Question from Globe & Mail young money community member Aaron: Once millennials have moved in together, at what point should we look at joining investments, as well as real estate and retirement planning?
Answer from Natasha Knox, a fee-only certified financial planner and founder of Vancouver-area based Pax Planning: Hi Aaron. This is a timely question, given that the most romantic time of the year is upon us. The best time to start thinking about joint investments and real estate is when you’ve decided that you’re building a future together for the long-term, and you have shared goals.
Once you are committed for the long term, conversations about how you want to merge your finances should absolutely take place. But merging finances isn’t as simple as putting two names on a bank account. It involves thinking strategically about your household financial picture as a single holistic entity and collaborating to make the most of your current and future opportunities to grow your wealth and minimize tax.
I’d recommend you start with an emergency fund, which I like to call a contingency fund, because if the pandemic has made one thing clear, it’s that every household needs one. Open a joint high-interest savings account to build up between three and six months of expenses that either of you can access in the event of an emergency. This would be a great foundation for your financial life together, and it’s something that you can do together even before you’ve worked out the details of your shared vision. Here’s a link where you can check out which institutions are offering good rates.
Registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs) are the savings vehicles that most people use when they start investing. Within these accounts, you can hold a wide variety of investments, such as stocks or bonds. The thing with RRSPs and TFSAs is that they can’t be joint accounts; there can only be one name on the account. That said, these accounts do allow you to name a beneficiary in the event of your death. You should consider naming each other as beneficiaries, in the case of RRSPs, or successor holders, for TFSAs.
If you are planning to buy a home in the next one to three years, and are using your TFSA or RRSP as a savings vehicle, please ensure that the money you’ve earmarked for the home purchase is in high interest savings, or cashable short-term guaranteed investment certificates (GICs), and not in something that has market exposure such a stocks, bonds, mutual funds, or exchange-traded funds.
When it comes to how much to contribute, I see a lot of couples making the same mistakes. For example, they will each contribute an equal yet arbitrary amount to their RRSPs or TFSAs every month. That’s because they are thinking about the household finances in individual silos, and in most cases, that doesn’t work.
Figuring out which one of you should be contributing to an account in any given year, and to what extent, will really depend on your specific person situation. Here are a few things that will help determine which of you should be using a particular account type or combination of accounts in any given year, and how much each of you should be contributing:
- Is there a large age gap between you?
- Do you have a large difference in incomes?
- Does one of you have access to a workplace RRSP or a pension?
- Do either of you hold U.S. dual citizenship?
- How much contribution room does each of you have?
- Do you expect your income to significantly change soon?
There is, of course, no rule that says you have to merge your bank accounts. Many couples keep their individual personal chequing accounts even after they have moved in together, and then also open a joint chequing account for shared expenses, to which they each contribute an agreed amount. This joint account can be a great way of starting down the path of managing your finances together and having shared visibility and awareness of your household financial health.
Merging finances is really about getting on the same financial page. It takes patience, planning, and forethought. You really do have to have a high degree of co-operation, transparency and trust to work jointly to this degree, but the end result is worth it. You could see an improvement of thousands of dollars a year – and a lifetime of financial security.
What could be more romantic than that?
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