As people have been signing up for The Frugal Couple’s newsletter and becoming more involved in the site, a question has come up frequently and I think it would be good to address it.

The question? What to do when one person brings more debt to the relationship?

Most often, this question comes up during engagement or the first few years of marriage. During these years, the likelihood of both partners working and earning money is high, so this article is going to address the issue with that assumption.

There really are only a couple of options on how to deal with a partner who has more debt than the other: Take the debt on as a couple, or Require the debtor to pay off his/her own debts with “his/her” money.

Taking on the debt as a couple
Hopefully the two of you sat down during your engagement and talked about each others’ financial situation. Assets, debts, income, and expenses should be included in this conversation. You don’t want to get to a situation where you’ve been married for a month or two and when going over your budget one person is surprised to find that the minimum payments on the other partner’s credit cards is $300 each month.

In taking on the debt as a couple, you simply factor in the debt payments as a part of your budget and go on your merry way.

Requiring each partner to be responsible for their debts
Let’s take Tom and Mary. Each of them takes home $2,000 per month after taxes. Their combined expenses are about $3000 per month and they save $400 each month into savings and investment accounts. This leaves about $600 per month for “extra” expenses.

Tom has $10,000 in credit card debt and Mary has $1,500 in credit card debt. The monthly minimum payment for Tom’s cards would be about $200 and Mary’s would be about $30.

In this case, if the $600 per month were split up between the two partners to spend as they liked ($300 to each partner), Tom would end up with $100 per month after paying the minimum payments on his cards and Mary would have $270.

If the two of them said, “This is our debt and we’re going to tackle it together,” The $230 would be added to the couple’s expenses and they would split the remaining $370 (giving them $185 each).

I (Mr. Frugal) feel that when you marry someone, you decide to take on the bad with the good and it’s best to simply attack the debt as a couple. If Tom and Mary were to put a combined total of an extra $50 per month toward their debt, they would save a total of over $1,900 (assuming the credit cards had 15% interest rates and they paid a fixed amount rather than the declining minimum payment) and they would pay off the debt 21 months sooner. (Click here to go to The Frugal Couple’s credit card calculator.)

Take a moment and share with us how you have handled this in the past in the comment section of this article.

Paying off a credit card can seem like a daunting task. I wrote a calculator that will help you figure out how much time it will take to pay off a credit card, both by using a fixed payment or the minimum payment. You can find the calculator here.

Let’s say you have a credit card with a $2500 balance, and let’s assume the minimum payment is 4% of the balance. Let’s also assume the credit card has an interest rate of 12%.

The minimum payment the first month would be $100 and the next month it would be $97.

If you were to pay it off like this with a minimum payment of $10, it would take 8 years and 9 months to pay off the loan and it would cost $789.17 in interest.

If you were to pay $100 each and every month, it would take 2 years and 5 months to pay off the loan and it would cost $390.32 in interest. This is a savings of 6 years and 4 months and $398.85 in interest. And this is not paying anything more than you’re paying this month.

It’s always interesting when clients come to us with the following situation:

They have saved quite a bit in their retirement accounts through work (either their 401k or 403b), but their finances are in slight disarray. Often, they may have an IRA of some sort that had been set up at a brokerage, but the IRA was never fully funded. In addition, they don’t have much saved in their emergency fund and they may have some debt, or worse, late charges on their credit report.

At first I wondered how people are able to save so much in their company retirement plan, yet everything else is all fouled up. The only explanation I can come up with is the power of auto pilot.

The automatic deductions from a paycheck into the retirement plan have been their saving grace.

Now, let’s take a look at how to get everything on auto pilot

Credit Cards

Most banks offer auto pay for their credit cards, but often the only option is to pay the minimum payment. Mrs. Frugal and I pay off our credit cards each month (with the exception of a couple that have very low interest rates). So I use a free email reminder service to tell me when to pay the card. The one I use is called Memo to Me.

