One of the most powerful financial decisions you can make is the decision to share finances with your significant other. Marriage, or a stable common-law relationship, is the perfect merger: creating powerful synergies and cost saving opportunities.
This is not to say being single is financially damaging, and it's certainly not a prompt to rush into a relationship. This post is more directed to the millions of coupled Canadians who don't share finances.
Sharing finances carries huge financial benefits. In fact, stable marriage is one of the ingredients of millionairism. One of my favorite books on money is The Millionaire Next Door by Stanley & Danko. It's clear from their research the vast majority of millionaires are frugal people in long-term relationships.
Last year I read a report from BMO which found only 1 out of every 3 couples completely share their finances. A further one-third of couples have almost purely separate finances and the remaining third share some finances.
Perhaps the most shocking parts of the report were almost missed at first glance: 69% of couples who don't share their finances would start sharing finances if it meant they would save more than $15 a month doing so. Also, 20% of couples admit to fighting about money at least once a week.
The main reasons for not sharing finances identified by the report are: differing methods of financial decision making, wanting a sense of independence, and fear of a relationship breakdown.
First To The 69%: It Pays
Sharing finances pays because it's easier to plan saving, improve tax efficiency, and control spending when you work together as a couple. Planning saving is the first big step. After doing some retirement math together, you can plan your savings strategy based on both your incomes and spending needs.
Filling both TFSAs is $11,000 per year. Over 35 years of saving and investing in a Growth/Balanced Portfolio, that will grow to $1.4 million in tax-free savings. The 20x Rule says you can pull out $70,000 a year plus inflation for the rest of your lives and achieve a >90% chance of success that you'll never run out of money.
If one person earns substantially more than the other, especially if taxable income is more than $92,000 a year, you can use a combination of personal RRSP and Spousal RRSP accounts to plan future retirement incomes which are more tax-efficient. If, as a couple, you can save $1,000 a month in RRSP accounts (on top of the TFSAs), 35 years down the road your RRSPs will grow to $1.5 million—good for $75,000 a year at the 20x Rule.
We know couples are much better off pulling $30,000 a year from the personal RRSP and $30,000 from the Spousal RRSP than simply drawing $60,000 of income from one RRSP account. Splitting those RRSP withdrawals between a couple can reduce your total tax bill by 20% or more.
Joint Cash/Margin Accounts offer more tax advantages. You can split realized capital gains income and dividend income along the way saving money during your working years. In retirement, you can do the same again saving more money on taxes yet. (I'm going to talk more about these taxable accounts in the future.)
Just the tax advantages from joint savings and investment strategies alone pay more than $15 a month. If you can reduce withdrawals $2,000 a year in retirement by working together on taxation, you have to save $50,000 less than your separate accounts neighbours. That's $35 a month in your pocket over 35 years.
Every dollar of tax expense reduced in retirement is $20 you don't need to save for if you follow the 20x Rule.
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