Long-time readers of this blog would probably remember that I mentioned the concept of Mental Accounting before. To put it simply, it’s our human tendency to characterize our economic resources in “buckets”, and we naturally presume that what are within these buckets are not fungible.
This tendency plays a big role in how we budget. I wrote about how it impacts your budget system in my post about value-driven budget.
Richard Thaler, who has just won the Nobel in 2017 for his work in behavioral economics, first introduced this concept. In the opening introduction of his 1985 paper, Mental Accounting and Consumer Choice, he demonstrated this example of mental accounting:
Mr. S admires a $125 cashmere sweater at the department store. He declines to buy it, feeling that it is too extravagant. Later that month he receives the same sweater from his wife for a birthday present. He is very happy. Mr. and Mrs. S have only joint bank accounts.
Mr. Thaler used this example to show that we like to give and receive gifts that we would not purchase on our own. However, I think this is also a good example illustrating the ultimate mental accounting in marriage.
The Ultimate Mental Accounting
Recently I had the honor of contributing to a report about how mental accounting impacts our financial decisions. Mental accounting is usually characterized as something not so positive. Whether you call it a mind trick, or fallacy, it’s assuming that we are supposed to be a rational human being, but always fail to be one.
The fact is, we should recognize that we have the tendency to account for our economic interest in buckets, and incorporate it into our intentional decision-making. Mental accounting isn’t good or bad, it’s just human. And everybody has different ways of bucketing. What is important is to know how I tend to bucket, and evaluate the cost and benefit of it.
It got me thinking, what was one of the biggest areas of mental accounting that most people aren’t even aware of? It came to me when I was doing a presentation about building a household financial system.
Mental accounting in marriage – What is yours and what is mine
One of the greatest areas of mental accounting exists in our marriage, and it can have dire consequences if you are not willing to let it come out in the open. No matter where you are on the spectrum from joint to separate finances, in the US we do view the act of marrying as “two become one”. This is the basis for having an unlimited gift tax exemption between spouses, filing taxes jointly, and certain states treating assets acquired after marriage as common property.
In many of our legal and tax codes, marriage allows us to be one entity. It means what is mine is yours, and what is yours is mine. However, in reality, it takes years to a lifetime for our brain and heart to catch up to this concept. In our daily lives, we often categorize our financial decisions into YOURS or MINE. I’m not saying it’s wrong to think about it that way. All I’m saying is that if you are not on the same page about when you make that distinction, you are likely to have stress in your marriage, or become unhappy yourself.
In Mr. Thaler’s example earlier, Mr. S was happy that his wife bought him what he wanted, even though it eventually came out of his own bank account. Perhaps it’s also because in his mind, the gift came from HER money, not HIS.
Here are few other examples of the ultimate mental accounting that I’ve encountered.
One Income Household
When I got married, I not only moved to a new country to follow my husband, but also gave up my previous career. So immediately I faced the dilemma of “sharing” my husband’s income.
In my mind at the time, it was HIS income that I was spending – on my daily expenses, housing, or even investments in a new career. It was deeply unsettling for a few months. I felt uneasy making purchasing decisions without asking him first. After all, it was HIS money. Who am I to make the decision for him? What if he is not happy with my decision?
After a few months, my husband noticed my discomfort and made it clear that he considered his income OUR money. We are a team. This particular conversation changed my thinking and empowered me to be the CFO of our family. Now that I’m earning an income, I also consider what I earn as OUR money. It doesn’t matter who earns more. What’s important is that we are in it together equally.
This applies to all the families out there that might be making it work on one income, whether one of you lost a job, decided to stay home with kids, or cannot work due to illness. Please have this conversation if you never explicitly made it clear to the other that you are in this together.
Personal Purchase Decision
A problem came after I comfortably accepted we own everything together. Since my husband’s income is MINE too, I started wanting to control HIS spending. We don’t spend money on much, but there are things that he considered important to him, but not to me. At the beginning of our marriage, I questioned these purchases a lot.
Finally, he got tired of justifying his purchases to me and we had multiple arguments. Yes, it is our money, but it doesn’t mean that we each have a say in every single purchase we make. We still need the autonomy and to trust each other’s decisions.
This trust took time to build, but after a few years of marriage, we gradually got there. I no longer track his every purchase; nor does he mine. However, we’ve learned to consult each other on large expenses before pulling the trigger, or at least notify after the fact.
Some couples “codify” this into “allowances” for ease of tracking. For example, each of you may get to spend $100 a month on whatever you like, even though your spouse may disapprove. This type of arrangement comes in handy when you want to hide your surprise gift purchase for your spouse.
401(k) and IRA
While we may consider we own everything jointly in our marriage, there is one exception. Your retirement accounts are legally for “individuals”, which means you cannot jointly title them.
Some couples get really hung up on this fact, especially if they both work. They want to contribute equally to their retirement accounts, even though one may have a better plan than the other. Or one spouse may feel uneasy if his or her account balance is much lower than the other spouse, and wants to be able to catch up. Another scenario is that they will each make their own investing decisions without considering their overall goal and combined assets.
Eventually, your retirement assets should support both of you together. It doesn’t make sense to consider YOUR retirement savings versus MINE. By making this distinction, you may lose out on a lot of good planning opportunities to balance each other’s portfolio.
Even if you are afraid that the marriage won’t last, it’s common to go through the legal channels to have an equitable distribution of assets at divorce. In fact, I encourage you to consult an attorney before you simply each take your retirement account and part ways. Whether you think that the assets were yours or not does not matter, especially in community property states.
Last but not least, we often consider each other’s career, or income earning potential, separately as couples. It seems logical. One of the few areas that each of us can be an independent individual is at our work place.
However, when you consider your career decisions jointly, you will find that there are a lot more opportunities and benefits. You won’t simply think about “sacrificing” one to support the other, but allocating your resources to maximize joint potential.
For example, in order for both spouses to support one spouse’s career, that career must be relatively lucrative and secure. If not, you are better off to “diversify” your income stream from different jobs; or better yet, different industries. If you do decide to embark on one income household or a joint business venture, make sure you understand the risks of betting 100% of your income stream on one thing, and plan for alternatives in advance.
How to overcome mental accounting in marriage
Let’s come back to the definition of mental accounting. It’s not to say that you cannot distinguish between what is yours and what is mine. It only becomes economically inefficient when you think the resources are not fungible.
The goal should be maximizing your household’s economic benefit, welfare and happiness. Once you are on board with this goal, you will be able to contribute your resources for what benefits the other.
For instance, it’s okay to have separate bank accounts and credit cards. But if one of you is hoarding cash and the other is carrying large credit card balances, overall it’s a losing scenario for your household. You are paying interest when you could have saved. Nevertheless, I know of many people who are reluctant to pay off the spouse’s credit card debt. Even when they do, they would think they were “helping” the other out, not doing it out of joint economic interest.
Of course, if you have drastically different wealth and financial responsibility, it’s scary to choose to think about yours as mine. But this should be something you consider before you marry. If you cannot work out the difference after you marry, the marriage probably will not endure either.
The main thing to remember is that no matter how you divide up your assets, income, or financial responsibility, your welfare and happiness is ONE. If one of you is destitute, will the prosperous one be happy? Whether you combine your finances, one spouse’s financial decision impacts the other’s life.
In the end, whether it’s yours or mine, it’s all ours. Breaking the artificial boundary in our mind may make our household a more prosperous and happier one.