It’s February, the month of love, the time of year when you snuggle under faux-fur blankets by the fireplace, canoodling with your honey, reflecting on how far your love has brought you, your blissful future together and, of course, the state of your finances. No? Are money talks with your man more likely to be swept under the rug along with the other dust bunnies in your relationship?
For most of us, knowing how and when to bring up the topic and focusing on what to discuss are the biggest challenges. After all, it’s hard to have a productive conversation when you’re not even sure what to address. Well, it may not be the stuff of sweet whisperings in one another’s ears, but we’re here to help sort you out!
In this month’s guide, you’ll learn what couples need to talk about when it comes to money — and, even better, how to make that chat easy and effortless. So take advantage of being trapped indoors during the next snowstorm: Light the candles, get cozy and whip out the calculators. Whew… is it getting hot in here or what?
1. Hornet’s nest of common law
The hacker heroine in Stieg Larsson’s bestselling books taught us a thing or two about outsmarting evil, nasty men. In The Girl With The Dragon Tattoo, Lisbeth Salander ultimately triumphs over the evil trustee who holds the keys to her finances. But it’s unfortunate that in real life, when Stieg died suddenly at age 50, he left his common-law partner, Eva Gabrielsson, almost as financially powerless as young Lisbeth.
Swedish law doesn’t recognize common-law unions, and Stieg didn’t leave an officially witness will. Despite having lived with him for 32 years, Eva was not entitled to any of Stieg’s estate. As a result, his half of the home they shared was awarded to his father and brother.
Stieg’s blood relatives now earn millions from the writer’s posthumous literary success and movie-rights sales. Eva, on the other hand, is locked in a legal battle with her quasi in-laws for the right to administer Stieg’s literary legacy — a body of work that was created over the three decades while she stood by her partner’s side.
Let this be a lesson: Moving in together without clarifying your financial affairs is like being the girl who played with fire. So if he hasn’t put a ring on it…
Learn the rules of common law. Unlike Sweden, Canada does recognize common-law unions, but that doesn’t always mean you’re protected. Be aware that each province has different rules on how long you have to live together to qualify has common law, and how assets are affected. One way to reinforce your status is to filing your taxes together. Another is to make sure government-issued ID, such as drivers’ licenses and health cards, have the same address.
When moving in with someone, however, the most important thing to remember is you may be entering into commitments or financial obligations that you never expected. Imagine being forced to share the value of your house with someone who didn’t pay for it. Or being kicked out of the home you helped build simply because you’re not on the title. What about having to pay support for your ex and his or her kids? Or losing a business you started? Even in the event of a death, the surviving common-law partner may be more vulnerable than a legally married spouse. That’s why it’s essential to seek advice from an expert licensed in your province.
Sign a cohabitation agreement. Memories fade, promises are forgotten and versions of events can change in the face of a breakup. Cohab agreements outline who brought what assets and debts into the union. They’re especially important if you own your own home and someone moves in with you — you don’t want to end up heartbroken and lose half your home. And remember, when you co-sign for a mortgage, loan or any other money obligation, you’re not merely agreeing to a 50-50 responsibility. You may each be on the hook for 100 percent if the other person defaults.
Open a joint bank account (or not). Be cautious of rushing into opening jointly held saving or chequing accounts. The only exception is an account where you each transfer in a pre-arranged amount every month to cover household expenses. But always maintain a personal account. You need some freedom!
2. Before saying I do
Agree on a unified financial plan. Do you want to retire at 50? Buy a cottage? Take one big trip a year? By establishing what matters to you as a couple, you can balance out long-term goals with day-to-day priorities; plus, it has a bonding effect like no other. The thrill of a shared victory is sweeter than any solo achievement.
Save for kids before they’re born. Little kids cost big! TD Canada Trust reports a baby’s first year of life will run you around $10,000. When you consider that most women will also have to take some time off work, the whole financial picture can seem pretty overwhelming. The solution? Even before you see those two blue lines, be disciplined about saving as much as you can, and continue as Baby arrives and grows. Open a savings account or TFSA and make regular deposits: a few hundred a month ongoing, 20 bucks here, 50 bucks there—it all adds up. Once they’re born, start contributing to an RESP.
Review your will. Marriage may change how you want your estate to be divided. Make sure you share your intentions with your partner. Don’t have a will? Now is a great time to see a lawyer and have one drafted, especially since cohab agreements and pre-nups do not affect estate divisions. Having a formal will is the only way to ensure you—not the courts—decide how your property gets divvied up.
3. Then comes marriage
Share the ups and downs of debt. When marriage and debt commingle, great things can happen. You can pay debt off faster and be more prudent about joint finances. But bad things can happen, too, such as lower combined credit ratings on debt jointly applied for, greater stress and bill-paying blow-ups.
