NEW YORK (MainStreet)—Millennials are once again changing the rules. Forget about living together in a rented apartment. According to the Marriage and Homebuying Study by Coldwell Banker Real Estate, nearly a quarter of Gen Y couples are buying their first homes together before getting married. Talk about unafraid of commitment. It's a reboot of romance, but what issues should 20- and 30-somethings consider before forming a "more perfect" financial union?
The 25% Rule
Nicole Lapin, former CNN and CNBC anchor and current editor in chief of the stylish financial blog Recessionista.com says it's best to choose a home with a mortgage that is payable on one income. "Don't splurge for the big fancy one that requires both of you to be working," Lapin says. "Should something unexpected come up, like an injury, sickness, or having a baby, you want to make sure you can keep making those monthly payments comfortably."
She says to note the use of the word "comfortably," not "getting by."
"It's important that the person you're splitting a mortgage payment with isn't just scraping by but in a good position to make their monthly payments," Lapin says. "This means your housing costs should be no more than 25% of the couple's monthly income -- and the same goes for you! If you're budgeting so closely that, should something come up, you'll be unable to pay your way, you should try for a less expensive place, period. Because guess what: if your significant other is unable to pay their portion, it's you that will pay in the form of late fees, or even eviction."
Three Buckets, Not Two
"For legal protection, I wouldn't recommend fully combining finances until married," said Alan Moore, a fee-only financial planner with offices in Milwaukee and Bozeman, Montana. "If you put money into a joint bank account, your partner can spend every dime of it, and there is no recourse. Of course, your partner would never do that, right? I have seen it happen, and it is a very sad reality. A middle ground option is to open a joint account and deposit enough each month to pay the household and joint bills. Keep savings and the rest of your paycheck separate. Over time, you can choose to further combine finances if it makes sense for you."
Dr. Marty Martin, a psychologist and financial coach in Chicago, agrees. "It is important to be in a relationship, not just emotionally but also financially, particularly for things which both individuals enjoy such as housing, food, and utilities," he says. "It is also important for both to keep a sense of autonomy and independence. The couple should be very deliberate about how they divide up the financial responsibilities recognizing that 50:50 is not always possible or fair."
Sheryl Garrett, the founder of the Garrett Planning network and co-author, with Debra Neiman, of Money Without Matrimony (Kaplan, 2005), says that couples should be honest with each other from the start.
"I know women who won't wake up and let their man see them without touching up their makeup," Garrett says. "Whether it's buying a home, a car or co-signing on a credit card, you're taking on the liabilities of this individual and you don't necessarily know much about them -- or you may think you know a lot about them. But we put our best foot forward when we're dating."
Nicole Lapin says, "It's better to get any uncomfortable or even embarrassing news out on the table before things get serious enough for it to become a deal breaker. This is where you could make known any unusual health conditions, family irregularities, or even past relationships that may come up in the future. And, of course, any pesky credit card debt, student loans, or financial goals that are important to you."
When it's time to have "the talk," how do you bring it up?
"This is a delicate topic for men and women," says Lapin. "So set yourselves up in a mutually comfortable, non-chaotic and un-rushed environment. The important thing to convey and establish here is sincerity. Men: give your girlfriend a realistic idea of your financial status so that it is never assumed you are in a position which you are not. You don't want to start the relationship by setting unreal expectations from her — and hey, if she doesn't love you for you no matter how heavy your wallet is, it may not work out anyway. Women: It is more appropriate for you to reveal your financial status by showing him rather than telling him. This way, you can make your situation obvious without bruising his ego or threatening any dynamic perceptions he might have."
"No one wants to be the couple that fights over money," Moore says. "Each partner should know how much debt the other has and what level of assets and income. A good exercise is to go through your credit reports together, as I have seen one partner become very upset when they realized their future spouse had terrible credit."
"This conversation may begin with talking about what they learned about money growing up, how their parents handled money, their first job and income earning experiences, and their future income earning, saving and investing goals," added Martin.
Plan For the Break-up
You've seen enough episodes of The Bachelor to know that things don't always work out. As easy as it is to start living together, it's that much harder splitting up the financial union.
"Divorce provides a legal mechanism to divide property," Garrett notes. "We don't have that without marriage. Even if you didn't purchase [a house] and are just renting, there is a need for a 'living together agreement.' If you're renting, you probably signed a lease -- you're both on the lease -- and if one partner takes off, the other one is responsible. Unless you go through these details ahead of time, you can really muck things up."
Financial planner Moore prefers an even more formal process.
"If you are choosing to wait to get married, work with an estate attorney to get the proper legal documents in place," Moore says. "Without the protection of marriage, all of your assets with probably be left to you parents or a sibling, leaving nothing for your partner. You will need a will, powers of attorney and to make adjustments to the beneficiary designations on your investment and insurance accounts."
No Shame, No Blame
So let's be optimistic and say things go swimmingly. You've aired out your financial laundry and you're both still talking to each other. Now it's time to look farther down the road. Anna Sergunina is a financial planner headquartered in Maryland. She says that preparing for the future should begin with a quiz.
"I frequently recommend to my younger clients to start thinking about future financial life together before they start living together," Sergunina said. "I find it beneficial to discuss each other's financial track record, preferences and how much involvement each person wants to take in managing finances. I also use Olivia Mellan's money personality quiz. I ask couples to take the test separately and then compare the results. This quiz gets the conversation started about the past experiences and how we were brought up and educated about money. The goal is to understand where we come from and learn how to accept and live with the partner you selected."
Garrett says that another helpful exercise for couples of any age is to separately make a list of the "First 30 Things That You Want to Do, Be, See or Accomplish in Your Lifetime." Once your share and discuss each other's list you may find areas to explore further that will not only impact your finances, but your happiness together, as well.
Garrett admits that deciding to live together before marriage can seem financially attractive. "Two can live more cheaply than two individuals separately," she admits. And the financial union can work "by partnering up, by talking openly, by being honest with each other and practicing 'no shame, no blame.'"
--Written by Hal M. Bundrick for MainStreet