The Financial Rules of Cohabitation
Moving in with a significant other is a big step: both emotionally and financially.
While experts say couples living together should have the same discussions about living arrangements as married couples, they advise unmarried individuals co-habiting take extra financial protections.
Before moving in together, couples should determine if they have shared lifestyles, calculate a budget and agree on who pays from what expenses, says Anna Behnam, an advisor for Ameriprise Financial. Leave emotion out of the decision-making process. “Have a black and white discussion for how you’re going to manage your assets and expenses.”
It’s also important for couples to have an exit plan in case the relationship sours, recommends Randy Kessler, founding partner of Kessler & Solomiany. “You are an individual, even in a relationship.” Agree on the terms of cohabitation and have legal agreements about anything owned together, like houses or cars: any name not on the asset means that person doesn’t’ have a legal right to it.
Experts offer the following tips to establish financial guidelines and budgets for couples getting ready to live together.
“The couples that partner together and discuss their finances are better able to meet their long term goals,” says Sandy Vaughn, financial solutions advisor and assistant vice president at Merrill Edge. Get everything out in the open.
Each party should divulge any assets, debts including credit cards and student loans, credit reports and FICO scores. It’s also a good idea to exchange net worth statements, says Tracy Stewart, certified public accountant and personal financial specialist in College Station, Texas. “Even if you’re not getting married, full disclosure is important because if the couple’s in a serious relationship and they want the relationship to thrive, open communication is key. No secrets, no surprises.”
Once a financial picture is established, decide who will pay for what. “If you make more or less than your partner, you have to be very open and clear and listen to each other,” says Stewart. Don’t be shy about talking about having the higher-earner pay more in rent, but make sure everyone is comfortable with any agreements. “Otherwise, look for a cheaper place that you can both afford 50/50. The one who makes more will be able to save more.”
Experts advise having monthly conversations about bills and goals. Once staying on budget becomes a habit or lifestyle, the talks can become less frequent.
Find a New Home
Both renting and buying comes with legal obligations.
Be on the title, not the debt. “If you’re buying a house, it’s OK to put your name on the title but not the debt,” says Kessler. A person doesn’t have to be on the title to co-sign a mortgage. The mortgage is an obligation to repay a loan and co-signing a loan doesn’t provide entitlement to a property. “If you’re buying a house together, have an understanding of what happens to it if you break up and put it in writing,” says Kessler. Anyone making payment should keep good records of what they spend on the house and mortgage.
“Sharing assets is a different relationship—you’re making a financial and legal commitment to each other,” says Behnam. “Set up the title properly and consult an attorney on that. Have a will in place so your share of the house goes to whomever you choose.”
Decide if you want your name on the lease. “[Having your name on] a lease gives you the right to be there and the obligation to pay,” says Kessler. If one name isn’t on the lease, that person can be evicted in the event of a break up.
Have extra savings. If both are contributing to the mortgage or rent, this money can cover your partner’s share if he or she stops paying for some reason, says Stewart. “If you have an emergency fund, you can carry yourself forward if you can’t move that fast or don’t want to move that fast. It gives you flexibility.”
Create a Household Budget
Track household expenses in a spreadsheet and decide who’s paying for what, says Stewart. Be accurate with spending and base a budget on the prior 12 months—don’t forget to include restaurants, vacations and extraneous expenses. “Make sure you’re on top of the bills and that the mortgage and rent is paid on time,” says Stewart.
While breaking a lease may be easy, says Behnam, it’s hard to divide up joint purchases, whether they’re assets owned outright like furniture or emotional assets like pets.
“Keep a record of what you’ve bought,” says Kessler. “Keep the receipts for things you might fight about—couches, TVs and dogs.” Writing that something is a gift gives the recipient full rights to it if a breakup occurs.
For items purchased together, decide who keeps it before or during the purchase, says Behnam. “Don’t start itemizing household assets but have an understanding. If there’s a breakup, there’s going to be enough fighting so don’t make it about a TV or sofa.”
Don’t Pay for Partner’s Debts
“Before you get married, you shouldn’t be responsible for paying someone else’s debt,” says Vaughn. “Co-signing loans doesn’t ever turn out well. If a bank isn’t going to give someone a loan, you should say no also because you’ll put yourself in a bad situation.” Having a joint credit card could negatively impact one party’s finances or credit if the relationship turns sour.
Kessler warns about paying the other person’s tuition since only one person will reap the benefits of the training and degree. “Unless you’re going to be married, don’t bail each other out,” he adds
Keep Accounts and Credit Cards Separate
Having separate checking accounts is the safest and cleanest way to split finances in the event of a breakup.
For couples with a joint account for household expenses, Behnam suggests each person only deposits what he or she is responsible for at the beginning of the month.
“It’s not about how much you love the other person, it’s about protecting yourself,” says Kessler.