Perhaps a happy money relationship isn’t about being equal, just equitable!
My wife and I long ago decided to split our expenses 50/50, right down the middle for things like rent, food, electricity, etc.
We maintained our finances separately and any money left over to spend after the 50% split was discretionary.
We both tracked our income, expenses, savings using Quicken, so it was easy to keep track of finances. We both had a knack for saving money, too, so we never had major fights or issues.
After we got married and bought our first home, we decided it was time to rethink how we approached our finances. Keeping our accounts separate and splitting bills down the middle, didn’t really give us a complete, honest picture of our financial life, plus it made it hard to plan for the future and keep track of our progress.
The 50/50 split didn’t make sense anymore, either. Since we both made different amounts of income, our budget (spending or savings) decisions were all skewed. It didn’t make any sense that the person making the least income paid the same percentage in expense, and vise versa.
This forced us to think about a better way to cover expenses and manage our money. Honestly, I can’t even begin to tell you enough how that was the best thing we could have ever done for our personal finances. Here’s how we did it…
Merged Our Finances
We created new accounts. A joint-checking for paying bills, joint-brokerage account for taxable investment, and used a single credit card for expenses with my wife as authorized users (this helps with points). We also merged all of our corresponding retirement and taxable accounts into a single Quicken file to easily track our salary, expenses, investments, and net worth. (Some options for tracking your personal finance)
Even though we use Quicken, we love to use Excel for a bit more flexibility when it comes to planning and trying out what-if scenarios between our income, savings-rate, expenses, and investments. Spreadsheets continue to play a pivotal role in our budgeting process.
Throughout this post I’ll refer to and include snapshots of the spreadsheet we created along with hypothetical examples.
Here’s a snapshot of our spreadsheet pay tracker tab:
No More 50/50 Split
We each have separate checking accounts. Once our paychecks are direct-deposited, we transfer a certain amount of money to our joint-checking account. Our joint-checking account is the only account we use to write checks and pay for bills.
The amount of money we each transferred was based on our overall income contribution. As I mentioned, since our income amounts were different and not the same, we decided that the fairest and most equitable way to split the expenses would be to use a contribution margin.
What is a contribution margin? Well, if you’ve ever taken a managerial cost-accounting business course, one key concept you might remember is contribution margin. It’s a way to do internal business accounting to aide in managerial decisions about a product or service line by determining its ability to cover fixed costs–in a nutshell.
If you’re new to this concept, don’t worry, I’ll save you from the long cost-accounting explanation since it’s not really relevant to get the point across.
I bring it up only because that was my thinking when we decided to use a variation of this concept in our personal finance and budgeting. I’ll share my own explanation below as we go through the process.
We decided that every payday we would each contribute a percentage of our earnings as it relates to our combined total take-home pay. To do that, we have to figure out what we each take home every month and the combined total (hypothetical examples below).
Mr. LifeMoneyFire Take-Home Pay: $1,699.30
Mrs. LifeMoneyFire Take-Home Pay: $1,410.52
Total Combined Take-Home Pay: $3,109.83
Once we have this, we simply divide the individual take-home pay amount by the total combined take-home pay amount to get a percentage.
Mr. LifeMoneyFire: $1,699.30 / $3,109.83 = 0.546 (or 55%)
Mrs. LifeMoneyFire: $1,410.52 / $3,109.83 = 0.453 (or 45%)
By dividing each person’s take-home pay with the total combined take-home pay we get the contribution margin percentage (%).
Contribution Margin (%):
Mr. LifeMoneyFire: 55%
Mrs. LifeMoneyFire: 45%
(should always equal 100%)
In other words, the contribution margin percentage means that Mr. LifeMoneyFire earns 55% of the total combined take-home pay (or net income) and Mrs. LifeMoneyFire earns 45%. By the way, take-home pay (or net income) is pay you get after all taxes, 401k, etc. have been paid.
This is what it looks like in our spreadsheet:
So, instead of using a generic 50/50 split to cover expenses, we now have a more equitable and fair approach–55/45 percentage split.
Expenses x Contribution%
Now that we have each other’s contribution to the overall total household income. Next, we figure out what our total expenses are and then multiply those expenses by each contribution margin (55%, 45%) to get the dollar amount each one has to pay to cover total household expenses.
Here’s a snapshot of our total expenses from our spreadsheet:
As you can see from the example above, our total monthly expenses (House + Monthly + Other) is $2,307.87.
Now multiple $2,307.87 by each person’s contribution margin and you will get the exact amount needed to contribute to total expenses.
Mr. LifeMoneyFire: $2,307.87 x 55% = $1,269.33/month
Mrs. LifeMoneyFire: $2,307.87 x 45% = $1,038.54/month
In this case, we now know Mr LifeMoneyFire pays $1,269.33 every month and the Mrs. pays $1,038.54.
That’s a difference of $214.31 more that Mr LifeMoneyFire will pay ever month.
Do you think this is fair? I suppose fairness depends on how you see things, and which side you’re on. Afterall, this should be seen as a partnership.
To compare, try to apply the 50/50 split to expenses and see the difference.
In the end, you have the same amount of money ($801.96) left over in total, but there are differences in how much each partner will have left over.
If you use the contribution margin to split expenses, the person who makes the most will pay more towards expenses, but they’ll always have more money left over.
Cash Left Over?
As you can see below, when you bring it all together in the spreadsheet, you have a good picture of your net income, total expenses, the amount each person contributes to expenses, and the cash each person has left-over on a monthly and/or bi-weekly basis. If you have…
In the example, at the bottom you can see we would have a total of $801.96 a month left over after paying expenses with a breakdown for each person. Woohoo!
If you find you have a surplus like this, that’s a good thing and you can decide on saving some of it for emergency, paying off high-interest debt, or investing it.
If you find you have a negative number after considering all your expenses, there’s a good chance your in debt–using a credit card or loans to finance your life; if so, you need to cut expenses immediately.
Check out my previous post to help you think through prioritizing and reducing your expenses.
We’ve gone through a bit of info. There’s a whole lot more to consider, but I’ll stop here for now. If you have questions, please ask it in the comments section below.
** Also, if anyone is interested in the excel document to track income, expenses, and contribution margin, let me know and I’ll work on it to make it available on this site.
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