4 steps to building an effective household financial system

Marriage is a partnership. Your spouse is your financial partner. Together you run a household financial system. That may not sound very romantic, but it’s a reality we seldom focus on.

A few weeks ago I had an interesting conversation with a friend, which sparked the idea of writing this post. Like many women, she had a successful career before becoming a full-time parent following the birth of her first child. When she had her own income, household finance was never something that caused contention in her marriage. However, it changed when they went to one income, even though her husband makes more than enough to take care of the family.

It turns out that her husband has a very particular idea of how the household finances should be managed. He makes sure that the family’s account is never empty, but also wants to have a say in small purchases down to grocery shopping. While my friend never has to worry about not having money, she also has no freedom in deciding what’s best for her family.

The result is that my friend started buying things that she thinks are important but don’t pass her husband’s scrutiny using her personal savings accrued before marriage. These are not extravagant purchases; in fact, most of the things she mentioned are books or toys for the children. She had to tell her husband that she got them used or as gifts, even though she felt bad about not being honest.

As you can tell, this couple’s financial partnership is not a very stable one, because one of the partners has very little say in how the partnership is run. If you were involved in a business partnership like that, would you want to stay in the long run?

Even if you were happy about not having to take any responsibility in the partnership, there may come a day when your partner could no longer take care of all the responsibility, possibly due to illness, disability, or even death. Will you able to shift from taking 0 to 100% responsibility overnight?

Like in all business partnerships, there are many different ways to divide up responsibilities based on talents, time, and desire. I don’t advocate one setup over the other. What I feel strongly about is designing your financial partnership with your spouse in advance, and adjusting continuously as your relationship evolves. Don’t take anything for granted.

Just like a business needs a partnership agreement, you and your spouse need to come to a mutual understanding on what kind of household financial system you adopt and what are each other’s responsibilities. If you can put it in writing, even better!

Design your household financial system

So what is a household financial system? I would characterize it as the system you use to actively meet your financial plan. A financial plan details your common goals and strategies, including debt payment, saving, investing, and tax management, etc., to help you get there. Having a plan is great. It’s like a business having a clear mission and business model. However, that is not enough. You still need to implement the strategy and assign responsibilities and tasks to various departments. That is why you need the household financial system.

3 questions to ask about your household financial system

The system describes how you actually carry out your financial plan. Here are a few major questions you can focus on initially:

#1: Where do you want to be on the spectrum from separate to joint cash flow?

Hundred percent joint cash flow means all the income or expenses come in and out of joint accounts, even if the cash flow comes from one spouse. While this is traditionally how couples operate their household financial system, it doesn’t mean it’s necessarily the only way or the best way. Due to the rise of two income households, many couples do not have the initial incentive to move toward a joint cash flow system, and end up somewhere on the spectrum.

I’ve worked with couples from one end of the spectrum to the other. It’s really a matter of mutual agreement. One method is not necessarily better than the other. I found that usually the problems arise when the couple did not intentionally talk about it, or failed to reach an agreement.

Most of the time, however, once you deliberately work on finding a solution, you can get to a compromise as a start, if not total agreement. If you are so far apart on what your ideals are, or one spouse refuses to engage in such conversation, then perhaps a total separate cash flow system is how you should begin.

#2: Who takes the responsibility for what tasks

While some household financial decisions require joint effort, many do not. Like running a business, you can make your household financial system more efficient if you are able to divide and conquer.

For instance, if my friend’s husband were to let her make grocery shopping decisions, they would be able to spend more time on the weekend with their children, instead of going to Costco when it’s the most crowded.

Before you discuss what you can each take care of, come to an understanding of what decisions require two “Yes” votes. This will greatly alleviate arguments going forward.

Some couples set an arbitrary dollar amount for joint decision making – for example, you can agree on always consulting each other if the purchase is above $200 dollars. Or you can use the area of operations – for example, never make decisions alone if it’s related to your children’s welfare.

Once you come to a consensus on when joint decisions are necessary, everything else can be a personal task. One can take care of the budget, while the other handles investments. Or each of you makes independent decisions on your employer benefits and 401(k).

However you divide up the tasks, I still recommend you learn how everything works, instead of delegating without knowledge. The division of labor shouldn’t be an excuse for being naïve; otherwise there may be issues when you are forced to take on the role in unexpected circumstances. This leads us to point #3 below.

#3: What happens in extreme situations?

