Honey, we need to talk about money!
Love was in the air in February for Valentine's Day. It's now the first day of March, so lets get back to our "un-public displays of affection" British ways.
Being a true romantic at heart is lovely; being extremely pragmatic with that romance is even more lovely. The number one reason for divorce in the US is due to money... if one half of your beautiful and idilic coupling is a frugal saver, and the other half of this equation is a spending splurger, I don't believe you'll ever find harmony in that relationship.
Money should be one of the core discussion topics of any relationship; household expenses, investment decisions, bank balances, career plans with associated earnings, spending habits etc. I'm not going to get in the psychological realm of finances within a couple. Dan Ariely does a fantastic job of that in his book "Small Change: Money Mishaps and How to Avoid Them". Get the book here. What I am going to cover today, is:
- why investment approaches should consist of a balance of the sexes,
- sh*t happens; empower yourself through transparency
- why regular financial communication is required
Reason 1: a blend of investing approaches produces the most optimised investment portfolio
Men and Women have different approaches to investing; neither is right, but a blend is required for optimised investment.
Commonly, women run the household budgets; they control the money for grocery shopping, child care, purchasing of furniture, presents for birthdays & Christmas's etc.
Typically, women do not make the household investment decisions; they do not decide which stocks and shares to invest in, what pension scheme risk appetite should be selected or whether ETFs (exchange traded funds) are right for the household.
A blend of input is required for optimised investing:
- Save More: according to Vanguard (one of my favourite asset management companies), women (in the US) tend to save more, particularly into employment retirement schemes. Considering the age we're living to, and the diminishing pension welfare in the UK, following female perception of saving more for the long term is financially a strong decision.
- Invest More: While women tend to save more, Blackrock Inc determined that women held more in cash. Considering the terrible returns on cash savings at the moment, following male actions of investing more, rather than holding cash, can see greater returns in the long run.
- Trade Less: Vanguard similarly report that men make more trades than women; i.e they move their money around more. There are many schools of thought on this but the overarching theme is don't try to second guess the market; don't move your money around. Women tend to invest it, and then leave it which typically performs better over the longer term.
- Confidence: I hate this one but as Meryill Lynch clearly noted in their research, women were more likely to say they had lower levels of financial knowledge than the average investor (55.3%). This is compared with men where only 27.2% of the study stated that they either agreed, or strongly agreed with the statement, "I know less than the average investor about financial markets and investing in general". The male confidence can help overcome the fear of investing in a relationship.
As we can see, a blend of both sexes on investment decisions provides a better outcome; bear in mind these gender biases if you ever work with a financial advisor.
Reason 2: sh*t happens: empower yourself with options
Emergencies and general crap happens every day. From household appliances breaking and destroying parts of your property to the rise of divorce, and need to uncouple yourself. Know where you have money; if you need to get out of a situation quickly, you should empower yourself to do so. Don't rely or depend on anyone financially. Emotionally, be as dependent as you want, but financially, know what your options are.
Going one step further on the above, one day, nature will naturally uncouple you (i.e death):
Your loved one passing away is terrible.
Your loved one passing away, and you not knowing where or how to access your joint funds is a consideration you don't want to have to think about in that moment of time.
Even worse is realising in the above scenario that as a couple, you are not in good financial health is a horrific distress, particularly in you're already into retirement or you had dependents such as kids.
- Know where all your accounts, investments, savings, retirement plans, mortgages are.
- Know the passwords, and
- Know what is in them
This is not a consideration for then; it's a consideration for now. For both of you.
As a start, use my asset and liability workout approach to assess what you collectively owe and own.
Reason 3: regular financial communication
Money affects so many things in your life: from where you live through to your mental health through to your credit score through to your retirement plans. Coupled with this, it effect each one of us in a different way. Some people place a lot of onus on owning a lot of money, or having a higher net worth, whereas other people place more onus on furnishing their house in a beautiful way, or spending money on clothes etc.
The communication around money should be constant; invariably one part of the couple will:
- earn more than the other;
- may loose their job for a period of time;
- have to take a pay cut to bring up children;
- have a student loan that still needs paying off;
- have money tied up in stocks and shares;
- have an inheritance windfall at some point;
- have elderly parents that need financially looking after; or
- emotionally deal will issues through shopping.
It's not the sexy pillow talk you were gunning for, but discuss the above in relation to where you are personally, and where as a couple you envisage yourself going. Don't find out too late that one of you is seeking financial independence and early retirement, while the other is seeking to spend money building the luxury around you.
Similarly, be wary of joint accounts before you have these conversations; credit scores for both individuals can be wrecked through joint accounts. You may be in the throws of love, but if you can't get a desperately needed credit card, or mortgage, as your other half keeps missing bill or credit card payments, this will place significant strain on any relationship.
For those that have taken time out of work for kids and are earning less, this conversation can be quite tricky, as for a period of time, you are financially dependent on another person. You may be ok with this, or you may not be. Be prepared for it either way. Make sure you have a conversation around this, but personally, make sure you have a small pot of emergency savings that you can access quickly to maintain a level of independence.
In a relationship, both individuals in the relationship should know where and how to access their finances. I wrote this blog to empower people to be their chief financial officer (CFO); to control their own financial destiny and wellbeing. Do not ever place that completely in the hands of someone else.