Deciding how to organise family finances is not as straightforward as it used to be. My mum and dad, for example, didn’t need to make complex decisions about that: my dad worked, my mum looked after the children and all money was shared. There is also the part where my dad, as an enlightened man of his generation, didn’t subject my mum to the indignity of a tight household budget and asking for personal expenses – family life was a joint venture and all members of the family nurtured it.
Today, most couples share the moneymaking part of the personal finance equation; still there are many questions around how money is spend. Hence, it is important to discuss, and think about, the ways to organise family finances.
In this post, I’ll share the four ways people usually organise family finances and tell you why John and I share all accounts (or we practice the ‘total fusion of family finances’ model to organise our personal finances).
Total fusion of family finances
Total family finance fusion, in a nutshell, means that the couple share all accounts and investment arrangements. This may include any, and all, of the following:
- Current account. All earning go in one current account and all regular bills are paid from this account. (I know that some households have multiple current accounts but I think this is inefficient. Maybe, I’ll tell you about it some other time.)
- Saving accounts. All saving accounts are shared.
- Investment accounts. All investment accounts are either shared or, when there is a good reason for that (ISA, for instance) equal funds are kept in them.
- Property ownership and mortgages. All property is owned jointly.
- Other investments. Other investments, like investing in business, are in both names and decisions are made together.
This model to organise family finances builds upon considerable level of trust and deep acceptance of common values and shared life. It can go wrong if trust in any area is broken.
To work, this organisation of family finances needs to meet two conditions: open and regular discussion and agreement on matters of finance; and shared responsibility for the financial future of the family unit.
One current account with satellites
This way to organise family finances, in a nutshell, means that regular monthly income of the couple is paid in a shared current bank account. It is different from total fusion of family finance, however, by the fact that after paying the expenses around shared family life, money is transferred to individual accounts, be these current, saving or investment.
Variations are possible here. For instance, it is possible that the money transferred to individual accounts and proportionate to the income; e.g. if one partner earns 60% of what the other one earns, the stream to their individual account reflect this.
What is distinctive is that partners have complete discretion over their parts of the residual income and can choose how and on what to spend it; save it or invest it.
This option requires sufficiently high income and considerable financial literacy to organise and maintain. Once this has been enacted and the proportions set, however, it is likely to run smoothly since it is questionable whether negotiations and money discussions are necessary after the initial decision on a way of distribution.
In this case income goes to separate current accounts but the couple has also a joint account where a certain proportion, or a set sum, is transferred to cover shared expenditure.
This arrangement appears very similar to the previous one but in fact there are some important differences. One difference is that it potentially allows much higher level of secrecy regarding income and personal expenditure. Partners are not necessarily aware of the financial situation of the other.
This model to organise family finance has strong points and downfalls. One strength is that the partners preserve their independence. This also makes it much easier to disentangle personal finances if the relationship fails.
One big downfall of this arrangement is that it makes pursuing shared and common financial goals difficult. Also, there is potential problem with regular, one-off spending like holidays, for instance.
Complete separation of personal finances
This option means that spouses have entirely separate finances where they have separate bank accounts and agreements which expenses will be met by whom.
This arrangement presents many practical problems.
Shared life is difficult to finance separately – although there are many expenses that can be divided there are many joint activities where this is not straight forward. What happens if the income of the two parties is dramatically different? Do they eat different things? Go to separate holidays? Stay in different hotels when they go on holiday? What happens when children arrive and there is, temporary or long term, loss of income and/or childcare fees?
This is how we organise family finances
Our family finances are organised along the lines of the ‘total fusion’ mode.
- We have three current accounts, in both names, where different income streams generated by John and me go. (Just to clarify, I don’t think that having many accounts just because bank offer an incentive to open these is wise. I shudder to even think of the effort it would take to manage 11 current accounts. For us, the reason we have three of these is pragmatic: one current account is in euro but to open that it had to be linked to a GBP account.)
- We have a savings account in both names. (This is the one where we save every month and build cash for opportunities.)
- Our house is in both names (and the mortgage is as well).
- We have two ISAs – not much choice there; and we have the same amount of money in each.
- We have a trading account in both names.
- Our business investment is in both names.
The only deviation is that we pay ourselves a small amount of pocket money and use personal savings account for that. (Usually, we end up transferring the money either in the ‘opportunities’ or ‘current’ account. Still, these accounts are our ‘blow’ money.)
We’ve always done that irrespective of what proportion of the household income each of us earns. This, as we all know, changes throughout the lifetime of a marriage.
Before we go any further, I’d like to say that nearly four out of five couples reported sharing at least one bank account in a recent survey. Still, relatively few couples opt for the total fusion model.
Here is why we do it:
- When we got married we made promises to each other in public to support each other in this shred journey through life. Keeping to these promises won’t be possible were we to keep our money separate.
- The basic premise of our marriage is that we’ll stay together. Hence, we’ve organised our money based on this. (Yes, thing may go wrong, but we’ll deal with it when and if necessary.)
- Our relationship is, and has always been, based on trust. Call me naïve but I believe trust is the core of a successful relationship. I wouldn’t have married John if I didn’t trust him (oh, and I have a bit of Leninist in me, so it is not a blind trust but tested belief in ‘the other’).
There are different ways to organise family finances.
Here I share for of these and tell you how John and I do it.
Organising your family finance is a very personal choice. Irrespective of which mode you choose, successful relationships, including their money aspect, build on openness, being ready to discuss possibilities and preparedness to re-negotiate arrangements.