Commit to involving both of you in the decision to take on new debt. Too often one partner will splurge on a new-car lease or another expensive purchase on credit, not realizing they’re obligating the other at the same time. Instead, as part of your plan, set a cut-off amount for any major purchase or new debt ahead of time; spending beyond this amount requires an agreement by both parties before it’s a go.
Take advantage of tax benefits. With marital bliss come bonus tax breaks from the government. Here’s how it works: Spousal tax planning can bring the spouse with the higher income down to a lower tax bracket, but borrowing some of the unused tax credits from the spouse with the lower income. (If you and your spouse haven’t tied the knot or don’t plan on it, you’ll be happy to know common-law couples can benefit from the same tax allowances. And if you’re in a stable relationship, why not?) It’s also a smart strategy to use the same bank, accountant and financial planner—and be clear with them about your financial goals as a couple.
4. How to protect an inheritance
Suppose you have a share in a cottage or you inherit the home you grew up in. If you and your husband split, surely anyone in their right mind would recognize these things as yours, right? There’s no chance our ex would force you to sell just for a cut of the profits…or is there?
Sadly, divorce can make people behave in unfamiliar ways, and all too often, the unthinkable occurs. The courts can protect you only to the extent you protect yourself. If you have sentimentally valuable items or property that you don’t want to lose, cover it with a legal agreement and update your will to clarify who gets it.
If you inherit money and transfer it into a family account or use it to pay down a family debt (such as the mortgage), that money may no longer be yours alone. Consider putting it in your own account (not a joint account) until you get professional advice and sort out what you want to do with it. You may choose to put it toward your family (many of us would), but if you’re in a rocky relationship, make sure you don’t make any rash decisions: Get solid legal and financial advice first.
5. If things don’t work out
Every year, some 70,000 Canadian couples go from happily ever after to never again. During a marriage, a couples finances become as mixed up as a heap of clothes in the laundry hamper. Untangling that mess is the difficult and costly work of divorce lawyers. Your biggest concern is establishing your financial independence.
Step 1. Accept that life will change. After a divorce, women typically experience a 27 percent decrease in their standard of living, while men see a 10-percent decrease (we know, not fair). You may be looking at moving to a smaller home, cutting back on expenses or, if you’ve been a stay-at-home mom, getting back into the workforce.
Step 2. Focus on cash flow. As you know, 50-50 rarely means equal. Some assets are costlier to keep than others; some generate more taxes. Any agreement on splitting assets and debt must consider how much cash flow you need to get by.
Step 3. Think in terms of action steps, deadlines and removing obstacles. Work with a lawyer and a financial planner you trust to help you sort out your best options.
6. Living financially ever after
It’s tough to get ahead when one or both of you spend more than the household earns. Here are a few ways to avoid the overspending pitfall.
Be honest about your spending. Even if you keep separate accounts, share big purchases with your partner along with changes in debt, assets and income. This may help you reduce risk and taxes.
Automate payments. If you worry about bills getting paid and regular RRSP contributions being made, set up automatic withdrawals and be done with it.
Get strategic when filing taxes. Avoid leaving credits on the table such as: Spousal Tax Credit (when one spouse’s annual income is below a certain amount (roughly $10,500), the breadwinner gets a tax credit.
7. Golden rules
RRSP & TFSA contributions: Hey, high-income spouse, contribute to my RRSP and that deduction is all yours. Yep, I’m that generous. Contribute to your honey’s TFSA account to make sure you both max out on this tax-free way to grow your savings.
Investment income: Hold interest-earning investments (more highly taxed) such as government or corporate bonds in tax-sheltering accounts such as TFSAs or RRSPs. Speak to your adviser about the best way to hold your income-paying investments for the current rate environment, and have a plan to be as tax efficient as possible. Investment returns are uncertain, but tax savings are a sure thing!
Charitable & political donations: Pool your tax receipts and use them to lower the income of the higher earner.
Self-employment breaks: There are many ways of lowering your family’s income taxes when one of you is self-employed. Talk to a tax advisor if one of you becomes self-employed.
Medical expenses: Claim the family medical expenses if you’re the lower-income spouse. If the costs are above 3 percent of your income, you’ll get a credit.
Public transit credit: If you don’t want to use yours, give it to your significant other.
Child care expenses: Generally, the lower income person must deduct the allowable child care costs, but hey, that helps, too.
Bottom line: Getting on the same page about money will let you relax and enjoy your relationship. Repeat this mantra: The couple that saves (and spends) together stays together!
Chatelaine experts: Laura McDonald and Susan Misner created GoldenGirlFinance.com to help women learn to build wealth. They’re also the authors of the bestselling money guide, It’s Your Money, Honey and soon to be released 10 Ways To Stay Broke Forever.