One of the biggest financial decisions we will make in life has nothing to do with money. At least, not for everyone. It’s what billionaire investor Warren Buffett claims to be the most important decision he has ever made: choosing who to marry.
Love and money are often a volatile mix that makes or breaks a relationship, according to a survey from the Institute for Divorce Financial Analysts, with “money issues” being one of the leading causes of divorce. However, research shows that couples who are financially in sync often have stronger, happier, and longer-lasting marriages.
That only happens through equal participation in your household’s finances. Sure, relationships involve compromise and sacrifice. But it need not be disproportionate.
Whether your relationship status is on date number two, recently engaged, on thin ice, or together so long you can’t remember your anniversary, here are a few tips to help you build a healthy relationship while preserving your own financial well-being.
Recognize How Your Money Personalities Differ
Turns out, the old adage “opposites attract” may be more fact than fiction. A paper published in the Journal of Marketing Research found that “tightwads” (people who spend less than they would like) and “spendthrifts” (people who spend more than they would like) usually marry each other.
While personality differences cause some relationship problems, it isn’t the real root of money issues. The source of the problem is remaining steadfast in your own financial habits and behaviors. Merging those differences can reshape each other’s financial behaviors in a positive way. For instance, the spendthrift of the relationship starts saving more for long-term goals. Over time, couples can find themselves in a sort of yin-yang of financial balance, bringing out the best in each other.
Consider a study from researchers at Washington University in St. Louis who found that having a conscientious spouse can boost your salary by $4,000 and increase your chances of getting promoted. In other words, your better half may encourage you to change your behavior and take greater risks to pursue growth opportunities you may not have pursued otherwise.
Understanding your conflicting habits is an important first step. Getting there, however, doesn’t just come naturally.
You Need to Talk About Money
In a relationship, the best way to grow financially isn’t through accounting but rather through communicating. Couples who communicate effectively make better financial decisions, according to a Fidelity Investments study. The couples who say they communicate well are more likely to expect to live a comfortable retirement, rate their household’s financial health as excellent or very good, discuss finances together monthly, and say money is not their greatest relationship challenge.
Money is an uncomfortable and emotional topic for a lot of us, as evidenced by the fact many people would rather discuss politics. But one survey found money is the thing couples fight about most early in a marriage, which underscores the importance of talking about money from the start. Treating money as taboo can be harmful to your relationship, particularly when it comes to creating equity between partners.
What should you talk about? Everything—income, debt, past experiences, future goals—so that you have a complete picture of each other’s financial situation.
Talking about money openly is important for building trust in a relationship. Financial infidelity is widespread, with over 30 percent of Americans admitting to committing some form of financial infidelity, according to a survey from CreditCards.com. And more than half of adults surveyed said that financial cheating is just as bad or worse than physical cheating.
The thought is: If I can’t trust you about money, what else can’t I trust you about?
Keeping financial secrets can do more than violate trust, it can also leave couples worse off financially.
Combining Finances Is Generally the Best Option
To combine finances or not to combine finances? That is the $1 million relationship question.
Some couples choose to keep their finances separate for legitimate reasons. For instance, they simply prefer independence. Or, they fear the messiness that could ensue while disentangling joint finances should the couple break up or divorce.
But research suggests combining finances is the better option. A study published in the Journal of Personality and Social Psychology shows that couples who pool all their money have greater relationship satisfaction and are less likely to break up. And, data from the Federal Reserve Bank of St. Louis indicates that married couples hold four times as much wealth as unmarried couples who live together, due in part to combining finances.
In addition to the financial advantages of having a larger pool of assets, combining finances encourages spouses to be more accountable for how they spend money. In a paper from the Journal of Consumer Psychology, people who spent from a joint account were less likely to make “hedonic,” or fun, purchases and instead choose more “utilitarian” options.
Certainly, every couple is different and should find an arrangement that is most comfortable for them. But another benefit to combining finances that no couple should overlook is that it ensures both partners have a hand in managing household finances, which is crucial for women later in life.
Each Partner Needs to Participate in Financial Decisions, Especially Women
If love is wishing good for the other, then an act of love is having each partner equally participate in household finances. Despite progress made over the past few decades, many households still have one person controlling the finances, often the man.
A third of men say they’re the primary financial decision maker, according to Fidelity, with 22 percent of women reporting they have little to no input in retirement or longer-term planning. Even among same-sex couples, 40 percent say they have only one primary retirement decision-maker.
Of course, couples can thrive financially when one partner acts as the household’s chief financial officer. But what if something happens to that primary decision-maker?
Nearly 80 percent of U.S. widows and widowers are women, according to a U.S. Census Bureau report. Widowhood can come as a major financial shock for those who are unprepared. The Stanford Center for Longevity found that in the first two years after losing a spouse, women experience a 22 percent drop in income.
