How should we handle merging (or not) finances when one spouse has lots of liabilities? Here's a tricky situation with some components many EREers will have to face. Please share your thoughts!
My wife is generally frugal, a hard and conscientious worker, and a reasonable financial partner. I will likely always have significantly higher earning power than she will, but she’ll do okay. In a vacuum, I would be okay with merging our finances. However, in addition to having less earning potential than I do, she has three big liabilities that I need to consider:
1) Huge student loan debt (six figures). (I knew it when I married her, I’m glad she got the education she did, and I know I’ll have to contribute to paying them off one way or another, but the loans are still a bummer!)
2) She wants to spend at least a few years as a stay-at-home mom when we have kids. (This is okay with me too, but by definition this will shift even more financial responsibility onto me.)
3) She doesn’t realize it yet, but my wife is likely to want “us” to provide some financial support for her father. She is incredibly close to her father, who is a financial train-wreck. (He is in his 60s with no retirement savings, no savings of any kind, a huge mortgage, home equity loans, car loans, huge student loans, huge credit card debt, and big spending habits. And now he's starting to talk about retirement, which demonstrates just how out of touch with his own financial reality he is.) The interest on his debts will start to overwhelm him, his standard of living will go down significantly, and he will inevitably come to us asking for financial support at some point. He will see his predicament as the result of unforeseeable bad luck, rather than as the entirely foreseeable result of living beyond his means and racking up debt at his age. My wife will have a hard time seeing his financial suffering while we have a big nest egg.
Frankly, I resent the guy's reckless behavior, and don't want to spend my life energy (in the form of savings or income) bailing him out. And, given that I’m already committed to major financial support for his daughter’s living expenses and debt repayments, I feel even less inclined to take on any liabilities related to her father’s reckless and stupid financial behavior. I want to be a generous and good provider, but I need to draw the line somewhere. I’m happy taking care of her, but not happy hitching my wagon to her financial train wreck of a father.
Given these liabilities, I am wondering how to best structure our financial lives. (We are recently married, and no permanent decisions have yet been made about how to structure our finances.)
I could pay off her six-figure student loans with my nest egg, which would be one of the best investments we could make (effectively a guaranteed annual return, every single year for what would have been the life of the loans, of around 8%, with no down years, no risk, and no tax. Part of me thinks I should do that. I’m effectively on the hook for a lot of that money anyway, because she simply can’t make enough to contribute to our shared living expenses and debt service simultaneously. So maybe I should just pay more now to reduce the interest burden?
However, there are a few potential downsides of doing that.
1) This debt is not officially my legal liability. If we ever got divorced (hopefully not), the debt would remain her individual liability. If I pay the debt, I will in effect have transferred a massive amount of my life energy to her (total savings from around 5 years of hard work). If we then ever got divorced and I didn’t somehow get "credit" for this expense in any divorce settlement, I will have made a mistake.
2) Some part of me thinks that having her in debt provides some insurance against her wanting to spend our money bailing out our father. If she’s debt free and sees our nest egg building up, it will be hard for her to see her dad’s standard of living start to painfully implode. She’ll want to send him money. Whereas if she still has her own debts, she might be more reluctant to want us to bail him out, and he might be more reluctant to ask.
So I guess I really have a few questions:
1) Should I pay off my wife’s debt?
2) If I do, can I get credit for doing so in any future divorce settlement?
3) Is there any way I can structure our finances to avoid having to bail out her dad?
4) How should I think about merged vs. shared finances in this situation?