Money is a cause of contention in many types of relationships. When people share expenses - whether as a couple or merely as roommates - arguments can quickly arise when people don't agree on key financial issues such as meeting expenses and saving money. However, many of these contentious situations can be avoided with proper budgeting and open communication about finances. In this article, we examine some of the difficulties that can be caused by a failure to budget, and provide some budgeting tips for new relationships.
The following four difficulties can result from a failure to budget:
1. Lack of Awareness Financial Changes
Being unaware of outstanding debts and financial obligations can cause an individual to overestimate the amount of disposable income in a household. As a result, a person may purchase items that he or she cannot afford. For instance, one member of a couple may feel it is OK to purchase a big-ticket item with "extra" money in a savings account, or with a performance bonus from his or her employer. However, when two people are sharing expenses, the other person may feel that these funds should be used to offset an increase in the rent/mortgage, insurance costs, and/or general increase in monthly expenses. (To learn more, read Seven Common Financial Mistakes.)
2. Increased Debt
Without a budget to show true disposable income, individuals may be tempted to buy items on credit, and then pay off those debts when salary/income is received, only to realize that what appeared to be disposable funds were actually needed to meet expenses. Similarly, funds that should be earmarked to cover living expenses such as rent and utilities but are spent elsewhere often result in credit cards and other loans being used to pay for living expenses. This can result in an accumulation of debt, and increase the likelihood of a low credit score caused by late/missed payments and/or a poor credit/debt ratio. A low credit score can compound financial problems, making it more difficult for the person to get a consolidation loan, a lease for renting, or to obtain a mortgage, and it also leads to higher interest rates than those available to individuals with good credit scores. (For related reading, see Consumer Credit Report: What's On It.)
3. Lack of Fun Times
Because lack of budgeting may lead to overspending and increased outstanding debts, this can adversely affect a couple's ability to go on vacations and spend quality time with loved ones. For instance, if a couple intends to take a vacation, it may be impossible to do so if there are no financial resources to cover expenses that would be incurred as a result. Furthermore, if a couple's debt burden becomes too large, one or both partners may need to get a second job or work overtime hours to cover everyday expenses and pay off debts, which ultimately leaves the couple with less time to devote to family, friends and each other. (To find out how to budget for fun, check out Top 5 Budgeting Questions Answered.)
Fatigue from working extended hours and stress caused by worrying about financial dilemmas can cause discord in a harmonious relationship. Prolonged tension of this sort can eventually lead to separation or divorce, and can create resentment between people who previously got along well.
Solutions For Couples And Roommates
Financial problems can be avoided or resolved by being open and honest about outstanding debts, income and financial obligations, as well as implementing some simple budgeting techniques. While general budgeting principles can apply to everyone, some are especially important for new relationships. (For background on budgeting, see Six Months To A Better Budget and Get Your Budget In Fighting Shape.)
If you are married, you should consider whether it makes good financial sense to perform a marriage of your finances - if you haven't already done so. As your combined expenses and income change over time, by preparing a budget, you can ensure that your finances are managed properly. The following tips may be helpful during your budgeting process:
- Prepare a balance sheet, showing your savings, assets and outstanding debts.
- Prepare an income and expenditure statement. Include a realistic amount for savings, and treat that amount as a recurring expense. This will make is easier to save, as the amount will not be treated as part of your remaining disposable income.
- While it is important to save as much as you can afford to, be careful not to overdo it. Saving more than you can afford may cause you to use credit cards and other loans to cover your everyday expenses, which would negatively impact your finances and your financial profile. (For more insight, read Are You Saving Too Much?)
- Identify your fixed and variable expenses and make allowances for the changes that may occur in your variable expenses.
- Consider including a personal allowance as part of your budget, so that you have funds to treat yourself without impacting the household finances. This is especially important for new relationships, as you transition from focusing on your individual needs and wants to including your combined needs and wants.
While preparing your budget, be cognizant of your short- and long-term financial goals and objectives and allocate your savings accordingly. Amounts for short-term goals should be maintained in a separate account from amounts earmarked for long-term goals, such as purchasing a home or saving for retirement, as these amounts are usually invested differently in terms of aggressiveness (risk) and liquidity. As you learn more about your expenses and income, it may be necessary to periodically revise your budget. (For more tips for newlyweds, read You Can't Live On Love.)
Roommates will likely go their separate ways when they move on to a different stage in life, such as finishing college or getting married. As such, except for shared expenses, your finances should be maintained separately. Unlike a marriage or unmarried couples living together, roommates that do not intend to share a life beyond being just roommates and friends do not necessarily need to share details about each other's income, assets and debts. Instead, the focus is usually on whether each person can afford to pay his or her portion of shared expenses. The following tips may be helpful:
- Discuss your financial habits with a potential roommate before deciding to room together. This will help you to determine whether you have similar spending habits. Conflicting attitudes about money and meeting financial obligations can create conflict, and leave one person covering the other's expenses. Don't be shy about asking for a references from former roommates and landlords.
- Before deciding to room together, prepare a hypothetical budget to get an idea of what expenses you may need to cover. This will allow you to determine whether each person can afford his or her share of the expenses before actually moving in together. (For more tips, read Are You Ready To Rent?)
- Identify mandatory expenses, such as rent, water and electricity versus optional expenses. This will help you to weed out any expenses that can be eliminated if financial resources are limited.
- If optional expenses will be incurred, such as subscriptions to premium cable channels, determine whether there is a consensus on obtaining such services. If not, an agreement should be made as to who will be responsible for covering these costs.
- Maintain a separate budget that includes your income and personal expenditures. This will help you to determine whether you can afford to include optional features in your shared budget
- Never consider taking on new expenses unless the budget is revised to include such expenses, a determination is made as to whether it is affordable and everyone agrees to the new expenses.
To prevent discord and establish a basis for recourse if individuals are not meeting their financial obligations, a written agreement should be maintained on how the expenses will be shared. In addition, a ledger should be maintained to show when expenses were incurred, when they are paid and who made the payments. The ledger will also help you to determine whether your expenses have changed over time.
Failure to establish a budget can result in an inability to afford basic expenses, increased debt, eviction as a result of unpaid rent/mortgage payments, loss of access to utilities as a result of unpaid bills and deterioration in relationships affected by adverse financial circumstances. On the other hand, the honeymoon phase of new relationships can last if communication is open and honest, and loyalty and dedication extend beyond the personal into the financial aspects of your lives. Establish ground rules for finances and form financial habits during the early stages of a relationship and continue to change and improve these ground rules as you go along.