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Should couples keep separate finances?
Megan Non-McArdle continues her transformation into a rational choice theorist:
While I can't guess how it will actually work out when I am faced with this in real life, I like the idea of both partners putting two-thirds of each paycheck in a joint account and reserving one-third to themselves. 'Cause why argue, or even discuss, some personal purchases? Buy it for yourself with your own money, and look, no one cares! It would also make gifts more meaningful, if it came from your own hoard rather than shared money. And give you a reserve, if you are the cautious type.
Convexifying the choice set. Who would expect that from a water engineer? Money decisions do not have to be all-or-nothing. Totally separate finances are undesirable, if only for symbolic reasons, but why not opt for a middle point?
The key problem, in my view, is not overspending from a common pool of money. Rather it is that couples use money as a medium for conducting ongoing fights, and thus the value of partially separate finances as a safety valve.
The percentage of separate funds should rise with:
1. The age of the parties when married. The two people might be very good together, but used to making their own money decisions.
2. The number of preceding marriages.
3. The two parties each earning decent or at least roughly comparable incomes.
4. Small numbers of children or grown, out-of-college children.
5. Portfolio safety. Portfolio riskiness should be borne jointly.
6. Inversely with the size of the mortgage and other fixed commitments. The common fund should be spent on something which is not merely automatic.
Surely state property laws should matter, as should the strength of Kahneman-Tversky framing effects, but I haven't quite figured out how.
Can you think of other relevant variables?
Posted by Tyler Cowen on September 18, 2006 at 07:46 AM in Economics | Permalink
Comments
Another way to share the finances but retain autonomous control over a large chunk of income is to divide up the bills. It has worked for Ms. Eclectic and me for many years. When one of us has a major change in income, we re-divide the bills. Dividing up the bills involves more negotiation than "each person kick in 2/3 of their income", but it is preferable (to me) to a scheme that imposes proportionality, especially if one person goes from having equal income to having a much smaller income.
Posted by: EclectEcon at Sep 18, 2006 8:00:48 AM
I think that culture also plays a large role. Religious people and others that attach more meaning to a marriage, will have less seperate funds. Additionally, people from collectivist cultures would be more willing to pool everything because there is less risk of it producing problems.
Posted by: Shmuel at Sep 18, 2006 8:33:03 AM
I disagree strongly that religion will lead to less separate funds, except as religion is reflected in other variables such as age of marriage, number of children, and likelihood of the woman working outside the home. Note that some religions and cultures have a strong tradition of encouraging separate accounts, such as the dowry in Islam. And separate accounts are more, not less, necessary in cultures where any de jure "joint" funds are de facto controlled by the man.
IMHO the 4 strongest variables would be:
-- propensity to save. (IRA's and 401K's are always separate; as a result, higher savings and higher wealth lead to greater separation.)
-- existence of unadopted or grown stepchildren. (separate pools of money may be set aside to care for them)
-- the couple's own beliefs about their expected probability of divorcing. age of marriage, # of past marriages, and presence of children might merely proxy the expected probability of divorce.
-- age. at some point estate planning overrides other considerations.
Posted by: DK at Sep 18, 2006 9:10:58 AM
My wife and I (3 months married) have just set up such a scheme, with one small improvement. Our paychecks are deposited into one account, and all the bills (and agreed-upon savings) are paid out of there. We then split whatever's left over.
We were previously following the EclectEcon approach of bill assignment, but irregular bills (car repairs/gifts/vacations) created imbalances.
Posted by: Mark at Sep 18, 2006 9:51:17 AM
Let's not forget convenience -- I think one of the big reasons my wife and I keep separate checking accounts (but common savings) is that it's just so darned easy to do so these days. This trend is likely to continue, with the rise of online banking and cheap tools for keeping track of accounts. Laziness (or its twins, rational ignorance and division of labor) probably motivates a lot of people to keep common accounts with one spouse assigned bookkeeping and budgeting duties; as the work involved falls, a marginal couple might well find separate accounts easier.
Posted by: Grant Gould at Sep 18, 2006 9:52:56 AM
PS: variables affecting our decision:
1) Religion: we are equal partners in the marriage, "2 have become 1" includes our incomes. The higher earner has no more claim to a single cent.
