By Simon J. Lau, CFA
Joint Accounts: Harmony or Headache?
Managing finances as a couple can be challenging, especially when it comes to joint accounts. Recently, I was asked a question that touches on several delicate points couples face with joint finances. Below is her question (edited for clarity):
Dear Simon,
My husband and I have always had a joint bank account that we use to pay for shared expenses. Recently, this has caused tension between us. We both earn good salaries and contribute proportionally to this account based on our incomes. However, he has been using this account to cover expenses that I don’t consider shared expenses. For example, he’ll cover costs for his parents when they occasionally join us on vacations. These expenses have added up, but he considers them “shared costs.” This has led to several disagreements, as I feel it’s unfair to use our joint funds in this way. At the same time, he contributes more to this account than I do. We also have individual accounts for discretionary spending, but the issues with the joint account persist. How should we manage these joint account issues to avoid further conflicts?
Sincerely,
Struggling with Shared Spending
Dear Struggling with Shared Spending,
Personally, I hate joint accounts. However, before diving into the reasons why my wife and I don’t have joint accounts, here are the top three reasons I think you should consider them:
- Ease of managing household expenses: A joint account streamlines the process of paying for shared expenses such as rent or mortgage, utilities, groceries, and other household bills. By having a single account from which all these payments are made, you eliminate the need for constant transfers between individual accounts.
- Alignment of shared financial goals: When you and your partner combine your finances, it becomes easier to save for common objectives, such as purchasing a home or car and building an emergency fund. This approach fosters a sense of teamwork and shared responsibility toward achieving these goals. At the same time, as you’ve pointed out, a shared account that isn’t well managed can also undermine these goals.
- Convenience when managing investments: For couples who actively manage their investments together, having a joint account can facilitate easier tracking and administration of these assets.
Now that I’ve laid this out, I want to dive into the meat of our discussion. Despite the benefits of shared accounts, I prefer having only individual accounts over sharing any joint account for two main reasons.
First, auditing and accountability. Keeping separate accounts makes it easier to audit and track individual expenses and income. When each partner manages their own account, it becomes clear who is spending what and where, which can help avoid misunderstandings and disputes over finances. This clarity can be especially beneficial when budgeting, planning for future expenses, or simply trying to understand where money is going.
Second, personal independence. Keeping separate accounts allows each partner to maintain a high degree of individual financial decision-making and, by extension, personal independence. This means that each person has the freedom to make their own financial choices without needing to consult the other for every purchase or investment.
Infamous Cookie Jar Reserve
What I’ve found to be the greatest drawback of joint accounts is the general lack of auditing and accountability. To use an analogy, when I was in business school, I had a very animated accounting professor. He was a terrible teacher, and his class was arguably the worst class I took during my two years at NYU, but he did leave me with one nugget: a discussion on cookie jar reserves.
In accounting, a “cookie jar reserve” is when a company sets aside reserves or provisions in good financial periods to use in bad periods. This practice can help smooth out fluctuations in a company’s earnings, making financial results appear more stable over time. It’s controversial and raises concerns about the transparency and accuracy of financial reporting.
In personal finance, joint accounts can be similar to cookie jar reserves in that they can obscure financial details and be easily mismanaged. For example, when one spouse needs a new car, is a $30K Mazda CX-5 sufficient, or does it have to be a $70K BMW X5? (As an aside, I love the Mazda CX-5. We bought one 8 years ago and have put 85K+ miles on it. Most recently, I drove it coast-to-coast (and back) with my dog to explore America! It’s never once given us a problem.) In your case, this issue might involve deciding whether you should be responsible for covering expenses for your in-laws on vacations.
In my experience, these issues acutely affect “high earners, not yet rich” (HENRYs). Think of two typical white-collar professionals in their early-to-mid careers. These couples can afford large and ongoing expenses but don’t have the financial cushion to consider all these expenses minor. As a result, joint accounts may become a significant source of anxiety.
Managing Family Finances with Individual Accounts
My wife and I have been married for nearly a decade, and we’ve never shared a joint account. In that time, we’ve also rarely, if ever, argued about our family finances. Much of this I attribute to the fact that we have separate accounts but still work together to meet long-term financial goals. Here are some important caveats (in no particular order):
- We don’t have kids, and we don’t plan to have kids. This greatly simplifies our shared expenses.
- We share similar spending habits and savings goals. In general, we save 40-50% of our net income (after-tax income) and invest it in diversified index funds. We treat most of our investments, including those in our individual trading accounts, as if they were long-term retirement accounts (e.g., we buy and hold).
Despite these caveats, I believe that this process (or some form of it) can not only be replicated effectively by many couples but may also be highly desirable. These are the steps that we take:
At the end of each year, we review our overall financial situation, including our retirement accounts, trading accounts, cash balances, and the equity we’ve accumulated in our home. We compare this to where we were last year and discuss how we’re tracking toward our long-term goals. Afterward, we make two adjustments:
- Changes in what I call our monthly “flat rate” allocations.
- Our monthly savings and investment rate.
For larger, recurring expenses such as the mortgage, HOA fees, and insurance, we split them equally (consider these our fixed costs). Some expenses, such as utilities, fluctuate monthly. To simplify, I forecast these expenses based on recent trends and set a revised monthly rate for the new year. Finally, I calculate the sum of these expenses to determine a forecasted total monthly expense, and my wife transfers half of this flat amount to my account each month. Large, but infrequent expenses, such as property taxes, we split as they are incurred. I’m responsible for paying these monthly expenses.
We don’t split other expenses, such as groceries, dining out, and family trips, as they are difficult to allocate. Furthermore, I believe that in situations where one spouse earns meaningfully more than the other, the higher earner should cover some of the ongoing and difficult to split costs. In our case, I generally cover these expenses as they arise.
Finally, we revise our monthly savings rate based on updated figures. Historically, we’ve aimed for a 40-50% net savings rate. This is a high rate, but each couple should set a rate they are comfortable with. Ultimately, the goal is to focus on meeting savings and investing targets, not managing individual line item expenses (which is far more time-intensive).
Summary
Besides easier accounting and auditing of individual contributions, the greatest benefit of managing family finances through individual accounts is maintaining a high level of personal independence and individual financial decision-making. For example, I’ve never questioned my wife’s purchases, nor does she scrutinize my spending, no matter how obscure and sometimes costly she may find my hobbies. At the same time, we’ve consistently contributed and grown our wealth in ways that align with our shared goals. These are key reasons why I advocate for individual accounts over joint accounts.
Ultimately, no matter how you choose to manage your shared finances, it’s crucial to ensure that it’s fair and transparent. This balanced approach allows you to combine shared responsibility with personal independence, leading to a healthier financial partnership.
All my best,
Simon
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