Ace of Wealth

Breaking the Budget

Ace — Fri, 30 Jul 2010 11:00:23 +0000

Budget. To me that word screams freedom. To many others it’s the shackle that ruins their life. I’ve failed many times in the past before finding a system that worked. While your budgeting system may not be a zero based budgeting system like mine is, here are 3 tips that I learned that has helped me incredibly.

Account for the Unaccountable

A budget is a tool for bringing order to your spending, but life is anything but predictable. Your budget needs room to breathe. Rather than trying to account for your money to the last penny, give your budget some cushion. This will help you account for the unaccountable.

Let the Cushion Ride

Rather than trying to bank the difference between your budget and your savings every month keep the extra cushion. Some months (holiday season for example) happen to be more expensive that other months. If you’re constantly trying to live your budget on the edge then you’ll just stress yourself out.

If you still have money left over at the end of each year, bank the savings at that point. The difference in savings by waiting a few months will not be significant, but you’ll be much less likely to stress out.

Stop Tweaking Your Budget

Another lesson I’ve learned is that by trying to tweak your budget each month, not only are you spending much more time on your budget than you should be, but you’re cutting things even closer to the edge than you need to be. Here’s what I mean, if you budget $500 each month for food, and one month you only spend $400. You think, great if I can get away with only $400 a month of food, then I only need to add $300 this month to my food “envelope.”

At a high level it looks like you’ve just found a way to net $200 extra dollars to distribute throughout the rest of your budget. But in reality, you’ve created a potential pitfall that will only cause you grief down the road. Track your spending, and decide a reasonable starting point. Don’t try to fix everything at once, and make slow steady changes. Old habits are hard to break, and sticking to a budget is no different.

Do you have any extra tips for sticking to a budget?

(Photo credit: dborman2)

Managing Joint Credit Cards

Ace — Tue, 27 Jul 2010 11:00:21 +0000

This is the third part of my mini-series about managing finances in a relationship. In my first post I wrote about the decision process that would help you decide if joint finances made sense for you and your partner. In my second post I described how to manage joint and separate bank accounts with your partner.

Credit Cards and relationships. Could be a lot of trouble, right? According to a survey conducted by creditcards.com, 19% of couples have argued about credit card accounts. If you’re thinking about sharing a credit card with your partner, then you have a lot of things to consider before proceeding forward. There is no magic bullet. Consider all the options carefully and talk them through with your significant other, before making a decision.

Different Ways to Do Joint Credit Cards

There are essentially two ways to get the effect of having joint credit cards. The first is for one person to add the other as an authorized user to an account. The second is to create a joint account. Each method has different pros and cons that you need to be aware of.

Authorized User

If you were to add your significant other as an authorized user, they would get the benefit of being able to use a credit card that would charge to your account. However, the authorized user is not responsible for the credit card bill. As the primary account holder you would still be solely responsible for any charges.

Here are some of the things you may want to know about adding an authorized user.

If one of you has bad credit being an authorized user won’t affect the application. This means that if your significant other has a few blunders in their credit history, you can get a credit card based solely on your credit history.
The account will still show on the authorized user’s account history. This can be a great way to help your significant other build credit if they don’t have a good credit history. This could also be bad for the authorized user if the primary account holder is irresponsible and forgets to make payments on-time.
If you add your significant other as an authorized user, you will be responsible for all charges. So if your partner ever goes on a spending binge with your credit card because of a fight, you could be left holding the bag.

Joint Account

The second option is to make your significant other a joint account holder. This means that both of you are responsible for paying the bills. And if one person fails to make the payments the credit card company can and will go after the other person in order to get their money.

Here are some things you may want to know about creating a joint account.

Both of your credit histories will affect the account application. If either you or your significant other has some blunders in their credit history it could be difficult to get a good credit limit and low interest rates.
You will both be responsible for charges. In the event of separation be aware that you could be responsible for charges that your partner makes.

Should You Share Credit Cards?

Really question why you think that it makes sense to share credit cards. Personally, my girlfriend is an authorized user to my account, and I trust her. But that doesn’t mean that you should do so blindly. It’s true that it can be incredibly convenient to have a joint credit card for all the joint expenses, but don’t let it overthrow the other considerations.

