Prenups and Our Family's Financial Arrangement
Getting married is a big deal, for a variety of reasons. Today, we’ll talk about money. The majority of couples don’t do anything special regarding their finances, and their legal standing in case of divorce is the default 50/50 split (that’s the situation in Israel and many other countries.) The thing is, divorce is unfortunately quite prevalent and any divorce mechanism provides its own incentives on your financial decisions throughout your marriage. That’s why many couples choose to sign a prenuptial agreement. But you can come up with a bunch of different principles for your prenup. That all depends on what incentives you want for yourself and your significant other.
My wife and I have been happily married 1 since 2013. In this post I’ll try to cover our own financial agreement and how we came about to implement it. This is how we handle money as a couple and a family. We’ll start with some general principles, but feel free to jump ahead into the details of our personal arrangement.
Now, a prenup is a legal document and I am definitely not a lawyer. This post aims to provide a framework for agreeing on the principles behind a prenup. It’s more of an engineer’s exploration of the different financial incentives involved in marriage and how we, specifically, overcame them. If you break up over this, remember that you took relationship advice from an engineer, so you only have yourself to blame.
And lastly, even if you don’t intend on signing a legal document, agreeing on a financial arrangement with your significant other is always a good idea. It’s perfectly reasonable to adopt some of the ideas put here without an official prenup.
Before you go and decide on the details on any financial plan, you have to talk and agree on a set of principles to guide the mechanism. And there are a bunch of different options you can go for.
The default “50/50 split on divorce” mechanism is based on something like the following set of principles:
- Money is not the only thing of value you can bring to a relationship.
- It’s impossible to quantify how much value each person generated.
- In the absence of knowledge, a 50/50 split is the most fair.
For example, imagine a high-earning CEO who has to work 24/7 and provides for her family while the husband is a stay-at-home dad, taking care of the children, house chores, event planning, etc. While the CEO makes all the money, she couldn’t have spent as much time in the office advancing her career if she had to do half of all the chores. Both spouses work “for the family”, even if the stay-at-home dad’s contributions are less measurable. This makes the 50/50 split fair.
If we forgo the 50/50 split and split the monetary possession based on monetary value generation (i.e., in case of divorce, each person gets the relative amount of money they put in), it’s clear that the stay-at-home dad is getting a raw deal - you’re essentially saying that anything other than money has no value. In fact, you’re incentivizing each partner to focus on their career rather than doing what’s right for the family. If you decide on splitting based on income, you can imagine the husband objecting to becoming a stay-at-home dad and insisting on getting a job and hiring a full-time nanny instead, just to prepare for a possibility of divorce.
So 50/50 can work, but that depends on your specific financial situation and starting points.
Let’s consider a few edge-case scenarios for your financial starting point.
This scenario involves one partner being the only breadwinner (imagine, for example, a small business owner who has to work late hours to keep the business going to provide for their family) while the other partner either works fewer hours or is a stay-at-home parent: taking care of the children, house chores, day-to-day activities and other household responsibilities. We’ll call it “The Breadwinner”.
The Gold Digger
This scenario involves one person entering the relationship with big sums of money, while the other person contributing less in practically any other field. There’s some sense in the idea that “it makes no sense for me to work full-time to make our overall income larger by 10%”, but that decision is not being offset by contributing in other areas of the relationship (whether it’s household chores, mental support, child rearing, etc.) This situation can be malignant (entering the relationship for money rather than love) or benign. Either way, to make it easier to remember, we’ll call it “The Gold Digger”.
This scenario involves two partners being relatively equals, except that one of them has potential to earn huge sums of money unassisted by their spouse. Examples can be a startup founder on their way to selling for millions (before the relationship started); a person owning a home they rent, and might make a lot of money depending on the real estate market; a partner that will likely inherit assets and money. We’ll call it “The Heir”.
Our relationship starting point was financially complex:
- My wife owned an apartment that was making rent. I had no assets (other than an old used car and a 3-piece framed Back to the Future trilogy posters.)
- My wife will probably inherit large sums of money some day. I will probably not.
- My potential salary as a Software Engineer (a good one, I hope) is very high. My wife is a lawyer, so she makes good money, but I can still earn 50% more, which is substantial over time.
As you can see, we have a certain mix of all the aforementioned scenarios: one cup of The Heir, a quarter cup Gold Digger and a tablespoon of The Breadwinner. What’s interesting here is that over time, we believe we’re pretty much on equal grounds. So if we go with the classic 50/50 split, I will have the incentive to divorce early (before I bring in too much money) and my wife has the incentive to divorce late (after my salary covered the difference in current assets or inheritance.)
