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Given the highly personal nature of money and people’s relationships with it, there is no single playbook for personal finance that can be followed. The dynamics are even more complex when it comes to couples, but there is a strong case for completely co-mingling their finances despite some potential drawbacks.
A recent article cleverly titled Common Cents: Bank Account Structure and Couples’ Relationship Dynamics published in the Journal of Consumer Research conducted a six-wave longitudinal experiment of engaged and newlywed couples. The approach was simple and used randomly selected couples either merging their bank accounts, maintaining separate accounts or having a no-intervention condition.
The non-merging couples had a normative or expected decline in the quality of their relationships during the subsequent two years, whereas the common-cents’ couples maintained strong — and, therefore, stronger — relationship quality. To an extent, this was expected, because it helps to align a couple’s goals financially and otherwise. It also echoes previous research demonstrating a correlation between combining finances and relationship quality.
This suggests that a couple should consider combining their finances. Although there are disagreement risks, it may be better for a couple to find out earlier in their relationship that they are not compatible about money, or generally, as opposed to coming to this conclusion many years later.
Common-law couples have more risk when combining their finances. Nearly one-quarter of couples were living common law in Canada as of 2021, according to Statistics Canada, the highest in the G7. The 22.7 per cent of couples who were common law is nearly quadruple the number in 1981, when only 6.3 per cent of couples were unmarried.
In some provinces, common-law couples have different property rights when they split up. As a result, it may be financially safer to maintain somewhat separate finances. The alternative of preparing a cohabitation agreement, such as a prenuptial agreement, is theoretically available to couples, but, practically speaking, it can be a difficult process to pursue.
Regardless, research shows that those couples who merge their money are more likely to be happy and successful. There are plenty of financial planning reasons to look at a couple’s finances holistically as well.
From an income-tax perspective, if a couple can keep more of their after-tax income, they can either spend more or save more. The simplest strategy applies to retirement savings. If one spouse is in a higher tax bracket than the other, that higher-income spouse should probably be the primary or sole contributor to a registered retirement savings plan (RRSP). The exception may be if a lower-income spouse has a matching contribution at work for their RRSP or an alternative retirement plan such as a defined-contribution pension. Those company matches should not be ignored.
If a common-law couple is hesitant about building assets in just one spouse’s name, a spousal RRSP is a tool to consider. The higher-income spouse can contribute to a spousal RRSP and claim a tax deduction for an account that is owned by the lower-income spouse. A spousal RRSP can be equally useful for a married couple, since both spouses will have RRSP assets to invest.
Subject to conditions, future spousal RRSP withdrawals are generally taxable to the lower-income account-holding spouse and can provide income-splitting benefits in retirement as well. A spousal RRSP can also be used by a contributor who is over the age of 71 and still working, but has a younger spouse who has not yet reached the RRSP conversion age.
I sometimes encounter couples who have not co-mingled assets and have inefficient assets or liabilities. One example is when one partner has non-registered or tax-free savings account (TFSA) investments, but the other has consumer debt. The investments could potentially be put to better use by paying down the debt, thereby avoiding more interest payments than the investments would be likely to earn.
Another example is when one spouse has non-registered investments, but the other has unused RRSP or TFSA room. The couple could save and defer tax by using the non-registered investments to make contributions to the tax-preferred accounts.
For common-law couples living in provinces that do not apply the same rules to them as married couples, or for whom the co-mingling of assets could put their assets at risk, it may be worthwhile to think outside the box. A joint session with a family lawyer to understand how they can protect themselves, but work together efficiently could be worthwhile.
It may be awkward to bring up the risk of a relationship breakdown, but given the statistics on relationships that do not last, perhaps it should not be so taboo. There may even be simple options such as loaning money from one spouse to the other to protect one spouse’s assets while being able to take advantage of opportunities to repay debt or invest in the other spouse’s tax-preferred accounts.
Given the increase in common-law relationships, I hope the provinces improve their Family Law Acts to make it clearer what might happen if couples split up and to reduce the disputes and litigation costs when they do. Collaborative family lawyers should consider providing consultations to new couples and collaborating with financial planners to arrive at mutually beneficial outcomes.
Perhaps one of the best parts of merging finances is accountability. Some people are savers and others are spenders, but there is a risk to the extreme versions of both.
Savers may shortchange themselves by spending too little or working too hard. Call me a bad financial planner, but I think balance is more important than becoming as rich as you can. Spenders can be financially riskier because they may compromise their retirement by never becoming financially independent. The odds of two people succeeding at finding the right balance are much higher than one.
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Research shows that couples who co-mingle their finances are happier and more successful in their relationships. My own experience is that couples can build and maintain more wealth by looking at their finances as a whole instead of building a wall between each other.
There can be challenges and even risks when merging your finances, but relationships are challenging and risky, too. Call me a hopeless financial romantic, but I think a true money union is most likely to be successful for most couples.
Jason Heath is a fee-only, advice-only certified financial planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever. He can be reached at email@example.com.