(Photo credit: consumerist)

Tips for Large Purchases

Ace — Fri, 23 Jul 2010 11:00:20 +0000

How do you handle large purchases? Large purchases has always been my weakness. In the past I’d do a great job tightening up my spending only to have a large purchase fly through and blow my budget to smithereens. These large purchases would often cause my previous attempts at budgeting my money to fail. I realize now that managing these large purchases are extremely important.

Having a system to work through the decision process guarantees that your purchase will be well thought out and provide you with the maximum possible value. Here are some tips to use before making a large purchase.

Make the Purchase Mentally Before Anything Else

A recent CNN article featured different families that are extreme savers. CNN interviewed each of these families to gain insight to their secrets of frugality. I found this statement to be especially insightful: “I usually mentally buy something before I actually do it.” But what does it mean mean to “mentally buy” something? I can’t speak for the family, but here’s what it means to me. It means the purchase is completely intentional. It isn’t just an impulse purchase that happened. Even more important than being intentional is that it’s planned. So before spending a cent towards a large purchase, think about it. Think long and carefully, and make sure that it truly is intentional.

Can You Borrow from a Friend?

Another great way to save a ton of money on large purchases is to borrow it from your friends instead. The best example are tools. Tools are extremely expensive given how seldom you use them. About a week ago my girlfriend and I were trying to install some blinds that we purchased. Rather than going down to home depot and spending a bunch of money on a tool set that no doubt wouldn’t be used for a while, we borrowed a set from a friend. Not only was our friend happy that his tool set was useful and helped us out, but it also saved us a bunch of money!

Are You at the Right Price Point?

One of the most difficult things to decide before making a large purchase is the price point. The best example of this are new computers. Companies make it incredibly difficult to know “how much computer” you really need with their long lists of options. Be aware that price anchoring can happen. Don’t be afraid to spend the extra money if it really affects the level of quality in a way that matters to you. For example, getting a slightly faster computer probably isn’t worth an extra $200. But getting higher quality cookware could be a wise move if it means that you won’t need to replace it for years to come.

Pay for It in Cash

With my student loans still hanging over my head, I know the detrimental effects of debt. The next time that I will go into debt is when I purchase a home, and even then I will do everything I can to pay off the mortgage as soon as possible. If you can avoid it, make the purchase in cash. If you don’t have the cash, wait. Being patient is great for two reasons. First it gives you the time the accumulate the money to avoid debt. But more importantly, it gives you the opportunity to change your mind about the purchase.

This is exactly what I did when I was considering buying an digital SLR. I’ve always had an interest in photography, but as many of you may know, it isn’t exactly a cheap hobby. So I told myself, “If you can set aside enough of your ‘fun’ money to purchase the camera, then you can do it.” I started working towards the goal, but along the way I realized that there were other things I wanted more, and I decided to hold off on the purchase.

What Matters

These types of budget busters are extremely dangerous, but if you’re aware of them, then you have a much better chance of protecting yourself. What helps is that unlike smaller purchases, you only have to dissuade yourself from making a few large purchases for it to make a big difference in your wealth. So remember to consider carefully the next time you think about making a large purchase. Do you have any additional tips that you use to prevent these budget busters.

Dropping the Emergency Fund

Ace — Wed, 21 Jul 2010 11:00:35 +0000

A while back I wrote a post about deciding how much money to put towards your emergency fund. Here’s the first line I wrote:

Everybody with basic financial knowledge knows the importance of an emergency fund. Just look, here, here, and here

Here’s the funny thing, I truly thought it was a no-brainer. However, a couple days ago I stumbled on this article written by Liz Weston on having a $0 emergency fund. Needless to say I was quite interested in what she had to say on the topic. Let’s see how realistic it is to have a $0 emergency fund.

Liz Argues Flexibility is King

In the beginning of the article Liz makes a very bold statement of how the traditional emergency fund needs to be rethought. Here’s what she said:

The whole idea that everyone needs a big pile of cash, and needs it right now, should be rethought. In reality, the failure to have a fat emergency fund isn’t inevitably a crisis. At the same time, those who feel safe because they have three or even six months’ expenses saved up might be kidding themselves.
What really counts is your overall financial flexibility — the resources you can command to help you withstand a crisis, even one that’s unexpectedly severe or long-lasting.

