Why Splitting Bills Based on Income Is Best
Determining how to split shared expenses in a relationship is an important, joint conversation that you shouldn’t gloss over.
It’s easy to just go with a 50/50 split or the grab-bag method where you each pay specific things hoping that it ends up being fair. Unfortunately, it rarely ends up that way.
So, if you’re living together with your girlfriend, boyfriend, husband, or wife, you need to do a little math to come to the fairest solution.
Splitting Bills Proportionally, Based on Income
The Best Way To Share Expenses
If you’re living together with your significant other, you need to split your joint bills and expenses proportionally, based on income to ensure financial fairness. To understand why let’s look at an example.
Let’s say that Person A and Person B are in a romantic relationship and are living together. After reviewing all of the joint bills and joint expenses, they determine that they total $2,000 per month. We’ll go over what bills and expenses to include in a later section.
To determine who pays what toward that $2,000 per month, we need to review each person’s gross (pre-tax) income and do a small calculation.
Let’s say Person A makes $40,000 per year as a school teacher and Person B makes $60,000 per year as a school principal. Their total annual combined income is $100,000 ($40,000 + $60,000).
Starting with Person A, we can calculate what their share of the joint expenses will be. Of the $100,000 of total household income, Person A makes $40,000 or 40% of the combined amount. So in this example, Person A would contribute 40% toward the $2,000 in joint bills. That comes out to $800 per month ($2,000 x 0.4).
For Person B, we simply take the 40% that Person A is contributing and subtract that from 100%. Therefore, Person B would contribute 60% or $1,200 toward the monthly joint bills and expenses.
You can easily see in this example that it wouldn’t be fair to split all of the joint bills and expenses 50/50. Person B in this example would have a disproportionate amount of their income remaining to spend on other things.
If you’re not comfortable making these calculations, be sure to read about my custom spreadsheet.
Divide Based on Gross Income, Not Net Income
So, why should you use gross income and not net income? It’s simple; you can’t manipulate gross income. Since net income is what hits your bank account after taxes and other deductions, it’s easy to make your net income look “worse” than it actually is.
Using the example above, let’s say that we’re now going to use net income instead of gross income. Person A in that example makes less and they’ll likely have a smaller amount available for personal things like retirement contributions at work. Let’s say they can only afford to contribute 5%. After payroll tax deductions and the 5% retirement plan contribution, let’s say that Person A’s net income is $28,000 per year.
Person B makes $60,000 per year and will likely have more financial flexibility. Therefore, let’s say that they can make a 15% contribution to their retirement plan. After payroll tax deductions and the 15% retirement plan contribution, let’s say that Person B’s net income is $36,000.
If we do the same calculation using the net income as we did with the gross income, we’ll find out Person A will be paying about 44% of the joint bills (about $880) and Person B will be paying the remaining 56% (about $1,120).
Now you may be thinking that it’s not that big of a difference, but you have to remember that Person B also contributed 200% MORE to their retirement account. So, they’re not only paying less toward the joint bills, but they’re also saving much more toward retirement than Person A. That puts them at a significant financial advantage.
Use gross income to ensure fairness.
“Non-Monetary Household Compensation”
When we talk about gross income, it’s also important to talk about the possibility of “non-monetary household compensation” within a household.
In this conversation, you can define this as specific work you or your significant other may do at home that should be considered “income” for this calculation.
Continuing with our example, let’s say that Person A does the majority of the household chores. They cook 80% of the meals, they do the weekly laundry, and they deep clean the house every other week. Person B still does chores around the joint home, but not to the extent of Person A.
If your household circumstances are similar to that example, you need to sit down together and decide how those non-monetary items will be used in your calculation.
To get dollar amounts, you could find out how much it would cost to have a third party complete those same tasks. For example, if it would cost $200 to have a cleaning service come to your house twice per month, you could consider deducting $200 from Person A’s monthly contribution toward the joint bills.
Looking at these types of non-monetary items can lead to some pretty heated conversations. So tread lightly, but consider talking about them.
Expenses To Include In The Calculation
So, what expenses should you be including in this calculation?
Joint bills are going to include any recurring bills that you both receive some benefit from. These could be related to a joint home, joint services/subscriptions, etc.
Here’s a non-exhaustive list of the possible bills you’ll see in this category:
- Renters/Homeowners insurance
- Utilities (e.g. electricity, water, mobile phone, etc.)
- Subscriptions (e.g. Netflix, local newspaper, etc.)
- Joint debt (e.g. furniture loan, etc.)
- Childcare for a child you had together
As stated earlier, you only want to include bills that you both benefit from. So if your mobile phone bills are separate, you’ll pay for those separately with your own individual funds. But if you combine your phone plans to save money, you would then include it on the joint bills list.
