Thursday, May 26, 2005

Joint Bank Account for Married Couple

Yesterday Simon and Caroline from Light and Easy’s Light Breakfast Radio Show brought up a very interesting topic, “should a married couple hold joint bank account or should they keep their personal bank accounts separate?”

We are in favour of holding a joint bank account. It provided us the discipline to finish off our 20 -year home loan in 7 years. We understand the difficulties and we have solutions to overcome them.

Why joint bank account for married couple?

A carefully handled joint account provides a sense of common purpose for the couple. With a joint account it is easier to plan for many activities in life that involve both parties. There is no second guess of affordability which is crucial in managing family’s finances. It makes planning for future, especially for couples with double incomes, much easier. It facilitates the couple in making common financial goals and gives them perspective and a sense of control for the financial future of their family.

Such common financial goals include:
- planning for retirement
- planning to buy a bigger house for a better lifestyle
- paying off home loan
- a holiday vacation
- children’s education

Pitfalls and Solutions

Joint bank account seems to work best for couples that have similar spending habits and equally careful about spending. However, not many couples share the same spending habits and philosophies of life. Does this mean they should not have joint bank account?

The best arrangement for a couple is to have a joint account to pay for the family’s common expenditure and to have their own personal accounts too. The couple must decide a monthly amount to put into the joint bank account and more importantly they MUST agree on what expenses can and cannot be paid from the joint account. Anything outside the agreed expenses, unless mutually agreed, should not be paid from the joint bank account. Any expense that cannot be agreed to be paid out from the joint bank account should be excluded.

What should be in
  • monthly installment of home loan
  • monthly apartment’s management fees
  • pregnancy and hospital expenses
  • babysitter fees
  • children education fees
  • family vacations
  • home renovations (do your budget and agree on the budget first)
  • regular donations that you and your spouse are committed to
  • family investment that you and your spouse are committed to, e.g. a second apartment for rental, a family trust that hold stocks, etc.
What should be paid individually or shared fairly outside joint account (unless otherwise agreed by both parties)

  • gift to spouse (hey, it’s a gift from you.)
  • eat out (just pay and share unless you enjoy the accounting part to tie the number every time you pay)
  • eat out with each other's parents, brothers, sisters, friends, etc.
  • groceries (yes, it is regular expense, probably too regular and petty too. More over the amount is not fixed. There will be a lot of accounting headache if you use the joint account to pay. Just share out the payment on the spot or do the regular IOU netting with your spouse.) Alternatively, the husband can just give a monthly sum to the wife for groceries, outside the joint account.
  • DVD player that your spouse doesn’t think it should be paid out from joint account
  • your own investment portfolio that your spouse is uncomfortable with
  • your beauty saloon expenses
  • your treats to your friends
  • donations for the cause that you, but not your spouse, feel strongly about

The Theory
There are four “must haves” for a successful joint bank account

ONE: Define usage
Yes, one of the most important keys to a successful joint bank account is to define the usage of money in the joint bank account. Remember, joint bank account is meant for family expenditure. It involves both parties money. It has to be agreed by both parties before spending it. The right way, therefore is to have a pre-agreed REGULAR expenses that can be paid out from the joint account.

Any expense comes incidentally has to be discussed and agreed by both parties. Since many family expenses could come incidentally and if you foresee such discussions will lead to arguments, you may just want to exclude these items from paying out from joint bank account.

TWO: Simple and predictable
Keep the arrangement simple. Try not to involve the joint account with daily petty expenses. Besides creating accounting havoc for both of you, it may lead to argument since the nature and amount of such expenditure is unpredictable. You save the hassle from agreeing or arguing over petty expenses. For such expense you may just pay and share the cost fairly on the spot.

THREE: Build trust
Once agreed, never break the rules and you will never break trust. Ultimately what glues all the operations together is the trust that you have in each other that the money in the joint account will be handled carefully, by the agreed rules and treated with respect.

The worst comes from breaking the trust of your spouse by taking the money out for own use without his/ her knowledge. Once the trust is broken, any arrangement would be difficult to carry out. (Can I make you swear that even if you are personally financially ruined, you will not touch the money in joint account that provides security and future to your family?) :-)

FOUR: Fair share of input
Failure of a joint bank account could come from not being able to keep up your fair share of input. Value each other's abilities to earn and set a fair (the word is FAIR, not EQUAL) amount for each other to contribute into the joint account. If you or your spouse cannot put in that much, set a lower amount. Once decided, keep the promise to contribute.

With this, no matter how different a married couple’s spending habits and life philosophies are, they will be able to operate a successful joint bank account that provides the family financial certainty and a sense of togetherness. So do keep a joint bank account for your family and a personal bank account for your own joy of spending.

Saturday, May 21, 2005

Personal finance: The Principle

At different stages of life we need to make financial decisions, critical personal financial decisions that will have long term irreversible impacts upon our financial well being and quality of life, e.g. buying a house, going for studies, sending our children to college, getting a loan to start a business, etc.

These decisions are critically important due simply to one reason - we are not rich enough, yet. We need to be careful in making these decisions simply because it may cost us dearly. Sure, it is all about assets(i) building, wealth creation and to be rich enough one day so that error in such decisions will be affordable and will not require thinking too deeply. However, along the journey for affluence we must ensure these personal financial decisions will not lead to financial disaster that will hamper our wealth building efforts.

In short, the single most effective way to deal with personal financial issues is to be RICH enough that mistakes are always within our budget. When we are not rich, when we are still on our path in search of wealth, we must then be careful of making such personal financial decisions. We make these decisions in a way that they will not obstruct our wealth building efforts.

This is the basis of all personal finance ideas. This is THE principle of Personal Finance.