Thoughts on handling money in a relationship

26 Dec 2023 | #money | #japan

One of the common causes of divorce is money problems, so it’s important to be mindful about it. Here are my thoughts on one possible way of doing it.

This post contains discussion of tax, but is not tax advice. Do your own research.

I’m considering 3 distinct phases of the relationship: dating, moving in together, and marriage.

Stage 1: dating

This is the first stage of the relationship, when the couple started dating but they don’t yet live together. Major shared expenses are likely taking trips together and going the restaurants. At this stage, the main goal should be to learn whether the two people are compatible, which includes how they both approach money. So I wouldn’t focus too much on how the couple splits the common expenses, but rather how this makes both of them feel and how they handle when there is a disagreement.

This also goes for how each party spends money on their own. Couples at this point often go shopping together and it’s a great opportunity to learn how the other person spends their money, what their priorities are, how they feel about the purchase later, etc.

Discussion about money at this point might be focused on shared expenses (e.g. what’s the budget for a trip; let me pay for dinner this time; I’m tired, let’s take a taxi, I’ll pay for it), or to learn about the other person’s way of spending (e.g. you asked me about what phone should you get, so what’s your budget and what’s important to you; so you said you need a new winter coat, do you want to go shopping together? Do you have a brand or budget in mind?).

Stage 2: moving in together

If the relationship is going well, the next big step is moving in together. Money becomes more serious now.

Before moving in together, the couple should sit down and discuss their expected shared expenses. This exercise has two steps:

1. What is considered a shared expense
2. How to fund the shared expenses

1. What is considered a shared expense

This will include things like:

• rent (or contribution to the mortgage and/or maintenance if one of them owns a home)
• utilities
• groceries (food, cleaning supplies, toilet paper, etc.)
• fun together (restaurants, trips, etc.)

The line between personal and shared expense will at times be a bit blurry. E.g. hand soap is definitely a shared expense, but how about body soap and shampoo that only one person uses?

It is never going to be perfect split (e.g. if I eat twice as much, should I contribute more?), and I think the goal is again to learn about how the other person treats money and whether the couple is compatible.

With my partner at this point we included a 20% rule into our calculation: if you are shopping for mostly common stuff, it is fine to include things for yourself up to 20% of the overall amount, and still consider it a shared expense. But we never actually calculate this, it’s more like a rule of thumb and in practice we go by feeling (e.g. I don’t think twice about adding a canned coffee for myself when I go shopping and pay for it all from the shared account, but I will split the bill if I buy a nice bottle of wine that I’ll drink with my friends without my partner).

Once you know what you two want to include in the shared expenses, make an estimate for each category and come up with an overall number. You don’t have to get this perfect first, and actually revisiting this estimate every few months is a great way to keep the discussion about money going.

2. How to fund the shared expenses

If the couple makes about the same amount, then splitting half and half is a pretty straightforward solution. If one of them makes significantly more, then I think the more fair split is in proportion to their take-home incomes, e.g. if one makes 4X money and the other makes 6X, then splitting the costs 40-60%, if one makes twice as much, then splitting 33-67% and so on.

Regardless of this split, the shared money should be treated as owned equally (so the person contributing more should not have a bigger say in deciding what to spend it on). Any decision about the spending of this should be made together, and either party should be able to raise concerns and discuss issues. If this leads to issues, I’d highly recommend to resolve those fully before moving to the next stage as income difference will likely only get worse (e.g. if one takes paternity leave after having kids), and it is a common source of marital conflict.

Get a shared account (or something like that)

To facilitate using this shared pile of money, I recommend having a shared bank account or shared balance that both people have a debit card for. In Japan shared accounts are not a thing (not even for married couples), but one can get a pre-paid VISA debit card that’s connected to a shared balance. This specific solution has another benefit: moving money between the shared balance and the personal balance is free and only a few taps in the app, so if a shop doesn’t take credit cards, then one can pay in cash and take the money out of the shared balance. This also works well for splitting expenses (e.g. I can pay for the whole cart with the shared balance, then put back the money for that expensive wine). Also adding the card to PayPay helps with shops that only take that.

Having it in an account has the other benefit that both parties can see where the money is going and it’s easy to look back to past expenses too.

