Money issues are responsible for nearly 50% of divorces. How can so many intelligent people be getting it so very wrong? To help remove one hurdle to having a great relationship, YMM presents the ultimate guide to having the ‘money talk’ and getting it right.
1. His, hers and ours accounts
A shared bank account is a good way to balance the books and save for joint goals. His, hers and ours accounts can ensure everyone contributes equally to the daily basics without having to ‘check in’ if you want to splash out.
“His and hers accounts allow full autonomy and freedom as well as privacy,” says Sunshine Estivo, managing director of Omni Wealth. “It also works for married couples who value having a bit of flexibility.”
A combination of the following four accounts might be right for you:
• His account: everyday account that receives his salary and from which he can spend on boys’ toys and surprises for her
• Her account: everyday account that receives her salary and from which she can spend on shoes and surprises for him
• Our account: account where each contributes equally every pay cycle for essentials
• Saving account: a high-interest account (requiring two signatures) or term deposits where each contributes equally (or an agreed amount) every pay cycle for big-ticket items like holidays or a house deposit
If salaries or spending habits aren’t evenly matched, good communication skills are necessary to determine what is 'fair' for each to contribute.
2. Lover landlords and the First Home Buyers’ Grant
The First Home Buyers’ Grant, worth $7,000, is a boon for those trying to break into the housing market. Every first home buyer is entitled to the grant on the basis the applicant and their spouse or de facto has not previously owned a property.
Sharing the grant 50/50 is fine if you’re certain about being together for the long run, but how do you keep it fair if things are still new or one has been diligently saving for a deposit and the other has been running up a credit card debt travelling in Europe?
According to AMP financial planner Mark O’Leary it does make sense to keep things separate in the early days. “It’s a sign of the times that, increasingly, people are living together without being as totally committed as they might have been in previous generations,” he says.
Enter the ‘lover landlord’ phenomenon: a growing number of 20-somethings are protecting their investments and their right to the First Home Buyers’ Grant by structuring formal rental agreements for their partners - in other words, becoming ‘lover landlords’. Lover landlords protect their rights to the property and lover tenants protect their rights to apply for the First Home Buyers’ Grant in the future.
It’s important to keep it fair: Lover tenants should only be expected to pay their share of market rent, not half the mortgage. A BFA may be in order to keep things watertight.
3. Ready or not, you’re de facto
When busy staring lovingly into each other’s eyes, legalistic terms like ‘de facto’ aren’t usually at the forefront of your mind. But before moving in together and furnishing the love nest, pause to consider whether you’re ready for the legal (and financial) commitment.
Living together brings down costs but it now takes only two years of co-habiting to be declared legally de facto – and that’s for richer or poorer. In some cases, that time can be reduced to six months or even straight away if there is a child or one partner has made a significant contribution to the relationship either financially or as homemaker.
Be honest and upfront about each-other’s financial positions and be selective about who you’re prepared to bind yourself to financially. “It’s not uncommon for one partner to believe the other is well-off financially due to their apparent lavish lifestyle, only to find out many months and sometimes years down the track that most of their extravagant purchases have been racked up on credit and they've inherited lifestyle debts,” says Estivo.
Lara Wentworth of Consolidated Lawyers says there are a couple of scenarios when it’s best to avoid becoming de facto:
Separated but not yet divorced: if your new partner is yet to finalise the financial side of their breakup, getting financially involved can complicate their settlement and place your finances under scrutiny and even division through the Family Court, especially if you start to mix accounts, work in a family business or make contributions to marital assets.
In excessive debt: at the breakup of a de facto relationship the Family Court doesn’t always assign debt to the person who incurred it. ‘Sexually Transmitted Debt’ is a nasty surprise for many who are oblivious of their partner’s (or their partner’s ex’s) bad spending habits.
Tip: make a regular time to chat about your financial situation and take stock of credit card and personal loan debt. Regular financial health check-ups keep everything running smoothly and avoid the worst-case scenario of being left making repayments long after she/he stops returning phone calls.
4. Getting a pre-nup (Binding Financial Agreement)
The best way to minimise the financial pain in the case of a break up is to enter into a Binding Financial Agreement (BFA) before you move in together. BFAs are a relatively new concept in Australia – they’ve only been around since 2000, and only available to un-married couples since 2009.
Tip: Pick your timing BFAs (also known as “big fat arguments”) have been known to trigger the end of some relationships. Don’t introduce the idea the week before the wedding, and allow plenty of time to do it properly. A partner who respects you should also respect your desire to protect what you or your family have worked hard to create.
A pre-nup makes sense if you’re coming into a relationship with uneven wealth – for example, one party might have an inheritance, an investment property or a business, or be in debt. They also have particular relevance when dependant third parties like children, elderly parents, or trusts are involved.
“A BFA should set out clearly how the assets and liabilities of each party, including individually- and jointly-owned assets and liabilities, are to be dealt with,” Wentworth says.
A lawyer needs to sign that you have had independent advice and fully understand what you’re signing, as BFAs are legally binding and may act in substitution of your rights and entitlements under the Family Law Act.
• Prepare a list of assets and liabilities and their current values.
• Swap lists and ask questions about any aspect that may need clarification. Assets may need to be professionally valued. A copy of each list or schedule should be signed by each party and kept with the FBA once values have been agreed.
• Discuss how assets and liabilities are to be treated during the relationship and possibly after.
• Once an agreement is drafted, both partners need to seek independent legal advice about the effect of the agreement. Property and company searches may be needed to satisfy your spouse’s solicitor about your claims to certain assets.
• Once details are amended and finalised, you must both sign the agreement and your solicitors must each sign a certificate of independent legal advice stating they have explained the advantages and disadvantages of the agreement.