2) Economics 'background': I am an amateur economist (trained only by blogs, but my limited exploration suggests that economics is 90% mindset, a few key concepts, and the application thereof). The ideas of incentive, externalities, and tragedy of the commons seem to apply to this situation.
3) An inquiring mind: Anybody with a dash of common sense can eventuall come up with a workable household finances plan if they just ask the question, "Is there a better way to do this?" This is our third iteration, by the way.
Posted by: Mark at Sep 18, 2006 10:05:50 AM
Marriage often encourages division of labor within the household. (Perhaps this is marriage's main purpose?) Suppose I specialize in household production. How do I bank my output?
The venom from middle aged wives being dumped for a newer model in the 70s and 80s was due to this breach in the implicit social contract. Since then, the inherent marital time inconsistency problem has led some spouses to be less likely to trust each other's actions years out and so choose the more certain property rights from market production over uncertain property rights from home production, even if home production would be more efficient for the couple. Economic theory suggests that such self-insurance causes welfare to fall relative to a world in which home production could be banked.
Posted by: MW at Sep 18, 2006 10:16:27 AM
The venom from middle aged wives being dumped for a newer model in the 70s and 80s was due to this breach in the implicit social contract.
How do you square this broad-brush outline of divorces in the 70s and 80s with the fact that women in America initiate the large majority of all divorces?
Posted by: Matthew Cromer at Sep 18, 2006 10:22:26 AM
Matthew: Two things on that statistic.
IIRC, "Initiate" just refers to the person who filled out that section of the paperwork, not the person who actually ended the marriage. My ex-husband told me that he was gay and wanted a divorce, but I think from the way we filled out the paperwork it shows that *I'm* the one who "initiated" it.
Also, I've read that the discrepancy between the genders in who initiates divorces is only for younger women.
Posted by: Jacqueline at Sep 18, 2006 10:40:57 AM
On the old side of the Atlantic we often promise something about "with my worldly goods I thee endow". Seems unambiguous to me.
Posted by: dearieme at Sep 18, 2006 12:55:32 PM
What EclectEcon said, and Grant Gould. If wealth needs to be transferred from one party to the other it should be done by unequal division of expenses or simple transfer. No point at all in joint accounts and attendant shared passwords.
Posted by: Mike Linksvayer at Sep 18, 2006 12:58:08 PM
Convexifying the choice set. Who would expect that from a water engineer?
Water engineers are familiar with discontinuities in equations, like when fluid flow goes supercritical. Some of us are even aware of the subtleties between all and nothing. We don't like them, of course, but acknowledge that they sometimes increase the range of solutions. Or you could attribute my comfort with complexity to the economics classes I took in my policy program.
Posted by: Megan at Sep 18, 2006 1:18:36 PM
"Rather it is that couples use money as a medium for conducting ongoing fights, and thus the value of partially separate finances as a safety valve."
Good thought on fights. But if it's just an excuse, then the common fund would still provide ammo for fights.
I recall the Bible passage,
"love keepeth no accounts...". But we do live in a second-best world...
Posted by: Eric Rasmusen at Sep 18, 2006 1:19:14 PM
Relationships cost money. Be willing to pay. If you can't forgive a financial mistake of six months net income, you can't afford the relationship. This can be anything from getting snookered into a pyramid scheme to "lending" money to a family member. It includes flings with cocaine and quiting jobs in a tight market. If you can't pay, don't play. This has nothing to do with agreements with a domestic partner; it's your cost; view it as a risk premium. Don't buy what is out of your price range.
Based on this analysis my next spouse will be a cynical, orphaned only child.
Posted by: joe Seki at Sep 18, 2006 1:26:19 PM
I vote for the complete separation of all assets. To say that husband and wife "become one" is simply untrue. It is in the best interests of both for each to retain maximum individuality. So one can own the house. The other would then pay rent on his room - rooms should be separate if at all possible - and for food bought by the other and for meal preparation and cleaning that directly benefits the non-cooker and -cleaner. I often wondered why traditional housewives got credit for cleaning their own space, making their own bed and cooking the meals they also eat. They would have to do those things if they weren't married.
I guess children would be the only exception, since they can't actually be owned. But accounts should be kept of how much each spends - in time and money - for the benefit of the children. Just think how easy this would make it if breakup time ever comes. And I think it would make breakups less likely.