Having the shared balance also helps push the couple to have regular discussions about money. There will be months when the money runs out early, and there will be months when there will be leftover. And there will definitely be exceptions to the “what’s included” that the couple didn’t consider before. This stage of the relationship should still be about learning about each other and setting a healthy foundation for the relationship, so having regular discussions about money will definitely be helpful.

At this stage it’s still “my money” and “your money”, and we just split the shared expenses.

Stage 3: getting married

The next stage of the relationship might be marriage. For some couples, they might decide to continue the system set up in the previous stage, and that’s totally fine, others might open a single shared account and pool all of their money together there. Personally I’m closer to the second option on this.

Pre-nup

Before getting married, I highly recommend couples to sign a pre-nup. For people in Japan, this site has a great template (Internet Archive). The thing that I really like with this specific template is that it lists out most of the default rules and laws about what’s considered marital property and how it would be split in case of a divorce. Most couples getting married don’t look into it, so having it all summarized is a good start for discussion (sort of: this is the default, what do we want to change).

I personally think that the Japanese rules are pretty fair: wealth obtained prior to the marriage and money received (gift, inheritance) is separate property, and only money made during the marriage (salary, bonus) is split half-half during a divorce. Thus the only thing I asked to add was about child custody, as Japan doesn’t have shared custody leading to child abduction cases where one parent can loose all contact to their kids.

Investments during the marriage

A marriage can end in two ways: one (or both) party dying or divorce, and most people aim for the first option (preferably after a long and happy life). In case of divorce, money will be split according to the pre-nup and applicable laws, while in case of death inheritance tax might take effect.

My hot take: investments made during the marriage should be split equally between the couple. (E.g. if the couple wants to invest 200,000 yen in a month, each of them should invest 100,000 yen of it.)

If the marriage ends with someone passing, the inherited amount will be lower leading to a lower inheritance tax (which is progressive), and if the marriage ends with divorce, everyone can just keep their own investments. If you are the higher earner, and worried about doing this and then divorcing, you can also think of this as giving your spouse the money when you still fully love them, rather than being forced to give them money during a divorce.

Moreover this can also help the couple invest more in tax-preferential investment options like NISA and iDeCo/DC (if one spouse wouldn’t be able to max it out on their own).

Be aware of gift tax

This is where Japan doesn’t make life easy, as gift tax is levied on any person who receives more than 1.1 million yen in a calendar year and this applies to gifts between married couples as well. However money given to a family member for daily living expenses (or educational expenses like university tuition) is not considered a gift, which can lead to very similar situations resulting in different tax implications.

For example let’s consider a family with the wife only working part time, making 100,000 yen a month. At the end of the month the couple has 200,000 yen left that they want to invest, 100,000 yen each.

1. Scenario 1: the wife spends her income on herself, the kids, or everyday items. The husband sends her 100,000 yen which then she moves to her investment account and invests. My understanding is that in this case the transfer would count as gift and would incur gift tax liability if it exceeds the yearly tax-free limit.
2. Scenario 2: the wife invest her income entirely. The husband gives her money for daily living expenses including personal purchases. My understanding that this would not be considered a gift, and thus no gift tax would need to be paid.

Summary

Mentally I prefer to consider the finances of the entire family as a single unit: there is money coming in (our salaries) and money going out (shared expenses, personal expenses, investments), e.g.

• One spouse makes X
• Other spouse makes Y
• The shared expenses are S
• Each spouse keeps P for personal expenses (this can be different per spouse, or the same)
• X + Y - S - P*2 gives how much the family saves per months. Divide this by two to get the amount each spouse should invest

How to make this work in Japan

As Japan doesn’t allow shared bank accounts and enforces gift tax between family members, I think the following strategy is the best to implement the above logic:

1. each spouse starts by investing their target amount from their incomes, then
2. each spouse takes out their personal expenses from their income (even if some of this would come from the other spouse, it would be for living expenses and thus likely not incur a gift tax. However using the other spouse’s money for items that have a resale value, e.g. jewelry, might be seen as a gift, so better to use each spouse’s own money.)
3. Pool the rest of the money together to pay for shared expenses (this is a big difference from the living together stage of splitting the shared expenses based on the income ratios)

None of this is not tax advice though, and do your own research before you make any decision.