Joint Bills That Only One Person Can Pay
Occasionally, you’ll run into some bills that can only be paid by one individual. In other words, you’re unable to pay for the bill/expense out of a joint checking account.
These bills/expenses are usually items that are paid through someone’s payroll. For example, if you’re married and your spouse is on your health insurance plan, you’ll pay the premium out of your payroll. You don’t typically pay for that out of your checking account. So technically, your spouse should be reimbursing you for the coverage they’re receiving.
So, if you’re paying for joint health insurance, dental insurance, vision insurance, or any other things that only one of you can pay for but the second individual benefits from, you need to make an adjustment.
If that’s you, I highly recommend you check out my calculator for splitting bills below. It automatically takes that into account when calculating how to share expenses. It essentially has the individual that’s paying for that particular joint expense contribute less to the checking account for joint bills.
Your joint expenses are going to be the discretionary expenses that you both benefit from.
Here’s a non-exhaustive list of the possible expenses you’ll see in this category:
- Home repairs (e.g. paint, plumbing repairs, etc.)
- Dining out
- Pet expenses related to a pet you jointly agreed on
- Expenses related to a child you had together (e.g. clothing, diapers, school supplies, etc.)
For some of the categories listed, you may need to calculate two separate amounts. One related to joint expenses and one related to individual expenses.
For example, let’s say a couple spends $100 per month on joint entertainment expenses (e.g. movies, bowling, etc.) and Person A in that relationship spends $100 separately on their own monthly entertainment expenses (e.g. video games, out with friends, etc.). If Person A’s joint contribution percentage is 40%, they’ll contribute $40 to the joint entertainment category and then budget a separate $100 for their individual entertainment.
It’s important to distinctly separate the funds so they’re easier to track if spending gets out of control.
For married individuals, be sure to read up on potential issues with income taxes further down the page.
“They Eat/Drink More Than Me!”
When reviewing these joint discretionary expenses, you also want to evaluate the individual categories as it’s possible that one person could spend significantly more than the other person.
For example, food may not be consumed in a proportional manner. Person A may be “eating” 60% of the grocery budget due to a food allergy or something similar. Therefore, you may need to take that into consideration when calculating your split expenses.
In the end, it’s possible that this issue combined with the non-monetary household compensation issue previously stated equal each other out.
Joint Savings Goals
In a long-term relationship, it’s extremely likely that you’ll want to spend money on larger, less frequent expenses like joint vacations, joint gifts, joint home projects, etc.
Therefore, it’s important to discuss these expenses, come up with a goal amount and target date, and then add this monthly savings goal to your calculation.
If we continue with the example from above, if you jointly agree that you want to spend $2,400 on a vacation this year, Person A would contribute 40% of the total amount or $960. Broken down monthly, Person A would contribute $80 per month. Person B would contribute the remaining amount which would be $120 per month.
If you want to save that money separately from the joint checking account, you could open up a joint savings account.
Variable Income = Variable Calculation
If one person (or both) has a variable income, you’re going to need to do this calculation frequently.
First, you’ll want to do a baseline calculation. This is where you put in the “worst-case scenario” gross income for the individual(s). So if Person A has a base salary of $30,000 per year, but could make up to an extra $70,000 per year in commissions, start with the $30,000 to ensure that you at least cover the monthly joint expenses. Person B may need to contribute a much larger portion toward the joint bills to start.
Then, at the end of the month, go back and look at the actual, total income received and recalculate the percentage. From that, you can then find out what Person A needs to reimburse to Person B, who footed a larger percentage of the bills that month.
Once you get accustomed to this idea, it would be wise to strive to have money saved up to pay all of the bills a month in advance. So you effectively are paying this month’s bills with last month’s income, which is already known. That will be extremely helpful when someone has a variable income.
One Happy Person, One Not So Happy Person
If you’re just moving in with your significant other and this is your first conversation about splitting expenses, you don’t have to worry about this too much. Yes, one person is going to likely contribute less than the other person, but as you’ve become aware, splitting bills and joint expenses proportionally is the best way to go. It ensures that you’re each left with a proportionate amount of money for individual expenses.
However, if you’ve been splitting bills for several years and never did it based on income, this conversation on how to share expenses may be more difficult.
Over the last several years, I’ve received quite a few comments and emails from this article. Most of them were from individuals that had a significantly smaller income than their partner and were still splitting bills 50/50. They had significantly less leftover at the end of the month vs. their partner.
If that’s you, be aware that you’re likely going to hit some pushback when you bring up the possibility of sharing expenses based on income. Once you and your partner go through the calculation, your partner is going to discover that they’re going to be contributing more. Sometimes, much more. They’ve had it really good over the last several years and have likely grown accustomed to the extra money.
