When you choose to spend your life with someone, you are also choosing to merge your finances, including your debt. Many couples are making that choice without all the relevant facts. Manulife, a financial services firm in Canada found that 20% of people in marriages or common-law relationships confessed they are hiding debt from their significant other.
The primary reason people hide their money problems is shame. They are embarrassed that they are not doing as well as they think they should be. This is especially true for men, many of whom are locked into financial gender roles from another century. If you’ve told yourself you are supposed to be the “breadwinner” of the house, it’s difficult and unpleasant to confront the reality that you aren’t.
What to do when you discover your partner is in debt?
When Trish and I decided to buy our first house was when we laid all our financial cards on the table. At this point, we were not married but had been renting an apartment together. We had a general idea of each others’ finances.
- We knew how much the other made
- We knew what retirement and insurance benefits the other had through work
- We knew how the other person generally managed their money and spending habits
- We knew that the only debt either of us had were my student loans
But we had not discussed the exact amount of those student loans. Before we went house hunting, we laid out all our finances and I revealed that I still had $11,000 left on my student loans (down from $50,000) and that I was paying 8% interest on that debt. I was in the process of aggressively paying it down and relative to my income it was easily manageable.
I also knew she had about $25,000 sitting in her checking account and that the optimal use of that money that was earning 0% interest would be to use $11,000 of it to eliminate the debt at 8% interest. However, given my desire to never be a burden on anyone I would never suggest this obvious course of action. I was content to continue paying the loan down myself.
During the process of getting pre-approved for a mortgage, we had to review all our finances with our mortgage agent. She quickly pointed out what I had noticed and suggested that we use some of the cash in Trish’s checking account to pay off my debt as this would maximize our chances of getting approved for the mortgage.
This idea had never occurred to Trish (unlike me, she has better things to do than obsess over money). Given her caring nature she immediately insisted that we use her savings to pay off my student debt. Given my misguided male ego, I resisted the idea even though I knew that it was the optimal use of the money.
After a lengthy discussion, we decided that she would use $10,000 of savings and I would use an extra $1,000 I had saved up to clear the student loan debt, once and for all. We had just signed a 5-year term on our mortgage, so we decided that I would pay her back $10,000 over the five-year mortgage term. $166 per month for five years.
We are four years into that agreement and to be honest our financial position has grown so much stronger, that we both admit it’s almost silly to continue with this because the $166 is not making a material difference in either of our finances (we are fortunate in that regard).
Why it worked for us
It’s critical to understand three things about your significant other’s relationship with money before you consider lending them money:
1. The current state of their finances
2. Their current financial habits, and
3. Their financial goals.
For us, it was a no brainer because apart from the student loan in question, I had no debt. I was and remain a frugal person and always spend much less than what I make and had very detailed financial goals which included paying her this money back.
If your partner is in deep credit card debt, spends more money then they make, fails to pay their bills on time and have no short, medium- or long-term financial goals, you may want to avoid lending them money.
You need to honestly assess the situation and ask yourself if you believe this person can and will pay you back. If the answer is anything but a clear and definitive “yes”, I wouldn’t do it.
If you lend money to someone you love and they fail to pay you back, that is a breeding ground for frustration and resentment. You put yourself at risk for losing both the money and the relationship.
Have you ever lent money to a friend, family member or loved one? How did the situation turn out?
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.