After setting up an account, you are able to set up reminder emails on a daily, weekly, every x weeks, monthly, or annually basis. I am reminded on the 22nd of each month to pay off my cards via email.

Saving

Mrs. Frugal and I have set up automatic deposits into our ING Orange Savings account. These, too, can be set up on a specific frequency (weekly, bi-weekly, or monthly).

ING has a nice feature. You are able to set up several accounts under the same login and name them whatever you want. We have several accounts (auto, travel, gifts, emergency fund) that are funded based on our budget. Since auto expenses, gifts (especially around Christmas), and travel expenses are irregular.

In order to set up extra accounts:

1. Log in to your account.
2. Go to “Open an Account” on the left near the top.
3. Choose “Open Now” under “Orange Savings Account” (near the top left of the main part of the page).
4. Select the type of account you want to set up.
5. Give it a nickname (auto, gifts, etc.) and define how you want to fund it (you can select either an external account or another ING account).
6. Agree to the terms and condition and click “Open Account.”

In order to set up automatic deposits:

1. Click “Transfer Money.”
2. Enter the amount you want transferred.
3. Select where the money comes from and into what account you want it deposited.
4. Under “When” select “Automatic Savings Plan.”
5. Then define the frequency and when you want the deposits to start.
6. Click “Transfer” and the deposits will begin on the date you defined.

This needs to be done for each account you want to deposit into.

By paying your credit card bills and saving automatically, you will soon be on your way to having some control in your financial life.

Our debt is all at low interest rates. Our highest debt is carried at 4.9%. We have had to take a serious look at whether the emergency fund in the bank is worth the interest on the debt.

Our savings earn between 4.5 and 4.8 percent, depending on where it is parked. Our weighted-average interest rate is about 4.4%. After taxes, our earnings on savings runs about 3.75% or so.

In other words, to keep $10,000 in the bank and not pay debt off, it costs us about $65 per year in interest.

We have decided to pay our loans back slower than we had originally imagined because I’m thinking of making a move and starting my own company. As such, the money in the bank will be an additional cushion that costs us about 0.65% per year.

UPDATE IN 2009

Wow, things have changed. First, our debt has gone down significantly since writing this. Second, we don’t earn nearly as much on our savings as we did back in the middle of 2007 when this was written.

What hasn’t changed is our cost of the debt. Our (weighted) average of our debt is about 3.5% and we earn about 1.8% on our savings after taxes are taken into account.

What’s this mean? Our cost to carry the same $10,000 in debt we talked about in 2007 would be $170 per year, an increase of 2.6 times! Ouch.

This highlights how the change in interest rates can have an effect on your net income for the year.

Six months ago (almost to the day) Melanie and I walked down the aisle separately and up the aisle together. We thought we had our finances all figured out. Although we had some school and credit card debt, we had a plan to pay it off, as well as the resources to do it (once I landed a job).

Fast forward six months and our debt has been reduced a little, but we feel as though we need to save more and spend less. We both like to think of ourselves as savers with the occasional unplanned purchase. Unfortunately, these unplanned purchases have been more frequent than we would have liked. Some purchases have been necessary (Melanie needed a new car when hers was totaled in an accident), and some haven’t (like an external hard drive I bought to back up our computers). I suppose the hard drive is debatable, but I bought a very nice laptop, but justified it because insurance money had paid for 90% of it.

This week, we decided to cut back our spending. With the help of Trent over at The Simple Dollar, I have used some of his tips and I feel as though we’re on our way.

One of the first things I did was look over our credit card bill to see what subscriptions were being charged monthly that we didn’t need any more. I was able to remove $17 worth of monthly subscriptions with visits to two websites and one phone call. One of the websites even credited back this month’s payment ($7.95).

I think the hardest thing for us will be thinking about every purchase, whether it is fifty dollars or fifty cents.

So here we go, and I hope you enjoy the trip with us.