Of all the many challenges couples face in life, whether married or living together - deciding how as a couple you’re going to manage your money tends to be the most confounding.
Some couples choose to keep their money absolutely separate. This is mine, that’s yours, and never the twain shall meet, or something similar. Of course, this option which seems very straight forward, clear and easy, comes with its own set of problems not usually envisioned when initially making this choice. The main problem being, you’re not working as a team when it comes to coordinating your cash flow, investing and tax planning strategies. As a consequence, you’re missing the opportunity to optimize your finances. You would never run a business this way, so why would you manage your cash flow this way?
Other couples choose a more hybrid option. One handles the day-to-day money management, the other handles the savings, investments and taxes. Or one handles ALL financial duties and the other takes responsibility for the kids and the parents financial needs.
Whatever option a couple chooses in terms of managing their money, opportunities as well as potential minefields await at each decision point. So with that said, below is the most common mistake I’ve observed couples, young and not so young, make when dealing with their money.
Highest Earner Syndrome (HES)
Highest earner syndrome (HES) is when the highest earner in the couple makes all the major and often all the minor decisions around the couples money. Never mind that this person may have very poor money management skills or have very low financial intelligence around personal finance or may not even want the role of decision maker around money. By default, they win because they make more, and sometimes much more than their partner.
Obviously, it’s not a smart move to place the responsibility of money management into the hands of the one in the relationship less skilled or less savvy around money, yet this happens more that you would imagine.
The close cousin to highest earner syndrome is when a couple decides to relegate all matters money to the guy in the relationship, sometimes for no other reason than this is the way their parent’s did it and their grandparents did it. Call it the default strategy to money management.
This was the case for my mom & dad in particular, and unfortunately I see it playing out with some of my other relatives as well.
In my parent’s situation, it was my mom who was the intuitive one who could spot a BS-er from a mile away. Although she was a stay at home mom, it was her natural born instincts, her smarts and her common sense that prevented my dad from losing big money to financial sales people masquerading as financial advisors. My dad was a business owner, so he was a highly valued target for sales calls. The problem he had more often than not was not being able to say no.
Even with my Mom’s watchful eye, many of the sales people contacting my dad, especially the insurance sales guys that seemed to have a new product to sell him everysix months, soon learned to avoid coming to our home and having to deal with my mom. She was the one who would always ask tough questions that the 'financial planner'/salesperson preferred not to answer.
So instead, they took my dad to a nice restaurant for a three-martini lunch where you can guess what happened. Voila, a sale was made! Mainly it was stockbrokers that took the most advantage of him, hyping some stock or great opportunity, blah, blah, blah.
But I digress.
My own parents were the perfect example of ‘highest earner syndrome’. Although my dad was the breadwinner in the family, and in charge of all things money, staying home and raising four kids was not a day at the beach for my mom. But once my mom got involved and started asking simple questions like how much did you pay for the stock and how much did you sell it for?, things changed big time in our family. My mom actually gained sign-off authority on all investments my dad would make in the future. That was a huge accomplishment as women of her generation usually didn’t have much say when it came to investing their money. That was the 'man-of-the-house' role, not for the little lady to worry her pretty head over.
Yet, no one bestowed the power onto my mother, she empowered herself. She knew what needed to be done and she had the courage to do it. And no doubt, if not for my mom’s keen awareness and ability to confront my dad, he most likely would have lost much more had she not spoken up.
Take the time to observe how you as a couple are handling your household money right now. Next, imagine you’re in business together and today is the day you’re deciding how to divvy up the tasks and responsibilities of running and operating your business.
- Who would you put in charge of the day-to-day, month-to-month cash flow?
- Who would be in charge of designing a spending plan for your business?
- Who would be in charge of investing the mighty profits your business is going to make?
Now compare your answers with how you’re currently running the show at home and course correct if needed. First - together, create a spending and savings plan. Next - decide who is best suited for the role of managing the finances. And finally - together, set quarterly and annual financial goals and work together on researching options for making smart long-term investments with your money. Remember that for couples, the power of two, working together as a team, beats flying solo any day of the week.