Key Considerations When Combining or Separating Finances in a Relationship

Merging lives with a partner or spouse can be both challenging and rewarding. Yet few aspects of this process are as complex as deciding whether to combine finances—and if so, how.

Indeed, sharing a financial life with another person offers a variety of joys and benefits, such as collaboration, mutual support, and shared financial goals. But it can also lead to misunderstandings, resentment, and in extreme cases, divorce.

In fact, numerous studies show that money is the number one source of contention among married couples. Furthermore, arguments about money are a top predictor of divorce in countries like the United States, according to data from the National Survey of Families and Households.

How you navigate the journey of combining finances as a couple, or the potentially tumultuous task of separating finances during a divorce, can have a substantial impact on your financial health and overall well-being. Whether you’re taking the next step in your relationship or unwinding one, the following considerations can help you maintain your financial stability and avoid potentially costly missteps.

Combining Finances: Navigating Your Shared Financial Life

Money can be a delicate topic in relationships. However, successfully combining finances often requires open communication and strategic planning. The following considerations can help you determine the best way to manage your finances with a partner or spouse.

#1: Aligning Your Financial Values and Goals

It’s rare for two people to be financially compatible at the beginning of a relationship. In fact, one survey from Ameriprise found that 73% of individuals have a different money management style than their partner.

The way we manage our finances is shaped by a variety of factors including our upbringing, experiences, and personal convictions. Therefore, having an open and honest discussion with your partner or spouse about your financial values and goals can be a helpful first step when combining finances.

For example, what are your short-term and long-term financial ambitions? How do you prioritize saving versus spending? By understanding each other's perspective, you can cultivate a shared vision for your financial future and avoid misunderstandings down the road.

#2: Unraveling Your Debt and Credit History

Debt can be a contentious issue in relationships. According to a study by Ramsey Solutions, the higher a couple’s debt burden, the more likely they are to argue about money.

Unfortunately, financial baggage is a reality for many individuals entering a relationship. This may be especially true if you’re embarking upon a second or third marriage.  

Thus, it's vital to have a clear understanding of each other's credit history and any outstanding debts before making the leap to combine finances. If either of you has excessive debt or an unstable credit history, dealing with it swiftly and effectively can help prevent it from becoming a major problem in your relationship down the road.

#3: Deciding on Joint or Separate Accounts

Every couple is unique when it comes to deciding whether to merge financial assets into joint accounts, keep them separate, or adopt a hybrid model. Indeed, each approach comes with its own set of advantages and potential drawbacks.

For instance, joint accounts encourage transparency and make it easier to manage shared expenses. Yet sharing an account with a partner or spouse can also lead to disagreements if you have different views on discretionary spending.  

Separate accounts, on the other hand, allow each of you to maintain your independence but can make it more difficult to manage shared financial responsibilities. Meanwhile, a hybrid approach can provide a healthy balance of transparency and independence.

Finding the Right Balance When Combining Finances

As you and your partner or spouse merge financial lives, it may take some time to learn each other’s money management styles and preferences. Ultimately, you’ll want to find the right balance for each of you based on your financial circumstances, personal values and goals, and individual comfort levels.  

Separating Finances: A Necessity Amidst Divorce

Navigating a divorce can be stressful and emotionally draining. Meanwhile, the financial aspects of divorce often add to its difficulty. The following considerations can help you manage the practical matter of separating finances and reach an equitable outcome.

#1: Seeking Legal Advice

When the reality of divorce sets in, one of the most prudent steps you can take is to seek professional advice. An experienced divorce attorney and financial advisor can help you navigate the complexities of the divorce process and separate your finances effectively.

Indeed, the laws governing divorce and the division of assets are far from uniform. In fact, these laws can vary significantly depending on the jurisdiction, and they often involve complicated legal concepts and procedures.

For example, some regions operate under community property laws where marital assets—and sometimes debts—are split equally. Other areas use equitable distribution laws, which aim for a fair but not necessarily equal division of financial assets and liabilities.

Understanding these laws and how they apply to your specific circumstances can be overwhelming. A legal professional possesses the necessary knowledge and expertise to interpret and apply these laws effectively, while a financial professional can help you maintain your financial independence post-divorce.  

#2: Separating Assets and Debts

The process of separating finances during a divorce isn’t just about dividing assets. It’s also about the equitable distribution of shared debts.

Shared debts are liabilities that either or both spouses incur during a marriage, and they can significantly impact the financial settlement in a divorce. The court may consider several factors when dividing liabilities, including each party’s income and earning potential, the length of the marriage, and the ability of each party to repay the debt.

Meanwhile, any assets you and your spouse obtained during the marriage, including property, savings, investments, and even businesses, must be divided. After you determine which assets are separate and which are marital, the next step is to value each marital asset.

The valuation process can be straightforward for some assets, like bank accounts and publicly traded investments. However, for more esoteric assets like privately-owned businesses or art and antiques, you may want to hire a professional appraiser to provide an accurate valuation.

Once the valuation process is complete, the equitable division of marital assets can begin. While this process can be grueling, transparent discussions and negotiations between each party can help ease the transition.

#3: Transitioning Account Ownership and Beneficiaries

The financial separation process doesn't end the moment you sign the divorce papers. You’ll still need to take steps to disentangle joint bank accounts and credit cards, refinance joint loans, and update vital documents.

For example, closing joint accounts and opening new individual accounts can help create clear financial boundaries between you and your ex-spouse. It also prevents either party from draining these accounts or racking up debt in the other’s name post-divorce.

In addition, any loans bearing both parties' names can pose a risk, even if the divorce settlement states that one party is responsible for the debt. While lenders can still pursue either party for repayment if you initiated the loan jointly, you can help mitigate this risk by refinancing joint loans into the responsible party’s name.

Lastly, be sure to update important financial and estate planning documents—especially beneficiary designations—post-divorce. You may also need to update your last will and testament or powers of attorney to ensure they reflect any changes to your end-of-life wishes.

Moving Forward After Separating Finances

While separating finances during and after divorce is no doubt about fairly dividing your joint assets and liabilities, it’s also about charting a new course toward your financial security and independence. With the right approach and guidance, this transition can help you build a robust financial foundation for your next chapter of life.

Combining or Separating Finances with Clarity and Confidence

Managing finances in a relationship boils down to cultivating a shared vision for your future during union and fairly dividing shared assets and liabilities in the unfortunate event of divorce. Whether you're in the early stages of combining finances with your partner or separating finances due to divorce, open communication, strategic planning, and expert advice can help you attain a favorable outcome.

An experienced financial advisor like Cooksen Wealth can help you navigate the complexities of combining or separating finances in a relationship. To begin your financial planning journey, please contact us. We’d love to hear from you.