She’s essentially making two main points. First, having 3-6 months worth of saved expenses may not be enough. Second, Flexibility is really the most important thing. The first point does not hold very much water. It’s true that emergencies may last longer than you expect and you may run out of cash savings, but you should still prepare.

The idea of having flexibility during a crisis is interesting. Liz’s argument is to use credit as a tool to help out during an emergency. She mentions two different sources, home equity line of credit (HELOC) and credit cards. It’s true that you could leverage your credit to save yourself in a pinch. Here’s where I disagree with her argument. Flexibility does not replace preparation.

Have Your Cake and Eat It Too

I will definitely admit that it’s difficult to grow an emergency fund. Since I am actively working on my student loan debt, I’m only putting away a couple hundred dollars a month. To reach my target goal of 9 months worth of expenses it may take me years. But the day that I need that emergency fund I know that I will be thankful that I was working towards it all along.

Just because something is difficult and takes a long time, doesn’t mean that it isn’t worthwhile, and I think that’s the fundamental problem with her argument. That’s almost like saying, saving up enough money to retire takes a long time, so I’m not going to save at all (okay it’s not really that bad but hopefully you get the point).

Here’s what I liked: the article pushes the reader to think about other options. What are the other things you can do in a pinch? This point is gold. When we think too traditionally, we can forget some of the other resources available. Building a traditional emergency fund and being flexible in the event of an emergency are not mutually exclusive. Have your cake and eat it too.

Peace of Mind

I stated this in my previous article about emergency funds. What really matters in the end is peace of mind. Liz’s first point does have merit, insofar as you shouldn’t lure yourself into a false sense of security. But with any emergency the best thing you can do is to prepare. One way to prepare is to try to save enough for the emergency. A second way to prepare is to understand your options. This goes back to Liz’s second point of flexibility. Whatever you decide to do in the end, just make sure that you’re comfortable with it. Personal finance isn’t always about the math. For some people knowing that they have credit to outlast a storm may be enough. For me, having a large pile of cash, even if it’s not earning me much, will help me sleep better at night.

What are your thoughts?

(Photo credit: dumbledad)

Managing Joint Accounts in a Relationship

Ace — Mon, 19 Jul 2010 11:00:37 +0000

This is the second post of my mini-series of combining finances in a relationship. The first post intended to help determine the right system for you and your significant other. In this post I will focus on managing your financial accounts with a hybrid of the completely separate and the completely joint.

The first step is to discuss with your significant other. The question is, once you decide, where do you go from there? Setting up accounts with financial institutions can be a tedious. Today I’m going to talk about how my girlfriend and I have our accounts set up, and hopefully it’ll give you some ideas of how you can do this with your significant other as well.

The Big Picture

Here is the big picture of how my girlfriend and I manage our accounts.

Cashflow In

It all starts when the new paycheck comes in. We configured direct deposits through our employer to automatically deposit $1,000 per paycheck into our joint checking account. The remainder of our paychecks go into our respective personal checking accounts. At this point, “our money”, “her money”, and “my money” are completely separate and remain this way for the rest of the process.

Fortunately for us, both of our employers have the same pay schedule. If you don’t have the same pay schedule as your partner then you will need to calculate how much you both need to contribute to make it even. If this happens, the most important thing is that both of you are involved in the decision process and understand how the deposits work. Communication is key.

If your employer doesn’t offer direct deposit, or it doesn’t offer direct deposit to multiple accounts, deposit your entire check into your own checking account, then schedule automatic transfers into your joint account.

How Money Goes Out

Both my girlfriend and I manage our own personal bills. For example, I will pay for my personal credit card through my personal checking account and my girlfriend will pay for her credit card through her checking account. Any joint expenses that we pay for will come of our joint account. This includes things like rent, utilities, maintenance, insurance, etc.

It’s important to make sure you talk to your significant other about what will be paid out of the joint account and what won’t be. Don’t assume that it’s obvious, or that they will understand. If you’re ever unsure, be sure to ask! Communication is absolutely necessary.

Dealing with Savings

Aside from bills, it’s also important to account for saving in your system. We have a few joint savings for things like vacation and emergencies. You should determine what savings accounts you create based on what goals you have. Having the separate savings accounts will help you keep track of each goal individually.

My girlfriend and I also both have our own personal goals we’re saving for. We both have automatic contributions from our personal account towards our individual savings goals. For example, I’m currently saving for a down payment (on top of paying down my student loan debt!), while my girlfriend is currently saving up to purchase a new car.

