The Planner's Perspective: Friends With Benefits
By Paul Morrone CFP®, CPA/PFS, MSA
Millennials have created an entirely new set of social norms that break the mold forged by their parents and grandparents. For generations, there was a predetermined order as to how some of life’s biggest events were handled. You graduated school (high school or college), started your career, got married, bought a home, and then had children. This universally accepted path was upended as younger individuals became saddled with mountains of student debt, pursued independence and have delayed getting married nearly 10 years later than previous generations. The result is the cohabitation of friends or significant others that are not legally married, some with no intention of ever being married. From a financial planning perspective, this poses its own set of challenges which can create chaos in the event something takes a wrong turn.
While renting an apartment with a friend may be a relatively low-risk approach to cutting costs, a roommate is a relationship like any other. And as with any relationship (romantic or not), money is one of the main reasons that things can sour very quickly. Personality and cleanliness habits aside, fiscal compatibility can be the catalyst to ruin even the strongest of friendships. To prevent this from happening, its best to put all the cards on the table before the lease is signed. Outline items that are deemed to be ‘shared costs’ (utilities, rent, etc.) and who will be responsible for paying the bills each month (is one roommate not credit qualified to enter into a lease or have the utilities in their name?). Are these common expenses to be shared equally, or should one individual shoulder a higher burden because they have a nicer bedroom? Does someone have a pet that is going to incur additional costs or liability? Do you each purchase your own food or is it a shared cost? Creating transparency as to what each party is responsible for each month may help avoid the he-said she-said arguments in the future. In any case, we recommend that both roommates carry their own renter’s insurance to protect against fire, theft or other loss.
Things become more increasingly more complex when there is a romantic relationship developing. This often leads to the commingling of finances prior to marriage that may include joint bank accounts, lease obligations or even real estate purchases between two people who are unmarried. Full disclosure is necessary to maintain trust in the relationship as any deviation from the agreed upon procedures can cause an irreparable rift. Without knowing the full extent of your partner’s financial picture, you may not know their credit worthiness, indebtedness or fiscal habits. Have you thought about your personal liability exposure if your partner defaults on a payment or files bankruptcy and you have funds/assets owned jointly? If you have joint credit accounts, is the primary borrower aware that they are legally responsible for the debts of both borrowers even if they did not personally incur the charges? Tensions can also run high if one individual uses joint funds to cover a personal debt (credit card, spending money, etc.), even if they say it is just a temporary ‘loan’ and will pay it back shortly.
As relationships develop further, it is not uncommon to see one individual ‘help’ another financially. This may be done in an informal manner such as one person covering the other’s share of rent or utilities on an ad-hoc basis. Other, more complicated, situations may arise if one individual in a relationship helps to pay down or eliminate debt on behalf of the other, including credit card debt, student loan debt, etc. Without some previously agreed upon terms, there may be a material disconnect between what one party believes is reality as opposed to the other. Do those payments made constitute a loan or a gift? Is the gift conditional upon marriage? What happens if the couple breaks up, is there a written agreement that states one party should pay the other back (with interest)?
Taking a black-and-white approach to finances may seem aggressive or antagonistic and give the impression that you don’t trust your significant other, however, it’s to the benefit of all parties involved to have all the cards on the table. With expectations established at the forefront of the relationship, it sets a precedent and reduces the chance of unwanted surprises. There is a reason that most divorces occur because of financial issues, and in this era of two-income households it is even more important to remain open with your partner regarding personal financial matters.