As Valentine’s Day approaches, romance is in the air as couples everywhere will soon gaze lovingly into each other’s eyes across a candle-lit dinner……(cue the sappy music and the cupid images)
At least this is what constant stream of recent radio commercials would have us believe. Flip through radio stations for even 5 minutes these days and you’ll be inundated with cheesy jewelry stores or on-line flower hucksters telling us how a gift of jewelry or flowers will make “the perfect gift” during this “romantic” time of year.
Now my job isn’t to judge the merits of Valentine’s gifts and I’m certainly not the guy to turn to for advice on how to be romantic. But this holiday does bring to mind a sometimes touchy topic common among many married couples and especially newlyweds: “should we keep separate financial accounts or combine them?”
I certainly have my opinion, (see below) but in short, I do think it’s a good idea for a family to consolidate accounts to the extent possible. Some may bristle at this notion because it’s perceived as a relinquishment of control, independence or even identity. But I believe it’s possible to take advantage of the efficiency and clarity that comes with combined accounts while still maintaining some independence. Here’s how:
Starting with the good ole’ fashioned checking account: I believe each household should have one account from which paychecks are deposited (after retirement accounts are already directly deposited) and bills are paid. The reasons are efficiency and clarity. For efficiency, having one account to reconcile simplifies things. With so many transactions that flow through these types of accounts, tracing two or more would be a nightmare and the whole practice would probably just be abandoned – not a good idea. While reconciling is important, clarity is even more important. Tracking all income and expenses of a household is one of the most important keys to Financial Fitness. As I tell all my clients, having a handle on living expenses is CRITICAL and a “foundational number” for financial planning. A true picture of living expenses is absolutely necessary to plan for retirement, optimize cash flow and even right-sized insurance. But most importantly, knowing the spending level (and the biggest components) helps crystalize a family’s priorities which can be directly derived from an accurate spending report.
It’s pretty cut-and-dry for tax-advantaged accounts such as IRAs, 401(k)s and 403(b)s. These are, by definition, individual accounts that cannot be consolidated to joint ownership. While I certainly advise these accounts are considered together when planning for retirement and always advise to keep beneficiary designations updated, keeping these accounts separate is the only option.
These are the accounts that can be viewed as the sole property of each spouse with the money earmarked for whatever he or she wants. In my view, maintaining an Independence Account helps to provide some level of autonomy and freedom that can get sometimes get marginalized in a marriage. This account could be a checking account, a savings account or even a taxable brokerage account.
So she wants to splurge on that pair of trendy boots? He wants to “grip it and rip it” with the latest Taylor Made driver? Want to get away for that “boys weekend” or “girls weekend”? No problem- just fund each Independence Account and go for it!
But of course, the trick is the funding. These accounts should be last on list as far as the priority for allocation of funds because by definition, this is discretionary spending. These accounts would only be funded after living expenses, the rainy day fund, retirement and college savings (if applicable) are all reasonably covered. In short- this account should be considered a luxury and not a necessity. Now given all the demands on our money, an Independence Account bursting with cash might not be realistic. So maybe throw a few bucks in there with each paycheck (I suggest direct deposit) and when that little luxury presents itself- take some of that cash and splurge- guilt free!
Bottom line: consolidating accounts for spending and savings drives efficiency, enables tracking which provides clarity on spending – the critical and foundational number needed in so many aspects of our financial lives.
So this Valentine’s Day, maybe you should buy some flowers, open a nice bottle of wine then lovingly gaze into your spouse’s eyes and say, “let’s talk about the financial advantages of consolidated accounts….”
Happy Valentine’s Day