Share Expenses? Get a Joint Checking Account
If you’re in a committed, long-term relationship and living with that person, I recommend getting a joint checking account to pay for these joint bills and expenses.
Figure out what each person needs to contribute to the account on a monthly basis and deposit the money in there from each paycheck you receive.
To help share in the financial responsibilities, you can have each person pay specific bills and expenses from the joint account. This will ensure that you’re both paying attention to the joint finances.
Calculator For Splitting Bills Proportionally
To make everything MUCH easier, I’ve created a spreadsheet to help you determine what each individual should contribute to the joint checking account based on their gross income.
This calculator is especially going to be helpful if you have some of those joint expenses that can only be paid by one individual (health insurance, dental insurance, etc.). Watch the instructional video below to see that particular feature in action.
If you want to ensure that each of you is paying your fair share, this custom spreadsheet will help you accomplish that.
To get instant access to this spreadsheet, click on “Learn More” below and become a member at The Self-Starter level or higher. You’ll get access to the splitting bills calculator, plus several others that I know you’ll find helpful.
Sharing Expenses Based On Relationship
How you share expenses and the types of expenses you share can vary greatly depending on the relationship. Let’s go over a few types of relationships for some clarity.
Splitting Bills With Your Husband or Wife
As we’ve discussed up to this point, I highly recommend you split bills and expenses based on income. Are there other ways to share expenses when you’re married? Sure. But using a different method is just going to lead to issues. One person will eventually determine that they’ve been getting the short end of the stick and there’s going to be some confrontation about it. Is that what you want?
Get a Joint Bank Account
If you don’t already have a joint checking account, get one. This is where you’re going to deposit the funds needed to pay your joint monthly bills and joint expenses, plus save for some of your longer-term goals.
Having this joint account will allow you both to see what bills have been paid and how much you have jointly saved for your goals.
Go All The Way
I’ve seen too many situations where separate finances lead to a lack of retirement funding, lack of funding for major home repairs, etc. Sure, you cover the joint bills and expenses, but when you’re not jointly discussing your finances, other things get avoided. So if at all possible, I highly recommend you go all the way and combine almost all of your finances.
This may be difficult to accomplish at first, especially if you’ve had separate finances for several years. But if you can open up the lines of communication and get on the same page financially, you should be able to plan accordingly so that some of the issues you faced in the past that led to separate finances (e.g. debt, spending problems, etc.) don’t return.
Having joint finances does NOT mean a lack of individual freedom either. You can still have separate accounts for certain expenses, but they would be limited. You could each have separate budgeted amounts for clothing, hobbies, and fun money. Those budgeted funds could be deposited into your individual account so you can keep track of them better and without judgment. It’s as simple as that.
What I hope is that by combining your finances, you’ll actually sit down and discuss the things that need to be accomplished financially. You’ll set financial goals, create a realistic budget, eliminate your debt, and start planning for retirement.
Keeping things separate will just keep pushing those discussions into the future. By the time you get to them, it may be too late.
Be Careful With Income Taxes
If you do keep your finances separate, but file your taxes jointly (which makes sense in most cases), you need to make sure you evaluate your projected tax liability as well.
How much tax to withhold from your paycheck can be difficult to calculate. If one person in the relationship over withholds by a large amount (i.e. too much is taken out of their paycheck), but the second person under withholds, you may still break even jointly (i.e. not owe anything) and it feels like nothing is wrong. However, the first person in that example just got gypped. They overcontributed to the joint tax liability to make up for their spouse, and likely didn’t even know about it.
To determine what your joint tax liability is likely going to be, check out the IRS’s tax withholding estimator. You can enter in your joint projected income and deductions to see what each of you should be having withheld from your paycheck. If the estimator is confusing, reach out to your tax professional for help.
Splitting Bills With Your Boyfriend or Girlfriend
If you’ve just moved in with your significant other or you’ve been living with them for some time, splitting bills based on income is still your best option if you’re looking for fairness.
The only difference between this group and the married group would be the type of expenses you decide to include in your calculation and the tax issue (as in it’s not an issue since you’re not married).
I would still have a joint checking account for joint bills and expenses. This will allow you to dip your toes into the idea of joint finances and the possibility of marriage in the future.
Stop At The Joint Checking
When it comes to other things financial, I would proceed with caution. I do not recommend taking on joint debt with a significant other if you’re not married. There are too many issues that can come from it.
So, no joint mortgage, car loan, or credit card at this point. Wait until you’re married or at least engaged before you consider taking on that responsibility.
Now that you’re seeing things on a level playing field, start working on other financial conversations as well. Start taking care of your money, so it can take care of you later.
Now get out there and take care of your money, so it can take care of you later.
Your financial coach,