Do the Banks Matter?

While it would make it much more convenient to manage if all of your accounts are with the same bank, it’s not strictly necessary. Depending on your past, you both may already have long standing checking accounts with different banks that you’re both happy with. That’s fine, just figure out where it makes the most sense to open up your new joint account. For my girlfriend and me, we decided to open a joint account and personal accounts with Chase. We figured that the added simplicity (and having a local bank) was worth the hassle of opening new accounts.

One thing to remember if you end up using multiple institutions is that transfer times can take a while. It seems like it differs from bank to bank, but you don’t want to be caught in a situation where you’re out of money in your joint account with rent due in a couple days. This is one reason why I argue it’s important to keep enough money in your accounts to cover one full months worth of expenses.

(Photo credit: markhillary)

Game Night | Weekend Links

Ace — Mon, 19 Jul 2010 00:52:05 +0000

I love board games. My friends and I will often have game nights where we spend the evening play different types of board games. We’ve played a number of different board games like The Settlers of Catan(*), Agricola(*), and Power Grid(*). They’re all a little complicated, but it’s a great way to spend the evening without spending too much money. Board games can be a little expensive, but when you consider the re-playability they’re great investments. What about you? Are there other board games that you like to play? I’m always looking for new great games, so please let me know!

Well this roundup is a little later than usual, but I’ve put together a bunch of really great reads around the blogosphere this week. Take some time to check them out.

Craig at Free from Broke had a great post describing the different types of mortgages. I’m really hoping that he does a follow up post describing his analysis of the pros and cons of each type of mortgage.

Jeremy at Generation X Finance wrote about ways to save on your cell phone bill.

ptMoney has a post about how to complain to get your money’s worth. I’ve always found it difficult to do this, but it seems to be pretty effective from his post.

Smart On Money had a great post about keeping things simple. Sometimes we try so hard to optimize our finances that we make our system overwhelming to deal with. I think this article hits at the heart of that matter.

Jim at Bargaineering wrote an interesting piece about bank errors. He makes a great point that taking the money and running probably won’t work out so well for you.

J Money talks poses the question: Which do you enjoy more: Saving or Spending? I think I used to enjoy spending much more, but these days it’s saving that gives me gratification. I always feel guilty whenever I spend.

Jackie at Money Crush makes the argument that Perfection is Overrated.

Carnivals I participated in

Carnival of Personal Finance @ Funny About Money

Festival of Frugality @ Wealth Junkies

Carnival of Money Stories @ Suburban Dollar

* denotes affiliate link

Procrastinating Personal Finances

Ace — Fri, 16 Jul 2010 11:00:09 +0000

You ever have something that you “know needs to get done,” but the task never makes it way off your to-do list? What about something that specifically had something to do with personal finance? Are there things that you mean to do (start saving for retirement, start an emergency fund, pay down debt) but somehow days, weeks, months slip by and no progress is made? Welcome to the world of procrastination. Unfortunately, when it comes to personal finances, procrastination can have devastating effects on your ability to grow wealth. So rather than letting those little demons control your life, fight back. Let’s look at some of the causes of procrastination and how you can overcome them.

How Common Could It Be?

Almost 20% of people consider themselves to be chronic procrastinators. This doesn’t include casual procrastinators. Some studies with students have shown that almost 85-95% of all students procrastinate. I know I fell victim to procrastination during college. Even today there are things that I procrastinate. For example, I’ve been meaning to close a Chase checking account for a few months now. I only have 90ish dollars sitting in the account, but this is money I could be using to pay down my student loans!

Causes of Procrastination

There are many potential causes of procrastination. Here are common reasons why people procrastinate with their personal finances.

You fear failure. Fear of failure can be absolutely paralyzing. Things like managing your retirement when you’re young can be incredibly overwhelming. The thought of having to plan for something that may be as much as 40 years away is enough to invoke fear in many people. But mistakes are your friend, because you will have an opportunity to learn. It’s much better to make these mistakes while you’re still young and have the opportunity to recover from them.
You can’t decide. Similar to the fear of failure, having too many choices can lead to complete inaction. Intuitively we believe that having more choices is a good thing. But in many cases, having too many choices makes it impossible for us to make a rational decision, and as a result we don’t do anything. Here’s what Physorg.com has to say about it:

Researchers from several universities have determined that even though humans’ ability to weigh choices is remarkably advantageous, it can also come with some serious liabilities. People faced with numerous choices, whether good or bad, find it difficult to stay focused enough to complete projects, handle daily tasks or even take their medicine.

