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The Best Way to Split Finances in a Relationship: The Equitable Portioning Method

finance & relationships - the equitable portioning method -- the best way of managing your finances in a relationship

The Inspiration:

The Method:

When you’re splitting/combining finances in a relationship, the most fair method wouldn’t be to decide to live a certain kind of lifestyle and then split the bills 50/50. No, the fairer (and possibly more intelligent) approach would be to first combine incomes equitably and then see what kind of lifestyle you can afford together as a combined unit.

For example, for the couple in the video, because she makes more than him right now, she should pay more. Of course, if he starts making more he’ll have to start paying more. It’s only fair. And the equitable method allows for those changes to be taken into consideration automatically.

Free Calculator

Download the couple’s equitable calculator Excel/PDF file below to help you follow along with the calculations below (or allow the calculator do the work for you). Enter your income & your partner’s incomes to see how much you have to work with each month.

accountingnerd.ca-couples-equitable-calculatorDownload Excel File
accountingnerd.ca-couples-equitable-calculatorDownload PDF Printable

The Calculations:

Determining Each Individual’s Portion of the Pie

She makes 80k, he makes 45k. Combined they make 125k. (80k + 45k = 125k)

To calculate her portion of the pie that she would have to contribute to things: 80k/125k = 64%. She should pay 64% percent of their expenses.

To calculate his portion: 45k/125k = 36%. He would have to pay 36% percent of their expenses.

Meaning if they purchased a $60k car with monthly payments of $1k (for simplicity’s sake), then she would have to pay 64% of that expense or $640 each month and he would have to pay $360 each month.

Vs. 50/50 Split

If they had split it evenly, they would have to each pay $500. Something that would be easier for her to do, but not him at a lower income bracket.

80k/12 months = approx. 6k (again, to keep it simple)

45k/12 months = approx. 4k

500/6000 = 8%

500/4000 = 12%

It would take up only 8% of her monthly income, but would take up 12% of his. Leaving him with less to work with. Hardly fair.

The Complete Method:

Step 1: Extract 20% from Individual Income for Savings/Discretionary Spending or Personal Debt Payments & then Combine Income

Obviously there’s more nuances. I would say they should both FIRST throw 20% of their individual income to their own debts, THEN calculate their combined income. So in this case, for her the 80k less 20% (16k) for debt repayment (or possibly her own individual savings plans to do whatever she likes with them) would leave her with 64k. (We’re going to ignore taxes for now.) Similarly, for him: 45k less 20% (for his own savings/discretionary income) would leave him with 36k to contribute towards their combined income.

Which brings their combined income to 64 + 36 = 100k.

Step 2: Build Budget

Then they build their budget around that amount. So recommended budget for housing is I believe 35%? Since their combined is 100k, they can afford $35k a year for housing, which works out to approximately $2.9k a month. Now when they’re looking for a place to own or rent, they know that they only have $2.9k to work with. If they can scrimp for less, that’d be ideal and they can throw the surplus into a combined savings goal for things like vacations or other major purchases they might want to make together.

And each will continue to contribute based on their portion of the pie. So if their income level changes they’ll recalculate their portions for contributions.

It’s a more fair approach.

How do you and your partner handle your finances? Do you use a different method to combine income & split expenses? Are you able to achieve your financial goals with them? Are there any other methods you know that help?

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The 1st Personal Finance Habit Everyone Should Adopt (+ Free Printable to Help You Establish It)

What is the # one habit of personal finance that you should develop? Tracking your cash flow.

The most important step in managing your finances is actually the basic first step that many fail to do: track their finances without judgement, without repercussions, just simple recording.

But it’s that simple habit of documenting transactions that lead to huge insights, which create the biggest ripples of positive financial changes for you. All you gotta do is take note of your transactions.

If you’re struggling, it’s most likely because of one (or more) of the reasons below:

  1. You’re afraid to see where your money goes. In which case, you’re approaching it with judgement. That’s not necessary and it’s holding you back. Get rid of it. All you need to do is write down your spending.
  2. You’re not sure how to properly record your spending. What should you focus on? Cash flow? Assets & liabilities? Both? Or: what the heck do those words even mean? (Tracking cash flow just means monitoring what comes in and goes out of your accounts. If you have a full system going, then tracking this activity would automatically update your account balances — in which case you’re now monitoring your assets & liabilities. But for now we’re focusing on the first step — tracking cash flow. Which is uber important and lays the groundwork for everything else. The second step will not give you insights that this first step will.)
  3. OR, you’re overcomplicating it and you’ve created a system that has become too unwieldy and cumbersome for you to keep up. You record every detail. You’ve created categories and subcategories. You’ve created a column to describe every item purchased. Gold star, but if it keeps you from actually tracking, then no beuno. Time to scale back.

“If you find yourself not doing it, reduce the amount of time that you’re taking for it.”Ryder Carroll, inventor of the Bullet Journal.

The Only 2 Things You Need to Know/Do to Track Your Finances:

  1. Your process should not take more than 5 minutes to do. Getting it done and out of the way is more important than building elaborate and complicated systems that you give up on after a couple of weeks or days. All you need to do to succeed is to quickly jot down what you spent.
  2. It should just measure cash flow (what’s coming in vs what’s going out). If you’re not tracking your spending regularly, then most likely the most important thing for you at this point in time is to focus on not spending more than you’re earning. Therefore, the only thing you need to track is what’s coming in against what’s going out.

Just tracking your spending can get you ahead. For the next 3 months, try using the free printable below to track your income & expenses on a daily or weekly basis to get an idea of where you are financially. See below for instructions.

Free Printable

Browse Pages:

8.5-x-11-printables-accountingnerd.ca-cash-flow-trackerDownload

Instruction/Description:

  • First page is the example page which illustrates how to fill out the template.
  • Opening balance = the total amount of cash you have across all your working accounts. Don’t look at your savings. Just whatever you have to ‘operate’ daily, usually what’s in your chequing or everyday account.
  • Debt repayment = if you’re not recording your transactions, I’m assuming you might have a good amount of debt that you want to tackle. Whatever you have left over at the end of the month, put towards paying down your debt. (If you have a negative balance, don’t worry, that can be tackled later.)
  • Don’t try to record your savings or your debt. Whatever’s there is there. Right now, we’re just going to focus all our attention on what’s coming in and what’s going out.
  • Record your transactions for at least 60 days with no judgments. Just write it down. If you see things that can be changed easily without much of an impact on you (e.g., subscriptions to services you never use), feel free to cancel them. Otherwise, if you feel an emotional attachment to them, keep them on and just keep tracking.

What’s the one thing that’s keeping you from tracking your finances? Is it because you feel like you have a good handle on things already? Or did you want to but didn’t know where to start? Or were you worried about seeing where your money was going? What would help you to start tracking now? What are some financial goals you’ve set for yourself? Do you think that tracking your finances now could help you achieve your dreams for the future?

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