Many of us get married because we are in love. “Being deeply loved by someone gives you strength, while loving someone deeply gives you courage,” says Lao Tsu. But not all loving relationships lead to marriage.
If you are in a loving relationship and you and your partner are ready to take the next step, here is one more good reason marriage is a much better option than cohabitation: a new study published by the Journal of Financial Planning shows couples who cohabitate have lower net worth and financial asset accumulation than married couples.
Cohabitation, living with someone with whom you are romantically involved outside of marriage, is common for many couples, especially among the millennial generation, who have assumed large college debt. Many couples view cohabitation either as a path that leads to marriage or as an alternative to traditional marriage. Through cohabitation, couples can spend more time with each other, pool financial resources, and test their relationship. If the relationship doesn’t work out, cohabitation can be more easily and cheaply dissolved than marriage.
But because cohabitation can be easily dissolved, the study finds that those who “have cohabited many times may be less interested in long-term planning and more interested in current consumption in the form of non-financial assets such as furniture…and they are less willing to invest in long-term asset accumulation, such as the purchase of a home and saving financial assets for retirement.”
In contrast, married couples are more future-oriented with their financial planning and more willing to invest in long-term asset accumulation. Thus, the study finds that one-time cohabiters had an average $26,927 smaller net worth than married people who never cohabitated. Cohabiters who’d lived with someone two or more times were worth $33,809 less. The study also finds that the number of years of education, income, and parental wealth are positively associated with increase in net wealth and asset accumulation.
The Big Financial Benefits To Marriage
As a matter of fact, marriage is more than just having an additional piece of paper. You can rake in many financial benefits when you marry.
Cheaper Insurance. Both your car insurance and health insurance will be cheaper as a married couple than each person buying insurance individually. That’s because actuarial data has found that the kind of people who marry also take fewer risky actions that demand insurance payouts.
Using car insurance as an example: According to ConsumerReports.org, two 30-somethings who combined their car insurance policies after marriage would save an average of $525 per year on the merged policy. The saving is usually the result of multi-car policies and bundling homeowner insurance with auto insurance. The saving does vary by state and insurer.
Lower Cost of Loans. As a married couple, you will have a higher joint income. If your spouse has a better credit history than you do, the bank will look at your joint application much more favorably than you applying for a loan on your own. With a higher combined income and better credit, you will qualify for a larger-sum loan with better terms and lower borrowing costs.
Financial Security. Two incomes are better than one. Married couples have a higher financial capacity to cover big expenses such as buying a house or raising children, and you will be better prepared to absorb financial shocks in life: debt, health issues, and unemployment. As a single person, you need earned income to contribute to your retirement accounts, such as a Roth IRA. But as married couples, one spouse can contribute to a non-working spouse’s individual retirement account up to maximum limit, which can double the couple’s retirement savings and maximize the tax savings of retirement accounts.
As a married person, you can either claim Social Security under your own earning history or based on your spouse’s earning history. The latter is called spouse benefit, which allows you to receive Social Security payments worth up to 50 percent of your spouse’s entitlement at full retirement age. This is especially beneficial if you don’t work or make much less money than your spouse does.
No one walks into a marriage thinking about divorce. But close to half of marriages end up in divorce, and the rate is even higher for subsequent marriages. When divorce happens, both parties will have some financial protection under divorce law, and it takes a court or a legal agreement to divide the assets of a married couple. There is usually no such legal protection for unmarried couples who just live together.
How Married Couples Can Better Manage Their Finances
Although marriage can bring many financial benefits to couples, money-related disputes are usually one of the top reasons for divorce. It is very important for couples considering marriage to have an honest conversation with each other or a counselor to discuss their individual spending habits and financial goals in life. It helps to write down individual and shared financial goals so you both have a clear visualization and also know what to focus on.
To cover expenses and build wealth, couples have to decide how to manage their finances before they marry. There are usually three ways: separately, jointly, and a combination of both joint and separate accounts.
Some couples choose to have separate accounts. They either split household expenses right down the middle or proportionately according to each party’s income level. The benefit of such an arrangement is each party maintains financial autonomy.
But such arrangements also have many drawbacks. It’s hard to create and stick to a household budget with separate accounts. Sometimes who pays what and whether it’s fair becomes a source of argument. Such arrangements also become less workable when children enter into the picture. In addition, if you are both saving for retirement based on your own incomes, you may not be maximizing your savings or optimizing your investments.
A couple who have only joint accounts will have a much easier time to create and keep track of household budgets and meet their financial goals. They will also have much less chance to argue who pays what. The downside is that your spouse may criticize what you want to spend your money on.
An unofficial poll of the women writers who contribute to the Federalist showed that most of us, including myself, use the hybrid model of jointly managing money while giving individual partners flexibility with personal accounts or spending money. With this model, couples put most of their earnings into joint accounts while each keeps a separate checking account.
This allows the best of both worlds: couples will have a much easier time to stick to a budget and work together to meet their financial obligations and goals. Each party will also have some autonomy and privacy with a certain amount of money. I usually buy presents for my husband from my own account so I can surprise him.
Talk With Each Other Regularly
Once you choose how to manage your money, couples still need to decide if one person should be in charge of all the money management or each party should take responsibility for some. No matter how you decide, it’s important that you and your spouse agree in advance. Also, couples should do a regular household financial review, say every quarter or every six months.
Both parties should clearly understand their combined income, expenses, investment performance, and where they are at in their savings and investment goals. Both should know how many accounts they have, with whom, and usernames and passwords. I worked with several women who relied on their husbands to manage their household finances and didn’t know how many accounts they had or how to access them after their husbands passed away. Since women generally live longer than men, such regular reviews are especially important for women.
Marriage is a wonderful thing for many reasons. The financial benefits discussed here are byproducts of a loving and committed relationship. But if you and your partner are debating between cohabitation versus marriage, now you have one more good reason to choose marriage.