We both like our jobs, but have aspirations to either retire early, work part-time or take long unpaid vacations for personal projects. We’d like to be able to do that independently of one another, so we need a system that allows each of us to find a different equilibrium point in the work-life spectrum. We’ve also decided that as a principle, we want to share the responsibilities of raising our children equally - so we’d like to somehow neutralize the effects of our Breadwinner situation - for example, if someone needs to stay home with a sick child, we don’t want our financial situation to affect that decision (”you stay because my workday is worth more / my career advancement is more important”).
Additionally, we wanted to make sure we are entering the marriage because we love each other and that there’s no financial incentive to do so.
Essentially, we want a mechanism where each person:
- manages their own financial situation separately and their decisions should not affect the other person
- does an equal part in our shared tasks - raising children, house chores, etc.
- keeps their ability to make a good wage and financially back their own expenses
- may spend their own “spare” money on whatever they choose without the other’s approval (e.g., I can buy as many board games as I want with my spare cash)
To satisfy our principles, we came up with the following mechanism:
- Each person will continue to handle money in their own bank account, independently of the other person (our private accounts.)
- We’ll use a new bank account (a shared account) to purchase anything that’s shared - groceries, gas, mortgage, vacations, anything children related, etc.
- Each person will deposit a fixed sum of money into the shared account each month. This amount should be enough to cover all of the shared expenses.
- If a large deposit is needed for the shared account (we want to take an extravagant vacation or need a down payment for a new house), one person can make an extra deposit and record it in a spreadsheet. The other person will then owe them half of that sum (or owe the whole sum to the shared account.)
- Any incoming sum of money - gifts, inheritance, bonuses, etc., are personal and belong to the person receiving it (if my parents give us a monetary gift, that money would be mine and vice versa.)
- In case of divorce, we split the shared account and shared assets 50/50 and have to settle whatever debt is recorded in the spreadsheet.
This might seem convoluted, but in practice it’s very simple - we each get our salary deposited in our private accounts and set up an automatic monthly deposit from our private accounts to the shared one. Unusual deposits are rare and require a few seconds to update the spreadsheet. When we buy stuff, we just have to use the right credit card. We also don’t squabble over details and err towards using the shared account.
Here’s a visualization:
FAQ and Common Objections
If you have some questions or objections you’d like me to answer, please leave a comment below!
Why use a fixed sum deposit and not a fixed percentage of your salaries?
There are a few advantages of using a fixed sum over a fixed percentage:
- In our situation, where one person has a large net worth while the other has a large paycheck, using a fixed percentage in unfair towards the second person.
- Using a fixed sum makes it easier to set up automatic deposits, so we don’t have to spend time each month in bureaucracy.
- Using a fixed percentage still incentivizes preferring the careers advancement of the person who makes more money.
- Using a fixed sum makes sure we set our shared expenses budget to fit the person who makes less money, which means neither of us depends on the other to provide a higher cost of living than they can afford. We are okay with living modestly on the cost-of-living level of the worst-off person in the relationship.
Money is an explosive subject, I rather avoid it and just use the default split
If the default split works for you, that’s great. But not discussing money because it’s awkward or volatile is just plain wrong. If you can’t sit down and discuss your finances with your significant other, marriage is not the right choice for you right now.
Look, I get it. Sitting down with your beloved spouse-to-be to show them an Excel sheet and explain your incentives in case of divorce is not the best pillow talk. But marriage is not about “nice and easy”, it’s about weathering the storm of life, together; money is a huge part of that. If discussing money is painful for you now, it’s going to become a hundred times more painful after you pass the point of no return. Even if you stay married happily-ever-after, you’re going to go through rough patches in your marriage. If your relationship can’t take a little bit of “we are both individuals and we sometimes have conflicting interests” at the start, how can you be confident it’ll weather a “FILL YOUR FAVORITE MARRIAGE ARGUMENT HERE” fifteen years in?
Don’t you love each other?
We do. We also love common sense and diagrams with arrows. We split the arrows in case of a divorce, though.
The burden of child bearing can’t be equal, because your wife has to actually give birth. How do you address this inequality?
Good question. First - we have one daughter and a baby boy on the way.
We don’t offset the burden of actually carrying a child to term financially, but we do share the responsibilities of child raising equally - spending quality time, spending non-quality time, picking up from daycare, bathing, feeding, playing, changing diapers, potty training - everything. I also took (and plan to take for our boy) same-length paternity leave as my wife took her maternity leave. I am doing my best to make up for my wife’s pregnancy with doing more than my share of both taking care of our first daughter and general house chores and family tasks during the pregnancy.
Is this legal advice?
The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.
I am not a lawyer.
What does your wife think of all of this?
She reviewed and approved all drafts of this blog post.
Follow me on Twitter and Facebook
Thanks to Inbal Parvari, Shachar Nudler, Ram Rachum, Yosef Twaik, Hannan Aharonov and Yonatan Nakar for reading drafts of this.