Splitting Finances When There is Income Inequality
Splitting finances with your partner (marriage partner, common law partner, or partner that you live with) can be a touchy subject within the relationship. However once you move in with each other and take the next step or plunge, Money Under 30 agrees that it’s very important to talk to your significant other about finances and how you plan to split the household expenses.
Every relationship is different, what works for you might not work for other people.
Things can get a bit more complicated when one partner makes much more than the other. Leigh from Leigh’s Financial Journey recently shared how she and her husband arrange their finances and suggested I share mine too!
A lot of personal finance bloggers think that splitting things 50/50 is equal, but when you make different amounts and there is income inequality, I don’t think it’s fair.
50/50 is equal but it might not actually be fair
The Financial Post states that 50/50 agreement (splitting everything down to the wire) may be equal but it may not be fair. I think this is especially relevant if there is an income inequality (let’s say where one person is making at least 25% more than the other). For a dating relationship that makes sense, but once you are living in a household together, resentment might build on the partner that makes the lower income.
When I was living with my ex-boyfriend (we had bought a house together) we also had a joint account but split everything 50/50 even though I did much more in housework and cooking. We put the same amount of money into the joint account on a monthly basis. When I was going to graduate school and making less than he was, I felt pinched and stressed out about my finances, but we still split 50/50. Doing this made me feel and think that it would be easy for division of assets should the relationship disintegrate. And disintegrate it did, within a year or so everything was divided into two when we broke up.
Instead of splitting things 50/50, here are options to consider when there is income inequality:
splitting options when there is income inequality
- Total Incomes Calculation– If one makes $40,000 and the other makes $120,000 the total is $160,000. So the lower income earner should provide 25% of their income to household expenses and the higher income earner pays for 75% of the household expenses. This is the option Daily Worth suggests.
- Percentage of Pay– The individual making $40,000 and the individual making $120,000 would each pay a certain percentage of their income, say 20% to the joint account. So the lower earner would pay $8000 annually and the higher income earner would pay $24,000 annually into the joint account. Obviously this options leaves a larger amount for the higher income earner for their own use but it’s the same percentage deducted for joint use.
- Everything in One Account- Of course another option is to merge everything, this would also involve a lot of communication and I would assume would be much more common with couples who did not sign a prenuptial agreement. My friends use this option and take out a certain amount each month for their own spending use.
- Everything Separate but Split Expenses- Finally the last option would be for one person to pay the mortgage, and the other person to pay for the hydro bill and the groceries. I know a lot of couples who have this method for their finances.
how we split our finances
My husband (I’m not going to call him Mr. GYM because he isn’t Gen Y, heck I’m barely on the cusp of Generation Y myself) makes more than I do and has much more in assets saved up. In my opinion, he is financially independent but chooses to continue working to achieve his passive income goals. We talked about how we would be comfortable splitting finances in a relationship actually even before we were even dating. It was easy and comfortable for us to discuss the subject of money.
How we contribute to the household expenses works for us:
We each have our own accounts, we know how much each other makes, and we have a joint credit card and joint accounts.
We also had a prenuptial agreement done before we got married, which indicates that the assets we have prior to marriage are our own (like our condos) and anything that has both our names in it are joint assets.
Each month, we input our incomes into a joint spreadsheet and deposit a percentage of our active incomes (for now, it doesn’t include passive income like dividends which is from investments) into the joint account on a certain day of the month. This is for joint and household expenses, including:
- Groceries and household goods (this includes my husband’s almost daily Red Bull which I don’t drink, and chocolate and junk foods which he doesn’t tend to eat and I love eating- New York Cheddar Kettle Chips anyone?)
- Eating out together
- Activities we do together, like watching a movie or accommodation and activities while traveling
- We have a ‘family car’ an SUV that we purchased with our joint account and the maintenance, gas etc. is from the joint account
- Baby stuff or family stuff including RESP contributions for the little one
- Netflix (up until a few weeks ago I was paying for this myself, and using it the least, now it’s added to the joint expenses)
For larger purchases, like a house, we will take the average contribution over the past 1.5 years (we started this system when we got engaged, to pay for the wedding) and each of us will come up with x% of the total amount needed.
We have our own individual accounts for things like:
- Clothes or other treats for ourselves
- Eating out with friends or family without the company of each other
- Expenses related to our work
Since we have different investing styles, our investment accounts are managed on our own and he is the portfolio manager for baby GYM’s RESP. I advocated for a portion of baby GYM’s RESP to be passive and therefore invested into index fundswith TD e-series. My husband will research and buy large cap/small cap equities with the rest.
This works for us. I’m happy, husband is happy. What works for us might not work for others- every relationship is different. That’s why it’s called personal finance. It’s personal 🙂
Readers, do you have income inequality as a couple? How do you split your expenses with your significant other?