Why Pooling Funds May Lead to Drowning
In my previous post, Pooling Resources: The Good, Bad and Ugly, I shared a few thoughts around being cautious and mindful when splitting expenses with others. It’s important to take a minute and make sure the end result will align with your long term goals and journey.
Part of building a strong financial foundation is thinking through the effect that the decisions you make today have on your options tomorrow. It’s like following down a path, taking turns and ending up somewhere other than where you intended. So next time you are considering pooling your money and financial stability with another person think it through.
A common scenario I’ve seen over the years working in finance is when two people pool their income as though they were one person. Here’s where things can go south. The debt load they can handle together is usually twice as high as either person can afford on their own. This creates a precarious situation when someone wants to do something different, such as move out, apply for a loan or loses their primary source of income. The other person can quickly become overwhelmed and drown in stress and anxiety.
Even when both people are working together towards common goals, it can be easy to take on more than they should. A good test to take is to list your housing expenses, the full cost – no halvsies – and divide it by your actual take home (net) income. You want to keep this ratio under 45% as soon as possible. If it takes two incomes to cover housing, what is your plan to handle the gaps when the other person isn’t there or can’t pitch in?
If you are spending more than 50% of your take home income to keep a roof over your head (rent, utilities, insurance), start thinking about small steps you can take to find a better balance. Sometimes it’s necessary to be in that place while you are working to get to the next step. That’s okay. Know your plan and build a support system to help you weather the storms as they come.