A look at different ways in which couples – live-in or married, single income, or double income – manage money.
Often, the need to list out financial goals, the need to systematically invest for them and the need to invest enough is highlighted here. What I never bother to state explicitly is, money management or financial planning by a couple is primarily governed by their financial compatibility and how well they communicate with each other. This is one of the key aspects of a successful marriage. Financial fortification and focused investing is obviously best done together with a single-minded purpose, but this is often not the case.
Financial compatibility is sheer dumb luck! We have no idea about our partners attitude towards money management is, before marriage (regardless of how we get married). In fact, this attitude can also change several years into marriage!
A marriage is all about compromise, serious disagreements wrt money can lead to permanent cracks in the establishment. If the one spouse is frugal and the other a spendthrift, then for the sake of their own sanity's, they will have to meet halfway at some point.
A families ability to meet their financial goals beat inflation and create wealth depends on when they choose to invest, where they choose to invest, how they choose to invest and how much they choose to invest. This, as we can imagine can vary widely among couples.
What follows is a set of observations. It is not my place to ‘advise’ couples as to what to do. This post is only an attempt to recognise that before all the Excel sheets, before the goal planning, before the SIPs, before the XIRRs, there is something way more important for any couple to contend with: mutual respect and agreement to whatever extent possible when it comes to money management (or any other issue for that matter).
Efficient investing and financial goal management first require ‘peace’ at home.
It is perhaps futile to try and compartmentalise couples wrt money management style. Let me nevertheless try. Since a marriage continuously evolves, couples may change ‘type’ in time.
Type 1: Typically the male is the sole breadwinner. However, neither does the husband feel superior, nor the wife (typically) feel inferior. The money earned belongs to the couple and not to one person. All big ticket money decisions (not just investments) are taken together.
Type 2: There are many families in which the wife tends to feel at least a little “powerless” wrt spending money freely. This may or may not be because of the husband's attitude. Somehow there is a sense of not being able to spend at will. There is a feeling that, “I don’t earn, so I need permission to do what I want”. In a ‘good’ marriage, the husband should be able to sense this immediately and reassure the wife. Some do and some don’t.
Type 3: There are husbands who blatantly act like they are special and superior to the wife who manages the house and takes care of the children.
My take: Whether a parent decides to not work after marriage or a parent quits to take care of the child/children, it is the duty of the ‘working’ partner/parent to ensure all the needs and wants of former are satisfied, typically ‘no questions asked’. Wrt money management, that is how mutual respect manifests.
The working parent should consult the stay-at-home parent when it comes to big-ticket purchases and investment decisions. This is common sense, but then again it is not quite common.
Type 1: Aside from the portion of each person’s salary which is pooled to manage expenses, the individual retains control over the rest. The husband’s net worth and the wife’s net worth are clearly demarcated even if done via joint accounts. From a personal finance perspective, I think is a nice clean situation.
Type 2: The husband (or wife) dictates terms over what should be done with the wife’s (or husband’s money). The wife has no say on everyday purchases, let alone investment decisions.
Type 3: Some couples constantly argue over whose career is more important and who earns more.
My take: In an ideal (but attainable) scenario, double-income or single-income, the couple should first identify key areas which are crucial for their long-term well-being and take action. After accounting for mandatory expenses and liabilities, the rest of the money can be freely spent by either partner free from guilt.
A while back I wrote a controversial post titled, Should a parent quit working after the birth of a child. Opinions were divided and it was made out to be a women’s lib issue.
Child birth is a defining moment for a couple and priorities can change overnight – sometimes by choice and sometimes by compulsion. From this point of view, it is perhaps prudent for double-income couples to invest as much as possible before they become parents and postpone taking up a home loan or other enterprises which depend on the two sources of income after the family is complete.
“How should a double-income couple manage finances and retirement planning?” was a question asked at the Hyderabad investor workshop. People also ask me how to enter their partner's income in the integrated financial planning template.
My answer, the planning should be done “together, separately“.
That is, they should list out financial goals, decide on an investment strategy and invest systematically with full knowledge of how much is invested and where. However, the amount to be invested can be divided as X% being sourced from the husband's income and (1-X)% sourced from the wife's income. Each person invests their portion in their own name (as a first holder). This keeps it clean.
In fact, this can also be done for a single-income couple too. The working partner invests a portion of the investible surplus in the spouse's name. This should not be done for evading taxes! Income clubbing rules are clear that the interest on the amount so invested is always taxed in the name of the person who earned it.
I think this can be done so that the stay-at-home partner has some assets which she can freely mobilize in the case of emergencies. Perhaps this might also give then a sense of financial security.
Feel free to add your own observations in the comments section.