Your relationship should be about falling in love, not financial ruin.
By Tama Smith
Money is the invisible third person in any relationship. While couples often spend a lot of time thinking about whether they’re emotionally or spiritually compatible, they should give just as much attention to whether they’re also financially compatible.
In part I of our Money and Relationships series, we detailed how women can boost their financial confidence as they prepare to close the financial readiness gap in the coming decade. Once you understand the numbers that matter most, the next step to achieving financial wellbeing is developing a plan.
How should people think about money in the context of a romantic partnership?
I chatted with personal finance expert Manisha Thakor to hear insights from her book, Get Financially Naked: How to Talk Money with Your Honey.
What Drives Financial Wellbeing in a Relationship?
In her book, Manisha talks about three categories that can help determine financial wellbeing with a significant other: financial compatibility, risk awareness, and the need to take financial risks.
Manisha defines financial compatibility as whether or not money is going to cause tension in your relationship. The American Psychological Association conducts studies every year to explore what causes stress in people’s lives. Money is always at the top of the list for couples.
There’s a period of financial intoxication while dating. For example, when Manisha was dating her ex-husband, she recalls getting popcorn and soda at the movies. It made her wonder why he didn’t sneak snacks into the movies, and it felt wildly exciting.
But Manisha also warns that this same intoxication can later drive two people apart. One might want to be able to live off their investments. Others might want to die with nothing in the bank account. Some might be spending without care, while others might feel they need to earn more to make up for their spouse’s spending.
Spending isn’t the only type of financial mismatch in a relationship. There can also be a savings and investing mismatch.
Your ability to invest is a function of the stability of your income. For example, if you have a two-income household, and you’re both tenured professors, you can take a lot more risk than a two-income household where you’re both entrepreneurs.
The Need to Take Financial Risks
We often see couples that are nearing a financial goal, and then one person wants to take a huge risk. This change involves a major shift in money management style.
Combined, these three examples of mismatches are why financial compatibility is so important. If you’re living through one of these scenarios, money will always be the third wheel in your relationship.
Achieving Financial Stewardship—Together
Aside from compatibility on money matters, there needs to be compatibility on financial stewardship—the meeting point of knowledge, interests, and behaviors as they relate to finances.
Financial knowledge is more akin to financial confidence. Studies show that men and women have remarkably similar levels of knowledge around personal finances, but men tend to feel more confident with that knowledge. In the absence of confidence, the gut reaction of either party may be dramatically wrong because they’re driven by overconfidence or underconfidence.
Manisha has found is that there is no gender difference in the level of financial interests. Often, two people have absolutely no interest, and sometimes, people have a lot of interest. The biggest issue is when two people are uninterested. Or the person who is interested doesn’t know as much as they should.
Last but not least, financial behaviors have two aspects: cash management vs. financial management. It’s crucial for both partners to be aware (if not involved) of what’s going on in both areas.
One person in a couple who handles the bills and all the paperwork might think they’re managing the household finances to a T. But the problem is that there’s more to it than cash flow management.
There’s also the investment perspective. Many couples don’t think like couples when it comes to investment accounts. This is a problem because knowing your mix of stocks, bonds, and other investments determines whether or not you’ll meet your vocational freedom and other goals.
If one person is handling everything, the other person doesn’t know where the paperwork is, where the accounts are, what the passwords are, and so on. You must align these financial behaviors like anything else in a relationship where parties have equal knowledge, even if there isn’t equal interest.
Putting It All Together
Talking about money from the perspective of shared financial stewardship is key to determining financial compatibility. This extends beyond savings, spending, and investment to include things like insurance, taxes, estate planning, philanthropy, and any legacy giving you plan to do with your kids.
Getting your financial house in order is the only way to strengthen the foundation of your financial wellbeing.
Do you have a clear financial plan in your partnership? Our team is here to help you navigate these conversations and more.
In part III, we will explore how to talk about money with family. Stay tuned!
Tama Smith leads the Women Living a Richer Life initiative at Brighton Jones.