• One partner retains the original and the other a copy. The agreement does not need to be registered or filed in any department or court.
It’s crucial that both partners make a full disclosure of their financial position during the drafting of the BFA as the discovery of a beach house that hasn’t been included may see you challenging the agreement in court.
BFAs shouldn’t be about planning for the end. You can learn a lot about a person by going through the process. It’s a great way to set some ground rules for how money will be handled in the relationship.
5. Spousal tax returns and tax-effective asset allocation
There is no instant benefit to doing a spousal tax return, but according to Zuraida Ariffin, director of ZA Wealth Creation, it can be more efficient for one partner to hold a variety of assets, depending on tax brackets.
Negatively geared investments are best suited to the higher income earners who can maximise the benefit because they’re in a higher tax bracket while income-producing assets like term deposits, cash-flow positive or high-capital-gains property investments and dividend-yielding shares are most efficiently held in the name of the low- (or no-) income earner as earnings will be taxed at a lower rate.
Keep in mind the longevity of the investment. If a negatively geared property is expected to achieve high capital growth, it would be better to eventually crystallise those gains in the name of the lower income earner.
Unless you’re certain that your respective vocations will result in a significant salary difference you may be better off putting the assets in both names and splitting the difference. A financial planner or expert tax advisor can help crunch the numbers and work out the best approach.
6. Bridging the career gap
Superannuation spouse contribution tax offsets are one government incentive that can help your spouse save for retirement. If one spouse is earning less than $13,800 pa, the primary breadwinner can receive an 18% tax offset on spousal super contributions up to $3,000. If a spouse doesn’t work or earns less than $10,800, the contributing spouse gets a $540 tax offset by making the $3,000 contribution.
7. Accounting for kids
Children are expensive, and with the cost of raising a child to adulthood estimated at $600,000, the government’s $5,294 baby bonus won’t go far.
The best strategy couples can employ to prepare for the financial challenges of parenthood is to start planning well ahead of the birth. Practice living on one wage for as long as possible leading up to the birth. You can then save the second income and use it to cover any shortfalls whilst mum or dad takes time off with baby.
8. Protect what you love
If one or both salaries are crucial to your family’s quality of life then life and income protection insurance is crucial:
• Families with young children should insure both parents, not just the major breadwinner
• Your spouse should be the beneficiary of life insurance held within your super and the nominated beneficiary details should be kept up to date
• Don’t let your partner own your life cover. In the event of a split, if an ex-spouse holds a grudge, they may not cooperate to sign the policy over and it can be costly or difficult to re-initiate life insurance later in life.
9. Living with adult children
Whether you view it as a blessing or a burden, adult children are staying at home longer and in many cases mum and dad are footing the bill. The ‘sandwich generation’ of men and women in their 40s and 50s can be providing financial support for themselves, children yet to fly the nest and dependent elderly parents. So where should you draw the line?
Each couple would have a different answer but O’Leary suggests that once adult children are educated and earning, they shouldn’t present a burden to their parents. “The critical thing is to make sure that you aren’t financially disadvantaged by your kids staying on and if that means your kids have to put their hands in their pockets then fair enough,” he says.
Tip: consider using money paid as board to top up your super. Deductible contributions have tax advantages, will speed up your wealth accumulation and help ensure your financial independence come retirement – good for both you and your kids.
10. Divorce (and how to bow out gracefully)
US studies have found individuals can expect to lose 77% of their net worth as a result of divorce. But there are strategies to minimise the financial fallout.
According to Wentworth, the cheapest way to a financial resolution is through a Binding Financial Agreement (BFA) created after separation (if one doesn’t already exist) or consent orders. “To ensure the outcome is fair, parties need to be honest and upfront with their financial position and adhere to their duty to make full and frank disclosure,” she says. “They can reach an agreement through the help of their solicitors and the agreement can then be formalised in a BFA or consent orders.”
If there is no BFA to guide the way, and tensions are running high, mediation can help you settle out of court. “Although it’s important to seek good advice, make sure it doesn't turn into an ongoing battle between the two legal representatives as this benefits no one,” Estivo warns. “Keep the lines of communication as open as possible and use a legal representative who encourages a fast and collaborative solution.”
In addition to splitting assets and debts, if there is a dependent child or spouse in the picture, child support or spousal maintenance may be a consideration:
• Child support is regulated by the Child Support Agency and is assessed based on a formula that looks at the costs of raising children, the income of both parents and the amount of time spent with each parent.
• Spousal maintenance means the court must order one party to maintain the other in cases where the paying party has the capacity to do so and the other party has the need, in accordance with the Family Law Act. The calculation can take into account the financial and career disadvantage the dependant spouse may have due to taking time out of the work force to raise children and is typically awarded for the time it takes help them retrain or find employment.
Having a good idea of the financial goings-on of your partnership is absolutely essential to be empowered in the worst-case scenario of a relationship breakup. “After the divorce, it’s women who are really seriously disadvantaged financially. They’re disempowered and vulnerable because they don’t know how it all works,” O’Leary says. “The facts are that guys tend to call the shots and have the career so in most cases they’re up and running again after a divorce much faster than the women.”
Ultimately a solid financial education will see you to a fairer and cheaper outcome if, like 50% of couples out there, you too one day end up facing the ‘big D.’
Does it matter who earns more?
Men earn more, and yes it matters. The current pay gap in ordinary full-time earnings between women and men is currently close to 17%. This gap grows to 33% when women’s part-time and casual earnings are considered. Interestingly, pay differences only seems to matter if she’s earning more than him. According to Susan Nicholson, psychologist and partner with MNM mentors, men harbouring confidence issues are more likely to feel threatened by their partner’s success than the other way around. By comparison, women see men who earn more as a bonus and actually tend to expect it.