How to manage income disparity with your life partner

In all likelihood, you and your partner probably don’t earn the same amount of money. This might lead you to consider some decisions about managing expenses not only on a day-to-day basis, but also for the longer term.

Splitting expenses

The first decision would be how to split your shared expenses: rent or mortgage, loans, vehicles, children’s education, groceries, etc. There are three main ways to do this.

• Equal contributions
  With this approach, each spouse takes on half of the total expenses. This has the advantage of simplicity, but “equal” might not be the same as “equitable.” Let’s say, for instance, that one spouse’s income is $80,000, the other brings in $40,000, and the couple’s shared expenses amount to $60,000 a year. If each person contributes 50%, or $30,000, one spouse would still have $50,000 for personal expenses and savings, but the other would only have $10,000. That’s why going 50-50 on expenses is usually only recommended for spouses with similar incomes. 

• Contributions proportional to income
  With this option, both spouses contribute to shared expenses based on their ability to pay. Going back to our example, one spouse would cover 2/3 of the expenses, or $40,000 (since that person’s $80,000 salary equals 2/3 of the couple’s total income of $120,000). The other spouse would pay for 1/3 of the expenses, or $20,000. The higher-earning spouse would still have more money left over ($40,000 versus $20,000), but at least there would be more fairness in their respective contributions. As well, once the basis for calculation has been established, nothing prevents the higher-income spouse from contributing more towards certain expenses, such as family vacations, for example. 

• Contributions proportional to use
  This option might interest couples who make different use of their common property. For instance, if one spouse works from home, the couple might factor this into their calculations. However, compared to the first two approaches, this method may result in more costs that are roughly estimated. 

Important factors to consider

• The joint account
  The simplest way to manage shared expenses would usually be to open a joint account, with both people keeping personal accounts as well. The joint account would be used for shared expenses, and each person would retain control over their own spending through their personal accounts. Then, if one spouse were to buy something for the household using a personal credit card, for example, the money could simply be repaid out of the joint account. 

• The type of expense matters
  Using a joint account can eliminate situations where one spouse takes responsibility for one type of expense (groceries, for example) while the other covers another type (furniture or technology purchases, for example). When one person is buying tangible items but the other isn’t, it could lead to unfairness and conflict if the couple were to separate. 

• Consider the tax implications
  Tax laws usually allow spouses to pool certain deductible expenses (e.g., charitable donations, medical expenses, childcare costs). In some cases, it would be more beneficial to attribute the expense to the spouse with the higher income. In others, to the lower-income spouse. As well, tax credits are generally available for couples. So it’s important to obtain good advice when preparing your tax return.

Children and the long term

The birth of a child can obviously have a major impact on a couple’s finances. It’s not unusual for one spouse to take an extended parental leave, generally involving a drop in income (which the other spouse can make up for by taking on a larger share of the expenses). However, the long-term consequences could be more significant: during the leave, the spouse who is off work may end up reducing – or even completely suspending – contributions to retirement savings. This could have serious consequences for that spouse’s retirement income. A study by UBS estimated that as a result of a lengthy decrease in income and savings, plus missed opportunities for career advancement, a woman, for example, could find herself with 43% less in savings at age 85.

Public pension schemes (Canada Pension Plan, Quebec Pension Plan) are designed so that no one is penalized for these years with lower contributions. However, the same cannot necessarily be said for private plans and registered retirement savings plans (RRSP). The other parent can help alleviate this problem, though, by putting money into a spousal RRSP, which is allowed as long as the contributing spouse has sufficient contribution room. The spouse who makes the contributions will receive the tax deduction, but the other spouse will have the funds to invest. To find out how to set up contributions to a spousal RRSP, talk to your advisor.

Financial security

Finally, it’s important to keep in mind that a couple’s financial health is based on their ability to maintain their income level over time. Should one of them become unable to work due to health reasons, even if it’s the lower-income spouse, it could affect the living standard of both people and their children, if any. It might disrupt their plans for the future, including retirement planning. And of course, if one of them were to pass away, the situation could be even more challenging. That’s why a financial security approach that integrates disability insurance, critical illness insurance and life insurance might be appropriate.

In this area, as in all joint planning of your personal finances, your advisor can give you some invaluable insights. Don’t hesitate to make good use of this resource.