Getting married is an exciting milestone in your life. Setting up a new household, combining your music collection, finally getting rid of his college futon that you’ve always secretly hated! Maybe less exciting is the matter of sitting down to talk money and merging your finances after marriage.
Before the ceremony or honeymoon even start is a good time to have a realistic talk about bank accounts, outstanding debt, credit scores and even retirement.
Bank Accounts – Yours, Mine or Ours?
This is always a hot button topic and there is a lot of information about whether or not combining accounts is good idea. There are a lot of strategies that couples can follow when tying the knot, whether it’s “what’s mine is mine, what’s your is yours” or “what’s mine and yours is ours.”
The Benefits of Merging Accounts
In the long-run, whether you merge your accounts or not, may not be of importance. In the case of divorce all assets and earnings accumulated during a marriage will be split either 50/50 or equitably (fairly), depending on what state you live in. So your earnings, even if they are in an individual account, can be distributed.
But here are a few benefits of merging accounts for those who live happily ever after:
2. Healthier for your relationship
3. Full access in case of emergency
How To Merge Your Accounts
It’s not as difficult as it might seem. Start with a complete list of the accounts and credit cards held by each partner. Take a look at the fees, rewards and interest rates on each account and decide which accounts to move forward with.
From there you’ll need to visit your credit union or other banking institution to have your spouse’s name added to the account. He or she can then set-up direct deposit into the account or pay bills out of the account.
Keep all accounts open for a few months until you see that everything is running smoothly, at which time you can close out the unnecessary accounts.
Paying Down Debt
No doubt each partner will come into the marriage with some debt, whether it’s student loans, credit card debt or a mortgage from a home he or she already owned. How you work together to tackle this debt will make the road ahead a smooth or bumpy one.
1. Start with any high-interest loans. If you’re able to increase your payment or even make an extra payment each month, then paying more than the monthly minimum will eliminate the balance much faster, saving you a considerable amount in interest charges. Once that debt is gone, move onto the next debt with the highest interest and pay it off. Remember to continue making minimum payments on all your other debts during this time. If you can afford to, consider using savings to pay off a loan completely, but don’t wipe out your emergency fund.
2. Consider consolidation. If you or your spouse is already a homeowner who has built some equity in the home, consider using a home equity loan to consolidate your debt. The funds you borrow on a home equity loan can be used to pay off multiple debts, leaving you with a single low-interest loan.
Can You Merge Credit Scores?
Unfortunately credit scores cannot be combined when you get married. Your credit score is yours and yours alone. So changing your last name won’t change your score even if your spouse has a good or not-so-good credit history.
But here’s where merging your finances after marriage can benefit credit history. If your spouse doesn’t have much of a credit history, for example hasn’t taken out any loans and doesn’t have a credit card, adding him or her to your credit card account can help build up his or her credit score. There are two ways to go about this:
1. Authorized User – Ask your credit card company to add your spouse to your account as an authorized user and issue a second card. When bills are paid on time, your spouse also gets the credit score benefits. However, if things go astray, the original account owner is the one liable for all charges.
2. Joint Account – You can also turn your credit card account into a joint account. With this option, the credit card company will want to review your spouse’s credit history before approving the joint account. With a joint account, both parties are responsible for the charges, no matter who made them.
Building Retirement Savings
Retirement is another area where finances cannot be merged completely. In fact, the key word in IRA is “individual.” However, there is an option available that allows your income to build up an even bigger nest egg.
Spousal IRA rules allow a husband or wife to contribute to the other’s IRA. Spousal accounts provide the same benefits and follow the same rules as regular Traditional or Roth IRAs. To take advantage of this rule, you must file a joint tax return. An individual can contribute a maximum annual amount of $5,000 ($6,000 if you’re over the age of 50) to their IRA.
A spousal IRA is not a joint account, as the funds in the account become the property of the person who is the account holder. This is a great way for a stay-at-home parent or a spouse with a small income to have a retirement plan established in their name and assets secured for their future, and for a couple to establish a larger savings on just one income.
Are you getting married this year? What discussions have you and your soon-to-be spouse had about merging finances after marriage? What plans have you made?