Similar to the fear of failure it’s important to remember that mistakes are part of the process. As long as you make corrections, then in many cases doing something is better than doing nothing.
You strive for perfection, when good is good enough. From the personal finance point of view, this could be like trying to make the perfect investment choice before ever investing. Unless you start doing things, you’ll never get anywhere. And in many cases good is good enough. Rather than waiting for the “perfect opportunity” to fall into your lap, make decisions that are good enough, and modify them as you see necessary.

Effects of Procrastination

The effects of procrastination stretch beyond the obvious fact that you’re not getting things done. Procrastination can be detrimental to your health. Living in a constant state of stress and anxiety can lead to many health problems. Here is what an article at Psychology Today had to say:

Just over the course of a single academic term, procrastinating college students had such evidence of compromised immune systems as more colds and flu, more gastrointestinal problems. And they had insomnia.

Another problem is that you could be wasting time. Wasting time can be one of the worst things you do to your personal finances. Imagine that there are two people, Bob and Mary. Mary recognizes that saving for retirement at a young age is really important so she starts saving when she’s in her early thirties. She puts $200 a month towards her retirement and does so for the next 30 years. Bob on the other hand procrastinates his retirement savings, and waits until he’s in his forties. But he realizes that he needs to catch up so he starts saving $400 a month for the next 20 years. For those of you keeping track Mary will contribute a total of $72,000 over the thirty years. Bob will contribute $96,000, so $24,000 more than Mary. Assuming that both receive an average of 6% each year, who ends up on top? Well many of you already know how this story plays out. Mary ends up with almost $202,000, whereas Bob has under $186,000. This makes for a total difference of $40,000!

Ways to Fight Procrastination

Here are six steps to battle procrastination.

Make a list of the things you need to do. Make sure that you only put things on the list that you really intend to do. Also don’t waste time trying to think of every little thing that needs to get done, you can always go back to your list later and add or remove items as you see fit.
Break each task into smaller actionable steps. Make sure they are actionable. “Start retirement” isn’t good enough. Break it down into steps like, “Go to my company’s 401(k) website and find a phone number to call.” etc. When you read the step you shouldn’t need to think about what to do.
Give yourself deadlines. Make deadlines of when you’re going to complete each task by. Don’t be unrealistic! If you create unrealistic deadlines, then you’ll give up and fall back to square one!
Create Focus. This is really key when it comes to avoiding procrastination. Create barriers that will make it difficult for you to procrastinate. If you find yourself constantly checking e-mail or reading online, disconnect yourself from the internet. This could be as simple as turning off your WiFi, or maybe as drastic as unplugging your cable modem until you’re done. The key is to create a situation where doing the work is the least troublesome thing to do. Another trick I like is to use a timer. If there’s something that I find myself dawdling to complete, I set up a timer and I race myself. I find that this normally instantly gives me the focus I need to complete the task.
Keep track of your progress. Check back with your list of steps to make sure that you’re making progress. Don’t constantly push back your deadlines if you’re failing to meet them. Either you set up unrealistic expectations, or you’re still procrastinating! Whichever it is be honest with yourself, and adjust appropriately.
Take breaks and reward yourself. Whenever you finish a task, it’s important to remember to come up for air. This will help you clear your mind for your next task.

Your Take

What do you do to avoid procrastination? What are some of the things you’ve been procrastinating? Leave your comments below!

(Photo credit: superfantastic)

Multiple Savings Accounts and Why You Need Them

Ace — Wed, 14 Jul 2010 06:58:49 +0000

These days many banks offer multiple savings accounts. And I’m glad that they do. Multiple savings accounts is a great way to organize your financial goals and easily track your progress. The trick to a strong personal finance system is to always balance complexity with value. While having multiple accounts will add some complexity to your management, they provide much better control over your money.

Personally, I use ING Direct for various savings goals. The best part: I can have different automatic transfers to each of the different goals I have. For example, currently I’m saving for a down payment, my emergency fund, and my vacation fund. With automatic transfers, I can see each account slowly creep towards my goal, and it encourages me to bump the automatic transfers to even higher numbers to accelerate my progress.