What’s more, Census data shows the average age of widowhood in the U.S. is 59. Since the average life expectancy for women is 79, these women may have to manage their finances solo for two decades or more. This underscores the need for women to participate in making long-term financial planning decisions and managing an investment portfolio. Certainly, as a woman, you should be involved in meetings with your household’s financial advisor.
And this isn’t the only area where couples thrive when both partners do their fair share.
Parenting Needs to Be a Team Effort
Any financial disparity between spouses can often be attributed to one thing: children. The fact is, kids are expensive. It costs more than $230,000 to raise a child until age 17, according to a report by the U.S. Department of Agriculture.
It’s common for one partner to take a more active role in caring for children. This can be out of a desire to, or as a cost-saving measure. A substantial cost for most families is childcare. The average annual cost of child care in America is more than $10,000, according to the advocacy organization Child Care Aware.
Research from the Center for American Progress says a parent can expect to lose up to three or four times their annual salary for each year out of the workforce. The parent who most often takes on this stay-at-home role is the mother. Which is why women are disproportionately impacted by children.
In every country, women earn less than men, including the United States where women earn 79 percent of what men do. A Princeton University study, as reported by Vox, suggests this wage gap is the result of having children. Essentially, women experience a sharp decline in earnings after the birth of their first child while men don’t. The disparity compounds as women earn 20 percent less than men over the course of their careers.
A study published in the journal Work, Employment and Society says mothers who earn more money than their husbands actually do more housework.
Therefore, couples need to consider balancing childcare duties equally. For many couples, the solution to the income disparity between men and women is right in their own homes.
Be Financially Vigilant During a Divorce
Alas, some marriages are not meant to last. Whether money is the cause of a divorce or not, it should be one of your priorities during one. Just as financial planning is vital for making a marriage work, it is equally important for getting through a divorce.
For one, the cost of a divorce can far exceed just attorney fees. And, while conventional thinking tells you that ex-spouses split everything 50/50, the financial impact of divorce is often unequal. Consider that one study found that women aged 50 and older who divorced experienced a 45 percent decline in their standard of living, whereas men’s dropped by 21 percent.
The end of a marriage can be complicated and emotionally charged, dissolving into a fight over what’s rightfully “theirs” and “yours.” That includes a variety of financial assets, including cash, retirement accounts, investments, real estate, or equity in a business. It’s unlikely your divorce attorney is fully knowledgeable about appropriately handling them.
One way to protect yourself is to work with a financial advisor, perhaps one who specializes in helping clients through divorce, such as those who are a Certified Divorce Financial Analyst (CDFA).
For instance, Kimberly Nelson, CFA and CDFA at Coastal Bridge Advisors and fiduciary fee-only advisor in the Wealthramp network, represented a female client whose soon-to-be-ex-husband attempted to make a claim on separate property that he brought into the marriage worth $9 million. The divorce attorney was not able to refute his claim. But Kimberly was able to review the financial statements and the client’s employment contracts to prove that the assets had been commingled in joint accounts over the years, that the rate of return on these assets had been significantly inflated and her client had been paying a portion of the tax bill associated with these “separate assets” for 25 years. She was able to get the ex-husband to settle out of court for $2 million of separate assets. If Kimberly’s client hadn’t been working with a divorce specialist, she could have ended up with $7 million less in assets that were legally hers.
Furthermore, you will most likely have to divvy up your 401(k)s or other retirement accounts. This can be tricky if you’re not careful. For example, if you split your 401(k) by simply withdrawing half the funds, you would be subject to a 20 percent withholding tax. And, if you’re under age 59 ½, you may also have to pay a 10 percent early withdrawal tax penalty.
Additionally, as you go through a divorce be sure to stay on top of your bills. And don’t forget to untangle any shared accounts so you’re not on the hook later should your ex max out a credit card or default on a debt. Lastly, start planning your single life. The post-divorce transition can be quite a financial adjustment. You will likely have to re-evaluate your long-term financial goals. How does saving and investing for retirement change for you? Do you need to start saving more?
Doing these things can help put you in a stronger financial position for your next stage in life—and maybe even for your next relationship.
Ultimately, relationships are something we nurture over time. In that sense money and love are much alike. The more we put into our own financial well-being, the better we can manage the financial well-being of a household.
Pam Krueger is the founder and CEO of Wealthramp, an advisor matching platform that connects consumers with vetted and qualified fee-only financial advisors. She is also the creator and co-host of the MoneyTrack investor education TV series seen on PBS and the popular Friends Talk Money podcast. If you’re ready to work with an advisor you can trust, visit www.wealthramp.com.