Consolidating your expenses has long been a tradition in British culture. It stems back to the days where a father had to barter with other families to trade off his daughter as a bride in place of cattle or arable land. The daughter would then become the property of her new husband. Their finances then become one, “What’s mine is yours.” It was the wife’s duty to raise children; it was unimaginable for them to earn money, so the joining of the household finances had to happen. Of course - in the modern world, things happen a little differently. Women are now in high paying careers all over the world, their wages have almost leveled out , or in some cases surpassed males in the workplace. Couples are on an equal playing field, so why should this age-old tradition of consolidating your finances continue when each person is as able as the other? Here are the 3 main reasons why you should be splitting your finances equally and why doing so should be the go-to de-facto for FIRE pursuers.
1) Encouraging You to Earn More
For every extra £10,000 the £100k earner makes they’ll lose £6,200 to tax. If they’re a ‘percentager’, they’ll also have to pay up an additional £1,200 per year on their mortgage (with the above illustration). That’s £7,400 out of the £10,000 that they’ll lose instantly - this is without even adding all of the other expenses! Almost all of their £10k gain is wiped out, it will also wipe out any motivation they ever had to earn more money. The same thing will happen for the lesser earner. They’ll be demotivated to earn more due to the fact that they’ll also see their expenses increase. “When the efforts and rewards are shared, it becomes apparent that the individual’s own efforts will have a less significant effect upon his eventual reward than if he were acting alone.” “Of course, he expects to get half the value added by the other person, too; but he doesn’t control the other person’s effort. He controls only his own effort. So what he controls will produce only a half reward.”
One of the traits that the FIRE community and myself preach is to always strive to generate side income. To do this you need a hard-working mentality, but you also need to be willing to try lots of new things. Higher-rate tax already puts a dampener on the UK hustlers spirit, you don’t want to make it worse by using a percentage based expense system.
2) Fighting Lifestyle Inflation
For everyone that’s thinking “But I don’t want to spend more than my partner.” Or “I earn more so I should pay for more.” You don’t have to do that; listen up! I earn three times what my partner earns in a year. We split everything equally and if she needs money, I’ll give her an interest-free loan - just like she’d do for me. We’ve been together for 7 years, own a home and we’re getting married next year (Yippee!!) - We’ll carry on splitting our expenses this way once we’re married. BUT!… I don’t plan on retiring without her. If I hit my FI number before her, I plan on continuing to invest until we both have enough to retire, I’ll also be filling her ISA when mine is full. As soon as we have children or get married our pots will be seen as one legally anyway. Most importantly; I don’t spend more than her - we spend equal amounts (we’re a team!) Splitting your expenses equally allows you to instantly beat lifestyle inflation. If we split them in a percentage based fashion, I would instantly be spending much more, and Mrs SavingNinja would have a lot more cash in her pocket. We’d need to battle lifestyle inflation just like all of the other high earners. Instead, I invest all of the difference (and then some) and we spend equal amounts, if we can’t afford something, we don’t buy it! I’m not going to go off and buy fancy clothes and a nice car and leave her behind, we’re in this together! But, by splitting our expenses equally; we’re on a much better path to FI.
3) Keeping Things Simple
Like FIREvLondon talked about in this excellent blog post; Complexity Costs . Keeping life simple is one of the greatest hacks to happiness and wealth presevation, and its much easier to split everything equally than to mess around figuring out percentages based off earnings.
Of course, all of these points are subjective to how you live your life. It’s easy for us as we live on less than minimum wage , so we can split our expenses equally and not miss the extra thats going into Vanguard. It may be a bit trickier if you need to increase your household expenses due to children or other unforeseen costs, and the lesser earner may be unable to earn more (although I believe anyone can earn the salary of a CEO ). But, I think for the majority of people, they’re doing themselves a disservice by splitting their expenses in a percentage based manner. Do you think you could lower your expenses enough to be on an even playing ground at 50/50? If so, try it out; just for a couple of months. Expense equally and save the difference - You’ll be surprised by how much your savings rate goes up.
- Do you split or intend to split your expenses equally?
- Do you think it’s unfair if the higher earner doesn’t pay more towards rent/mortgage costs?