The Problem with a Unified Saving Account

You made goals. You set a timeline. And you created actionable steps. Great! But on your way towards achieving your goal, where do you keep your money? How do you keep track of your progress? In the olden days, you would have a single savings account with your bank, and you would have to keep track yourself.

Let’s say that you were planning a trip and wanted to buy plane tickets with the money in your savings account. How did you know how much money you could use for the tickets? Are you sure you weren’t spending money for your emergency fund? Well unless you kept extremely detailed tabs on your savings, you may not actually know.

This is the inherent problem with a unified savings account. Especially when your savings goals are a mixture between protective goals (emergency fund) and what I like to refer to as fun money (new car, vacation, etc). Making the mistake of overspending in one of your goals could have a really negative effect on your other goals.

Banks that Allow Multiple Saving Accounts

From my research I found four banks that offered multiple savings accounts. I’m sure that there are more out there, so if I missed one then please post a comment and I’ll update the list.

ING Direct – This is what I use, and it couldn’t be easier to open multiple accounts.
Ally – I’ve read that making multiple accounts through Ally is just as easy as ING Direct, although I don’t have an Ally account to confirm this
FNBO Direct – Similar to ING Direct and Ally, their multiple savings account feature is geared towards saving for multiple goals.
HSBC Direct – I’ve read that while it’s not quite as easy to set up multiple accounts as the others, it is possible to set up multiple accounts with HSBC Direct.
SmartyPig – While SmartyPig isn’t a traditional online bank, they make it easy to set up multiple goals.

What About Interest Rates?

Personal finance is not always about math. This is another perfect example of that. While the little mathematician in you may want to chase after the bank with the highest interest rate, that’s not important in the end. Creating a system that you’ll stick to is much more important than squeezing the few extra dollars out of your money with higher interest rates. In the end what matters the most is whether or not you follow through.

Your Take

Do you currently use a bank with multiple savings accounts? If not, how do you determine your progress towards your goals? Do you know any other banks out there that offer multiple savings accounts or sub-accounts?

(Photo credit: alancleaver)

Student Loan Update for June

Ace — Tue, 13 Jul 2010 11:00:21 +0000

Last month I made a promise to make myself accountable for my progress towards debt freedom. So here is my first monthly update for the month of June. I decided to make a large lump sum payment this month to quickly kill off one of my six loans. I figured that this would be a great way to get the momentum started. Not only will this help me stay motivated, but by paying off that loan I freed up $25 a month to add towards my snowball.

A Look at the Debt Table

All together I paid down $2,350.88 in principal this month. Including the interest payments I paid a total of $2,530.01 this month. Overall I’m very happy with the way things went this month, and I hope that I’ll carry this momentum forward. To be clear, I won’t be able to keep this much progress up every month (boy I wish I could). My goal is to pay around $600 a month, but most of that will go towards interest until I can increase the size of my debt snowball.

Currently my monthly payments are all automated, but I will be making manual lump sum payments in addition to the automated payments. I am also actively working to optimize a few areas in my budget to maximize the amount of free cash that I have to pay down my debt. So there you have it, my June update. If you have debt to manage, I hope that you made progress in the month of June as well.

How to Manage Finances in a Relationship

Ace — Mon, 12 Jul 2010 11:00:33 +0000

Money and relationships, sometimes it works out well, and other times it’s like mixing oil and water. If your relationship is at the point where you’re wondering whether or not joint finances make sense, proceed with caution. Finances means different things to different people, and for some, talking opening about their finances can be overwhelming. Approach the topic the wrong way, and you may find your significant other getting defensive really quickly. Let’s take a look at a few different ways that you could manage your finances as a couple and see the pros and cons for each system.

Completely Separate

With this approach, you would keep all areas of finances separate. For joint expenses such as rent you split it appropriately. You both would be responsible for managing your personal expenses.

Separate finances have a number of benefits:

You won’t have to worry about your significant other scrutinizing your statements and questioning every purchase you make.
Separate finances is the de facto approach many couples use when they first start dating. The saying “If it ain’t broke, don’t fix it” carries weight in this situation. If things are working well, it may be wise to keep things the way they are.