Many couples have a well-functioning system 80% of the time, but the system breaks down outside of their normal circumstances. Usually it’s because two people is no longer the optimal number for making financial decision.

While you may agree that certain decisions require unanimous votes, it doesn’t mean it’s easy to get there. For example, you may both want a good education for your children, but one of you is happy with public school, and the other is partial to private education. This may not be a difference you can quickly come to terms with.

What do you do when you have one vote on each side? Let me suggest that’s the reason why an objective advisor is very useful. He or she can serve as a tiebreaker based on professional opinion, or force both of you to take a step back to evaluate why you take a certain stand. This allows you to come to the initial agreement to move forward rather than postponing the discussion to avoid arguments.

Another situation is when one person suddenly is not able to be part of the decision making. Maybe one of you takes a job temporarily at a remote location, or is sick with an illness that requires an extended hospital stay. The other person may need to make unilateral decisions during this time.

Facing these extreme situations, make sure you adjust your system in advance to make sure the partnership can still run. You may need to get familiar with some of the tasks that you have no knowledge about, or learn to be confident to make certain decisions on your own. Again, this is when having outside assistance may help you transition to a different system.

4 steps to building an effective household financial system

In addition on the technical information, here are some practical steps you can take to start building an effective household financial system:

#1: Talk about money / No secrets

I noticed that the couples that are the most successful at running the household finance together are those who are open to discussing everything about money, how they feel and why they make certain decisions. Before you can reach common ground, you really need to have an open conversation and listen to each other. This applies to everything in your relationship, but especially to your finances.

Even if you may fight sometimes in the beginning, discussing money matters is still better than avoiding them. I’ve found being able to talk about money is also an indication of the level of intimacy you’ve developed. Since money is such a taboo subject in our society, we really only talk about it with family and people we trust. If you experience fear from having honest and open financial discussions with your spouse, then it may be a sign that you need to address something deeper in your relationship.

#2: Reconcile the differences and find common ground

When you discuss how you wish to run the household financial system together, don’t just force your ideas on your spouse, no matter how much better they may be. Often, one spouse has a lot of interest in making a change in the household financial system, but the other just refuses to participate.

Rather than go your separate ways, the first step is to really listen to what the other is saying, and why he/she acts this way. Try to get all the differences out in the open, so you may find something in common. There is a reason why you decided to become life partners in the first place. Focus on that reason and extend that to how your partner can play up his/her strengths, instead of being bogged down by the weaknesses.

#3: Jointly create a system that works for you

Once you find common ground, no matter how narrow it is, try to build a small system on that. Maybe at first you can only agree on wanting autonomy with part of your income. Without jeopardizing the welfare of your family, you can jointly decide how much money each of you keeps in your personal account. Open a joint account so there is some transparency on how both of you manage cash flow, but still keep the privacy in your personal accounts.

Once the initial system works, continue to increase your common ground and build on your success. Don’t worry about having everything in place overnight. You are spending the rest of your life together, so you have plenty of time to get it right.

I found that for most Gen X and Gen Y couples, the main obstacle at this step is the time. We are all so busy getting through our day that we usually put something strategic like building a household financial system on the back burner.

If you usually don’t get to talk about finances until you absolutely have to, the pressure will mix with emotion and turn into an argument. Take a date night to actually talk about money and creating the system. Use the 3 questions that I’ve identified earlier. Your future self will thank you.

#4: Trust each other’s decisions

Lastly, no matter how good a system you build, there will always be a situation that requires you to go outside of the script. Maybe there is an emergency and you can’t reach your spouse. Or you thought you made the right decision but found out you didn’t consider all the facts. Second guessing your spouse will gradually dismantle your relationship. When all is said and done, you simply need to trust each other will make the best decision he/she can with good faith.

If you have legitimate reasons to not trust your spouse with handling household financial decisions, you need to discuss that in advance and talk about ways to mitigate it. Maybe it’s intentionally keeping a budget, gaining knowledge in personal finance, or engaging with a professional.

Once the system is set up, trust your spouse to play his/her part. If the system falls apart because at least of one you has trouble handling the responsibility, then go back to the drawing board and look for a new solution. It’s a continuous process.

This is one of the longest posts I’ve written. Your marriage is a life long journey, and so is your financial partnership. I don’t pretend to have all the answers. Our household financial system still evolves, and we still learn more about each other everyday through discussions and disagreements. There will be some hard work, but I hope you’ll eventually find that actively managing your financial partnership to be a rewarding experience.