At one time or another, we all end up living with people out of want or necessity. Some of us have housemates, others have partners and others have marriages, but at some point, we are all going to have to discuss finances and share the cost of living responsibilities in an equitable manner.
Dividing monthly household expenses between roommates equally may be fair and unavoidable in most cases. The most common way of splitting expenses among housemates is by tallying up the total monthly cost of rent and utilities and dividing them equally at the end of the month with each roommate writing out a check for their portion to the one responsible for making sure the bills are paid on time.
According to Suze Orman, dividing the expenses based on a percentage of the people's income is a reasonable solution that is fair because it is not equal. Her example shows partner A) makes $7,000 a month and partner B) makes $3,000 a month. Household expenses are $3,000 a month. In this case she suggests splitting the costs on a 70 percent to 30 percent ratio to make the situation equitable. On a 50/50 split the percentage would be unfair to the partner making less since partner A) would only pay 21 percent of her income and partner B) would be paying 50%.
This solution is bound to work for some partners and married people who keep their finances separate but it is unlikely to work for college students seeking housemates to share expenses equally. One thing is for sure, everyone should know how to set a household budget based on their income and expenses.
Fairness and Profits
Another alternative is to set the amount others pay without having to reveal how much the living expenses are. Monthly household expenses between roommates can be arranged by the title holder to the property based on his needs, desirability of location and the laws of supply and demand.
An example would be someone who lives in a large property in an area with low crime, great views and is located close to nightlife, business centers and other desirable amenities. The average cost for a one bedroom apartment in the area is $3.000 a month and vacancies are hard to find. In this scenario, our original dweller lives in such an unit but he only pays $2,000 a month because he rented or purchased early on.
Our original dweller places an ad in the newspaper renting two of the three rooms for $1,500 a month to cover his expenses and make a profit. Is this fair and equitable? The answer is yes, because the responders know what the cost of living in the area is beforehand and this arrangement provides them with what they need at a price they can afford.
These types of arrangements have always been popular in Hawaii where space is limited and desirable rentals are hard to come by on a limited budget. Renting a home near the ocean or overlooking majestic mountains or gorgeous beaches requires housemates that are willing to sacrifice some privacy and space for the luxury of stepping outdoors onto a private beach or land expanse. A household of roommates typically provides the full mortgage payments for the title holder and in a tight market where desirable accommodations are not only expensive, but scarce, everyone involved is satisfied. The same can be said for large apartments in New York City and other popular metropolitan areas.
While it is common for roommates to divide the cost of living expenses in equal parts, it is usually a source of discontent when someone is perceived to be getting more benefits than the other housemates for the same price. For instance, let's take into consideration the following example.
Four roommates choose to rent a four bedroom house equally, but one of the bedrooms is larger than the rest and has its own private bathroom. In this case, it may be more equitable and fair to assign a higher percentage of the rent to the person with that room. This particular example typically happens when housemates are shopping for a place together.
Fixed Expenses vs. Variable Expenses
Some housemates split the rent in equal parts but decide that one should be responsible for the electric bill if the other person is responsible for the water bill. This arrangement is not always fair because energy consumption can be very high during the winter and summer months while the water bill maybe higher during the summer months and negligible the rest of the year.
To avoid resentment and arguments about abusing electricity, heating or taking long showers, housemates should have an idea on what the average monthly cost is for all utilities and set aside an approximate amount to cover the expenses. At the end of the month, utilities should be split in equal portions or in percentage amounts previously agreed by all involved.
Buying vs. Renting
Purchasing a house together makes perfectly good sense to friends who would rather build equity together and plan to save money to purchase their own place at some point in the distant future. In this scenario, the situation is a bit different than renting since there is a 15 or 30 year commitment in which all parties are equally responsible.
- Everyone should adhere to equal ownership and equal sharing of household expenses – that includes property taxes.
- Everyone should be prepared to have to buy out one or more of their partners at some point.
- Everyone should be prepared to have to sell the property if no one is able to buy out the shares.
- Everyone should be fully aware of the real estate market and the ease or difficulty of selling at a profit.
Buying a house with people we are not married or related to is not as unusual as some may think and in many cases it has been a successful and profitable endeavor, while in others it has been a disaster that ruined credit scores. Those who have been successful employed clear communication and meeting financial responsibilities on time, as scheduled.