Marriage and Money: The Importance of Making Joint Financial Decisions
Personal Finance is a very broad term that covers various areas of money management. These topics can range from monthly budgeting and saving, all the way to retirement and estate planning down the road. The philosophy behind how you choose to manage your money relies heavily on your personal goals. Do you want to retire early? If so, that may cause you to increase your retirement deferral rate in your working years. Or, is your goal to buy a new house within the next 5 years? That may cause you to spend less and save more. Once those long-term personal goals are established, short-term goals provide a segmented path that leads to long-term success.
These examples cover the process of goal setting and its impact on the short-term parameters of your individual money management. Now, let’s say you are married. You have decided to spend the rest of your life with the person that you love most in the world. Along with this life-long commitment, you have discussed your future life plans with one another (your long-term joint personal goals). Some couples stop here. They talk about their big plans but have not yet discussed how those goals should be reflected in their personal finance decisions. Instead, one spouse takes sole responsibility of the couple’s financial world. Having only one spouse in control of personal finance decisions can be detrimental to your long-term goals. Both you and your spouse should be involved in personal finance decisions, and here’s why:
It Creates Transparency in Your Long-Term Goals
Have you ever had a miscommunication with someone that turned into a real disaster? The lack of intentional conversations may lead to differing expectations, which then, if coupled with a sole financial decision-maker, may lead to unintended financial results. For instance, the term new car may not mean the same thing to both spouses. Let’s say both spouses agree that a new car is one of their financial goals. Then, the spouse that makes all the money-related decisions for the household does what he/she thinks is what they both want. Without a financial discussion, the couple now owns a $50,000 SUV that puts a major strain on their monthly expenses when the other spouse perhaps meant they needed a “new-to-them” pre-owned vehicle. This could have been avoided with an intentional financial discussion.
That was a pretty extreme example, and some may say, “That would never happen to us.” However, another way we may see clouded financial goals is on a smaller scale – spending and budgeting. When only one spouse pays the bills and makes the credit card payments each month, the household’s monthly spending can quickly get out of hand. Transparency in your joint goals, whether it be the type of vehicle you want to purchase or even your day to day spending habits, can prevent future financial mistakes or misunderstandings that may cost you in the long run.
You Can Keep Each Other Accountable on Meeting Your Short-Term Goals
If you and your spouse decide on the big picture of what you both want (long-term), but don’t follow up with a plan of how to get there (short-term), it is unlikely that you will reach that long-term goal. For example, my wife and I wanted to buy a new-to-us (pre-owned) small SUV. Spoiler: we achieved our goal and bought a Nissan Rogue. But how did we get there? We sat down and developed a budget. This was no “high-level” budget either. We wrote out all our fixed expenses, estimated our variable expenses, and gave ourselves a limit for “fun” line items like dining out and vacations. Then, we decided how soon we wanted to purchase the car (which determined how aggressively we needed to save). The main takeaway is that we had an open and detailed (number-oriented) conversation. We both had equally validated inputs, which led to reciprocated accountability and successful execution. Also, having those conversations allowed us to grow closer in our relationship through the transparency of our finances. When both spouses are part of the development and maintenance of personal financial decisions (like budgeting), it makes for a higher success rate in accomplishing your financial goals.
There is a Difference Between Being Financially Responsible and being Financially Aware
We hear a lot of people say, “Well, my spouse takes care of our finances – which is fine with me.” This is not always bad, as some people enjoy it more than others. Meaning, it is okay if either you or your spouse is responsible for carrying out the financial duties of the household. However, the spouse with less/no financial duties must be financially aware. What does it mean to be financially aware? It means understanding your current situation, knowing the required recurring financial tasks, and knowing what to do if something happens to your spouse.
First, understanding your current situation, which can mean several things. A few things to consider are listed below (please note that this is not a comprehensive list):
- What is your debt to income ratio? How many loans do you have and what are their individual interest rates?
- Do you have enough in emergency savings? (we usually recommend 3 – 6 months of expenses)
- Are you contributing to retirement funds? If so, how much? If not, why not?
- What is your savings rate?
Second, what are the recurring financial tasks that need to be completed? This may include some of the following:
- How do you pay your mortgage? From what account do you pay this?
- What other bills are paid? Would you know how to pay them on your own?
- How many bank accounts/debit cards/credit cards do you and your spouse have? Do you know how to log on to the website for each account?
- Make sure you know the usernames and passwords necessary to login to all financial accounts.
Lastly, would you know how to manage your finances without your spouse? Do you feel comfortable paying the bills, checking account statements, and any other necessary financial tasks? An additional note: make sure that you and your spouse have updated your beneficiaries on all financial accounts. As with building comfortability with your financial situation and tasks, verifying that your beneficiaries are up to date allows for a smoother estate process if something were to happen.
In summary, it is incredibly important for both spouses to be involved in the financial decisions within a household. Not only will you be more likely to reach your long-term goals, but you both will feel comfortable in the knowledge and understanding of your financial situation. If you have any questions regarding personal finance, or would like to talk through your financial planning, please give Tull Financial Group a call at (757) 436-1122.