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Friday, May 6, 2016

A Flexible Way to Combine Finances in Marriage

You'll find thousands of articles on the internet about the best way to combine finances when you get married. Do you keep them separate ("mine and theirs")? Do you combine them ("ours")? Something in between?

I got married last year, and we gradually developed a system that works very well for us. Even better, it's a very flexible system that you can adapt to your unique situation. We call it "mad money". Others call it "flex money", "blow money", or "allowance".

How it Works

Our primary family checking account is used to pay for nearly all expenses: house payment, utilities, vacations, food, and so on. Naturally however, there are some expenses where our priorities are different. In your relationship, you might prefer to spend money on videos games, whiskey, and casino trips while your spouse would rather save for her model train hobby and bungee jumping.

Because of this difference, my wife and I each get a monthly allowance of "mad money": This is the money that your spouse is not allowed to get mad at you for spending. I can burn through this money every month, or save it up for a year to blow on a fancy gaming computer.

You might choose to actually set up two bank accounts for this money, and automatically transfer your monthly allowance to them each month. My wife and I just track a "virtual" balance in a spreadsheet, while the money actually all stays in our common checking account. Our Mad Money spreadsheet looks something like this (fake numbers):


Flexibility

Food: Maybe your spouse thinks you eat fast food too much, and you think she drinks too much Starbucks?  Why not just include food in your mad money? Take it out of your normal family budget, and add the appropriate amount to your mad money.

Gifts and Bonuses: Currently, when we receive a bonus at work, or a gift from grandparents, we just throw it into our family funds. But maybe you want to put it (or maybe just part of it?) in your mad money. Go ahead! See the "adjustment" column in the image above? You can split it evenly, or put it all in your mad money if it's your bonus. Just make sure the two of you agree on your approach.

Different Tastes: Need to buy a new couch? You want the $1000 one, and your spouse wants the $500 one? Why not agree to pay for part of the couch with the family budget (say, $750), and charge the rest ($250) to your mad money?

As you can see, the whole concept of "mad money" simply gives you a platform to discuss and agree upon how you deal with your finances. 

Different Incomes: If you get married later in life and and both have well established careers, you might want to keep a lot of your finances independent, and will shift more of your finances towards mad money and away from the family budget. Maybe you even each get a different amount of mad money each month, based on your salary: She sacrificed a lot early in life to go to med school, and now has a bigger income. Maybe she should get $500 a month in mad money, while you only get $300, proportional to your salaries?

If one spouse is a stay at home parent, or you align very closely on entertainment and luxury spending priorities, it might make sense to leave nearly everything in the family budget, and only keep a small mad money account for hobbies and gifts to one another. Feel free to adjust the "slider" as it fits your family!


Perspective

This system work best if you have a family budget in the first place! Write down how much of your money each month goes towards house, utilities, travel, mad money, etc(as you can see, we simply include mad money as a line item in our budget.) How much leftover monthly cashflow do you have to put towards debt, savings, and investments? You may need to adjust the amount of mad money you each are allowed in order to meet your other shared goals for saving.