep the majority of your expenses separate to protect yourself in the event that you split up. You do not receive the same protection under the law if you are not married, so you need to provide protection for yourself.
You can and should devise a household budget with your partner when you decide to move in together. Here's how.
Determine the Expenses You Will Share
First, you need to determine the expenses that you will share as part of the household. Generally, you will need to split the rent, utilities, and basic groceries. If you have pets, you may include the pet care in the household budget.
As a couple, you need to sit down together and come to a mutual understanding of what you think should be covered under household expenses. You should have a small household emergency fund of $1,000 to cover emergency expenses. You will need to agree on the amount of rent you are willing to pay together.
Set Your Contribution Amount
Some people would say that you should each submit 50% of the household expenses to the budget, since you are living together and splitting the costs, but this is not necessarily the best idea.
Often one person makes more than another person, and for them, paying 50% of the expenses may be crippling to the person who makes less money.
Contributing a percentage based on your income is a better way to handle it. That way, you both can contribute to your retirement and cover your other expenses without being crippled by your monthly contribution amounts.
Figure Out Your Contribution Amount
To determine how much you each contribute you should add together your gross pay amounts and total your household budget. Then divide your gross pay by your household budget.
Paying bills such as rent, utilities and grocery bills based on the percentage of what you and your partner make, not a flat 50%, makes the most sense when creating a fair cohabitation budget.
Open a Separate Checking Account
You should open a separate checking account just for your household expenses. You should both be signers on the account and have a set date where you make a deposit to that account to cover the monthly bills.
Then you will pay for the expenses you have included in your household budget from that account. That will protect your other money if your partner makes poor financial decisions, and it will make it easier to divide things up if you split up in the future.
Covering all household expenses with this account will prevent you from running up a credit card or dipping into your savings to cover shared expenses. It will be best to have the account at a different bank from your original account.
Items You Are Responsible For
You should be responsible for paying for your own car, car insurance, and other expenses. You should purchase your own clothes, cover your haircuts, and personal care items. If you purchase meals out on your own or with friends without your partner you should pay for that with your own money.
You also need to contribute 15% of your gross income to your retirement. You are solely responsible for any loans or credit cards you have out. You will need to cover your own medical bills and insurance.
You should also have your own emergency fund of at least six months of your expenses, including what you would contribute to your household account. You should analyze your budget to make sure it is in line with the proper percentages of spending and savings.
Budgeting the Rest of Your Income
You should have your own budget set up to control your incidental spending and to help you get out of debt. This budget will help you stay on track for your retirement contributions and prevent you from getting into a bad financial situation.
Follow the normal budgeting rules when you set up this budget, but you should only cover items in this budget from your personal checking account. Make sure you don't forget common budget categories. You may also want a category set aside for unexpected or irregular expenses like attending a friend's wedding.
Keeping Expenses Separate
It is important that both of you keep your outside expenses separate from your household account. You should not make major purchases together until you are legally married.
Purchasing a home or car together can make splitting up more difficult. If you want to save up for a down payment when you do get married, you can save separately and report your progress.
Once you get married, you should rework your budget together and include all of your expenses together. If you have children together but are not married, you should include all childcare costs in the household budget, including formula, food, clothes, medical care, and daycare costs. That will make it easier if you split up due to a job transfer for one partner. It will also allow you to focus on your own budget weaknesses, rather than looking at the way your partner spends money.
Frequently Asked Questions (FAQs)
What happens if we're jointly liable for a debt, but one of us can't or won't make payments?
The creditor can legally pursue either or both of you for the entire balance owed. The delinquency will be reported on both of your credit records. If your partner won't pay, you'll have to make the entire payments yourself to preserve your credit score.
How much of our incomes should go to housing costs?
The accepted rule of thumb is that you should spend no more than 30% of your income on housing costs. That would apply to your joint incomes if you were married, but you should calculate 30% of your own income and 30% of your partner's income, add them together, and then try to keep your rent payment close to that amount.