There is one major disadvantage to having separate finances:

Having separate finances makes it more difficult to deal with joint expenses. For fixed expenses such as rent, it may be easy to split since it is fixed. But when you consider variable expenses, such as utilities and grocery bills, it gets more complicated.

Completely Joint

On the complete opposite end of the spectrum is joint finances. If you took this approach you would completely merge all of your finances. Once money comes in, everything is considered “shared money”. The same holds true for all the money that is spent.

There are a couple great advantages to joint finances:

You will have half as many accounts to manage between you and your significant other.
If your significant other is apathetic towards managing personal finances then having joint finances makes it easier to manage joint spending.

There are a couple disadvantages to joint finances

This approach doesn’t give you much breathing room. Imagine being having a 2 bedroom house where you had the freedom to do whatever you pleased, then suddenly being crammed into a small single bedroom house with your significant other. Sounds complicated doesn’t it?
If one of you spends more or earns more, it can spark resentment and lead to arguments.

Somewhere In Between

The last strategy is to do something in between the first two options. So both you and your partner would still have separate accounts, but you would also have a joint account for joint expenses.

There are a few advantages to this approach.

You still maintain independence with your accounts, and you get to manage your them as you please.
Managing joint expenses is much easier, since you have a joint account to pay from.
By putting the same amount into your joint account, your costs will be split evenly.

This system still has disadvantages.

Since you will have a joint account and your personal account the hybrid system is the most complicated to manage.
You will need to make sure that you both agree on what will be paid from the joint account to avoid any disagreements.

How Do You Pick?

The most important take away from all this is that there isn’t a one size fits all. Like many things in personal finances, it really depends on what works best for you and your partner. The best way to go about this is to talk with your partner and determine what would work best for the two of you. The key point is that you need to talk about it. Don’t assume things or shy away from talking about it, because that will only get you into more trouble down the road. Here’s what Ann Smith of Psychology Today has to say about communication.

Talk about money. When you have a connection and are ready to be honest with yourself and each other, act like grown ups and face the facts. Keep emotions separate and don’t worry about whose fault it is. Look at the numbers and accept your share of the responsibility whether that is spending, being under-employed or procrastinating. Get help or read about healthy financial habits and work together to make a change gradually over a long period of time.

Here are some tips to help you and your partner decide which system will work the best for your relationship

Wait for a good opportunity to talk about your finances. Don’t rush into the topic. Pick a time where you won’t be distracted by other things. Make sure that your partner has the time and isn’t in a rush. Be patient and pick the right time to talk about it.
Talk about your financial goals. It’s important to discuss with your partner where you want to be 5 years from now, 10 years from now, etc. Take time to listen to your partner’s desires as well. Try to see things from their point of view, even it you don’t initially agree with what they’re saying. Don’t just listen to what they’re saying, but try hard to understand the why behind what they say.
Talk about your fears and concerns. Talk about what worries you about managing finances in a relationship. If you’re worried that they’ll over-scrutinize your finances, say so! It’s important to get everything out in the air.
Be prepared to disagree. This can be difficult because in your mind you may know exactly what you want. But relationships are about working things out together and finding solutions that both of you will be happy with.
Clearly state your expectations. Whatever financial system you end up using, it’s important to clearly define both of your expectations. I’ve found that many disagreements that my girlfriend and I have about our finances stems from the fact that there were lopsided expectations. So whatever expectations you have, state them and state them clearly.
Set regular intervals to talk about your finances. Whatever you decide with your significant other, it’s important to remember that this is not the end of your discussions about money. In fact it should happen at least once a month. Use these talks to air out anything that’s not working, or anything that needs to be adjusted. Remember the goal is not to get into the blame game, but to make your finances run like a well tuned machine.

What My Girlfriend and I Use

My girlfriend and I use the hybrid system. It took a while to get to where we are today, but so far it’s worked out really well for us. My girlfriend doesn’t care for tightly managing her money, but she enjoys the guidance from our budget. It was also very important to her that we split our joint costs evenly. We accomplished this by using a joint account where we both contribute the same amount of money each month.

Finances is often considered a taboo subject. And sometimes it may seem easier to ignore the topic altogether with your significant other. But if you are serious about each other, it’s important to discuss your finances openly and truthfully. So what about you? How do you manage your finances with your partner?

(Photo credit: mar1lyn84)