What’s the best method for sharing expenses as a couple?
Many couples opt for the 50/50 method, splitting all household expenses in half. While this technique may be the simplest approach, it’s only fair if both partners have similar incomes.
When this isn’t the case, the partner who earns less is at a disadvantage, which can lead to a significant financial gap over the long term.
Conclusion: If there’s a significant difference between your incomes, the best strategy is to split expenses proportionately.
Why is it best to split expenses in proportion to your incomes?
This strategy means expenses are divided more equitably. It can also help couples prioritize their savings. Why? Because with less disparity in disposable income, both people are more likely to save.
By opting for the 50/50 method, you reduce the lower-earning partner’s savings capacity, and by extension, their ability to save for a comfortable retirement. Over a lifetime, this can contribute to major disparities which – in the event of a separation between common-law partners – can have a considerable impact on the quality of life of the person who earns less.
Example : Say one member of a couple has an annual income of $70,000 and the other $40,000. Their expenses total $50,000 and are shared 50/50, so each ends up paying $25,000 a year. After these expenses, this leaves $45,000 for one and $15,000 for the other to put towards savings and personal expenses.
In contrast, splitting expenses proportionately to your incomes offers greater financial independence by allowing each partner to contribute to joint expenses on an equitable basis. They’re then able to save and make a discretionary budget for personal expenses.
Another option is to open a joint account with your partner, making it easier for you to pay your shared expenses.
Are you a blended family? If so, a discretionary budget could be especially helpful because once the shared expenses have been paid, each parent can look after their children’s expenses independently.
Tip: It’s a good idea to pay major expenses together and co-sign loans for a home or car. If one member of the couple is covering more significant costs such as a mortgage, car loan, furniture or appliances while the other is paying for groceries, the latter may be penalized in the event of separation. By dividing major expenses equally, you’ll be jointly responsible and avoid unpleasant surprises should you separate.
How do you calculate expenses in proportion to your incomes?
It’s fairly straightforward. First, you calculate what percentage of the total household income each partner earns. You then apply these percentages to the total monthly budget. This will give you the proportion of expenses you’ll each have to cover.
Do you or your partner have fluctuating or unstable income due to seasonal work? Think about starting an emergency fund to cover periods of reduced income. In other words, save during the more lucrative months so that you’re ready to face the unexpected during slower periods.
Here’s an example:
- You earn $60,000 a year and your partner earns $40,000.
- You earn 60% of the joint salary and your partner earns 40%.
- Your monthly household expenses total $5,000. How do you divide them up?
- Based on the ratio of your incomes, you should pay 60% of the expenses and your partner 40%.
- Since 60% of $5,000 is $3,000 and 40% is $2,000, you have to transfer $3,000 a month into your joint account.
- Your partner, on the other hand, needs to transfer only $2,000 per month into your joint account.
- The result: You each contribute to shared expenses while respecting your own financial capacity and ability to save.
Good to know: There are several apps that can help you divide expenses fairly. In most cases, you just need to enter the percentage of your income in relation to your total joint income.
How do you prepare for the arrival of a baby?
Couples need to plan for the arrival of a baby together. You’ll need to discuss future expenses and how you’ll divide them up before and after the baby’s arrival.
Remember that parental benefits negatively affect the income of the person taking parental leave. This means the person taking the longest parental leave may no longer be able to contribute to their pension plan to the same extent as when they were on full salary.
New parents will need to find solutions to offset the impact on their finances.
Good to know: According to a study by UBS, taking a career break of six months or more – for maternity leave or to care for an aging parent or sick relative, for example – has a significant impact on a woman’s long-term wealth. Research shows that this could mean 43% less wealth for a woman by the time she reaches the age of 85. The bottom line is that it’s essential to review budgets when major life changes occur to ensure an equitable arrangement between couples.
Would you like to discuss this with us? Contact your National Bank advisor or your wealth advisor at National Bank Financial. Don't have an advisor?
