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| The Basics | Protect your finances when you move in together
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Bank accounts, financial plans and credit cards are not foremost on your lovesick mind when you decide to live together. Who knew? Here's how to keep passionate cohabitation from turning into a financial heartbreak.
By MP Dunleavey
The most colossal mistake I ever made was deciding to live with a guy I'd been dating and moving across the country to do it.
Sometimes when I remember the catastrophic price I paid -- both emotionally and financially -- I want to tear out my fingernails. Or put my head through a wall. Either of which would cause less pain and cost far less in damage than what I actually went through.
The beauty of hindsight (this was several years ago) is that now I know exactly what I did wrong. Like many people, I underestimated the cost of living together. You could argue that what I'm describing is the cost of breaking up, but I'd disagree. The fundamental problem was that I failed to see living together as the investment it is, an investment of one's most precious resources: one's time, self and sanity, not to mention one's finances, property and other assets.
I think there are misconceptions about living together. There's the clich about two people living as cheaply as one. And that if your emotions are on the line, your finances are safe. But when the guy you've moved across the country for dumps you -- right after you've relinquished your apartment back home -- you quickly realize it's all connected.
Your investment is worth protecting
There's a reason why I'm preoccupied with this topic now. I'm about to move in with my current boyfriend. We're also engaged, which I'd like to believe offers me some protection, but, in fact, it doesn't. The fact that he's a great guy offers me some protection, but let's focus on the legalities. (Sorry, honey.)
The No. 1 hazard of living together is that it offers almost none of the financial or legal protection that marriage does. "If you're unmarried, the law (governing that status) follows contract law, rather than family or marital law," says Frederick Hertz, a lawyer in Oakland, Calif., who specializes in the formation and dissolution of non-marital relationships and is the co-author of "Living Together: A Guide for Unmarried Couples."
Many of the legal advances in the field of nonmarital relations were in large part pushed along by the needs of gay couples, who often don't have the option of marriage yet still need protection. But most couples, when they decide to live together, don't think they need a contract (either oral or written). Moving in together is often seen as a prelude to marriage, so treating it as a legal step on its own seems a) unromantic and b) unnecessary.
Yet cohabiting couples will often embark on all kinds of financial entwinements -- joint bank accounts, joint credit cards, joint purchases of big-ticket items like sofas, stereos, cars, houses and Hawaiian vacations -- without batting an eye.
So, as unromantic as it sounds, most experts on the unmarried state advise those of us contemplating it to make some kind of contract, even an informal cohabitation agreement, that will protect each person's assets and document key expectations. "It's really just a recitation of everything you agree to before you move in," says Wynne Whitman, a tax attorney in Morristown, N.J., and the co-author of a new book, "Shacking Up: The Smart Girl's Guide to Living In Sin Without Getting Burned."
For those of you who smugly think this advice is for other people -- after all YOUR relationship is protected under the Divine Perfection Act of 1985 -- let me tell you something. One, I've lived with three different partners and had to pack up my dishes more times than I ever dreamed; ergo, you never know. According to Dorian Solot, co-author of another new book on this subject, "Unmarried to Each Other: The Essential Guide to Living Together" and the founder of the Alternatives to Marriage Project (see link at left), there are about 5.9 million couples cohabitating. "After five years, on average, 55% have married, 35% have broken up, and 10% are still living together," she says.
An ounce of prevention . . .
I dislike the word contract -- I'm not a free agent about to sign with the Yankees -- so let's go with agreement. The advantage of setting up an agreement with your partner, in writing is significant. (Fact is, only a few states will honor an oral contract, and they can be difficult to prove in the event of a split.)
1) Asset protection
"The first question you need to answer is what's mine, what's yours and what's ours," says Hertz.
This is important in the event that you decide to share or buy a car or other titled property. One person's name may be on the title, but if both people are sharing the expense of it, that needs to be in writing.
For items that aren't titled but may have considerable value (either monetary or sentimental), it's a good idea to specify that X is yours and Y is theirs. This is particularly important if one partner gets a gift. Is that money or property or swank new stereo one partner's property, or does it belong to the two of you? Sort it out.
2) Debt protection
One or both of you may arrive under the same roof dragging some debt behind you. Or you may acquire debt during the course of living together. In either case, says Hertz, decide who is liable. He describes one couple who decided to pay back one partner's student loan with a home equity loan. Now both women are liable for the debt, even though only one of them went to graduate school.
"For convenience sake, or for a lower interest rate, the name on the debt is not always in synch with who incurred the debt," says Hertz.
This may be especially true if the couple decides to get a joint credit card -- something experts say you should avoid until you're protected by marriage, or by years of long-standing trust.
3) Earnings protection
Most couples have to face an unequal salary situation. Under marital law, those earnings are considered joint, but unmarried couples need to set up their own arrangements. "You have to figure out which expenses will be shared, which won't be, and if you're going to split expenses 50-50 or figure out a ratio based on your incomes," says Solot.
It might seem fair that the person who earns more should pay more, proportionally, of the household expenses. But not all couples see it that way, and it's a vital point to hash out between the two of you.
One thing to beware of: Hertz says that in his experience, when a couple starts out with an income gap, it tends to get wider over time. "If one party is richer, you tend to live at a higher level -- and the poorer one will save less money," he says.
One way to avoid that: Share most expenses, but establish a standard of living the poorer partner is comfortable with.
Hertz says otherwise couples run the risk of facing a "mommy track" phenomenon -- whether or not they have a child -- where the higher earning partner tends to set the lifestyle and dictate certain choices like where to live (in the event of a job transfer). "Then guess what happens? The lesser earning one has a series of bad jobs, no promotions. . . . You come back 10 years later and the income differential is worse."
4) Setting expectations
Finally, the main reason to hash out some kind of agreement is that if nothing else, it will force you and your partner to have the kinds of tough conversations you need to have anyway -- about priorities, goals and expectations (never mind who cleans the bathroom).
Both Wynne and Solot say that a typically overlooked expectation has to do with the relationship itself. "I certainly have heard many stories about couples who assumed they were in agreement about getting married -- and were heartbroken to find out two years later that there were seriously different expectations in that regard," says Solot.
That's another mistake I'm realizing I made when I've lived with people in the past. Although it's common to look at the living together phase as a test drive where you figure out whether or not you can get along on all the basic issues of committed life (like who cooks, who shops, who picks up his damn socks off the floor -- and what IS it about guys and socks anyway?), it's really a chance to make sure you're on the same page for the long haul financially. Can you or should you commit to someone -- with or without nuptials -- whose ideas about retirement or paying for a child's education are radically different from your own?
Better to ask now than pay heavily for your ignorance later.
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