Almost 75% of Americans experience some financial stress, while nearly a quarter feel extreme financial stress, according to a study by the American Psychological Association. Not surprisingly, a SunTrust Banks Inc. (STI) study found that finances are a leading cause of stress in relationships with more than one-third of respondents calling it a primary cause of friction. CreditCards.com further discovered that one-in-five Americans hide transactions from their significant other.
The good news for financial advisors with couples as clients is that most problems stem from simple mistakes that can be easily corrected by making smart financial changes. Let's take a look at some common mistakes that couples make and how they can be easily avoided in the future. (For more, see How Advisors Can Help Couples Agree on Finances.)
Too Much Debt
Couples rarely see eye-to-eye when it comes to determining how much debt is excessive and what kinds of debt are acceptable. Moreover, couples enter relationships with uneven debt levels that were accrued throughout their 20s and 30s. These issues make debt the single most contentious issue between couples when it comes to their finances.
In most cases, debt becomes everyone’s problem after entering into a long-term relationship – especially when getting married. A prenuptial agreement may protect some assets accrued before marriage from debt collectors, but in general, couples should try to work together to pay down debt as quickly as possible and avoid any late payments or interest penalties. By working together, couples can nip the problem at the root before it blossoms into a major stressor. (For more, see Marriage, Divorce and the Dotted Line.)
Keeping Separate Accounts
Smart Money magazine found that 64% of couples put all of their money into joint accounts, 14% kept everything in separate accounts, and 18% maintained both types of accounts. Similar to how many people feel that a person’s debt is their problem, they feel that a person’s income should be their own. Some couples also point to the fact that separate accounts may also make it easier to divvy up finances if a marriage ends in divorce or a long-term relationship ends.
While there are certainly valid reasons to maintain separate accounts, couples should at least explore maintaining one joint account and slowly merging their accounts over time. Joint accounts make it much easier to handle household bills and other common expenses, while couples should avoid making each other feel as if they’re closely watching the account for mistakes or spending levels to avoid any fights. (For more, see: How Advisors Can Help Newlyweds.)
Not Making a Budget
Spending is the second most common reason that couples fight, according to Smart Money magazine. While it’s easy to point fingers at each other for spending, several studies have shown that men and women spend equally on different things. Women usually spend money on clothing, groceries, and household items, while men tend to spend money on large purchases that happen less frequently, which adds to the confusion.
The simplest solution to controlling spending is to establish a household budget that everyone must adhere to throughout the month that puts everything on the table – no secrets. By taking the element of surprise out of the equation, couples can avoid fights over spending and ensure that everyone is being treated fairly. A similar approach can be taken when allocating how much to save or invest for large purchases or retirement over time. (For more, see Tips for Assessing a Client's Risk Tolerance.)
The Bottom Line
Debt is the single largest cause of conflict among couples, but issues can be avoided by taking care of the problem early on together. Spending is the second biggest cause of conflict, but a well-defined budget can eliminate surprises and make arguments less frequent. Joint accounts are generally advisable in order to reduce conflict, especially when kids or a mortgage come into the equation. (For more, see Tips for Helping Clients with Life Insurance Needs.)