This idea owes much to Harry Browne's book, "How I Found Freedom in an Unfree World".
Posted by: Robert Speirs at Sep 18, 2006 1:45:13 PM
Doesn't matter, what's mine is mine and what's his is mine.
Works really, really well.
If I die before him, tho, it'll get ugly.
My only instruction upon marriage was, "If we're broke, I'll be
really upset."
He bounce my engagement ring check.
Posted by: Sandy P at Sep 18, 2006 1:53:30 PM
Intuitively, one would think that income pooling would produce a tension between an individual's self-interest and the desire to cooperate for the greater good of the family (or the marital union).
In her paper (http://links.jstor.org/sici?sici=0003-1224(199310)58%3A5%3C723%3AMITBTC%3E2.0.CO%3B2-7), Judith Treas suggests that depending on a marriage's parameters, some couples are better-off pooling their incomes while in other marriages, maintaining separate accounts is more efficient.
Under these three general conditions, Treas argues that income pooling is more efficient since transaction costs are minimized in relation to other forms of organization:
1. When exchanges are expected to be complex, frequent, and long-term.
2. When the value of goods and services rides largely on who is exchanging them (i.e. when there are sunk costs in a trading relationship)
3. When high costs are involved in monitoring or metering the quantity and quality of goods and services exchanged.
Some other notable points/findings Treas mentioned were:
1. Trust enables the family to serve a social insurance function, indemnifying members against misfortunes over the long run.
2. Sunk costs lock people into relationships and call for a different, less market-oriented structure i.e. joint bank accounts, for their associations. Children are an example of a sunk investment for the couple.
3. In joint production activities like parenting, individual contributions to productivity cannot be gauged from outputs (e.g. children's school success), but only from inputs (e.g. time devoted to tasks).
4. Having joint accounts not only fosters partnership, but also facilitates monitoring because "the monthly statement can serve as a warning to you both if one of you is getting overextended."
5. People who think their marriage is likely to continue have less incentive to hold back money in a separate bank account.
6. For marriages where both the husband and wife work, there is a greater likelihood of having separate accounts since contributions are more easily measureable.
7. Institutional arrangements play a significant role. For example, people who have jobs that expose them to higher risks of being sued -- like doctors and lawyers -- have an incentive to place assets solely in their spouse's name.
8. The higher the wife's education, the greater the relative likelihood that she alone will bank separately.
9. Remarried couples are more likely to have separate banking accounts.
Posted by: CL at Sep 18, 2006 1:55:37 PM
im with gould on convinience..
my wife and i have been married for 2 years now and never merged our checking accounts... the reason is its a royal pain to get up to the bank at the same time to sign papers, close the old account, and such, especially when theres really no reason to join them... im sure one day we will get the joint account but theres no value there to make us rush to get this done... or if there is please let me know
Posted by: mr. Yawn at Sep 18, 2006 1:59:12 PM
7. Inversely proportional with the difference in income.
Totally spearate finances are undisarable not only for symbolic reasons but also because pooling them together is the best signal of commitment.
Posted by: Slavisa at Sep 18, 2006 3:40:47 PM
FYI to Mike Linksvayer, joint accounts don't involve shared passwords, at least if your bank isn't incompetent.
and Mr. Yawn may have the best comment: merging the accounts is a royal pain! merging my wife's and my bank accounts is the single hardest customer service situation I have ever faced -- and I work for a bank, so I would have expected them to take better care of me. I'm not sure I would do it again.
To Joe Seki, I would never get in a relationship with or have children with anyone I thought might go on cocaine or get into a pyramid scheme or "lend" money to a friend, and I can't imagine forgiving anyone for that. I don't think I'd forgive myself, either, in a case of self-deception.
Posted by: DK at Sep 18, 2006 4:00:44 PM
Off topic question Tyler, but you've now referenced Megan's blog several times. Isn't it about time to start referring to her by who she is rather than by who she is not?
Posted by: fd at Sep 18, 2006 4:19:13 PM
DK writes:
... at least if your bank isn't incompetent.
[describes bank incompetency]
Me: No point, just found the sequence humorous.
Posted by: Mike Linksvayer at Sep 18, 2006 6:04:19 PM
fd - I think I first referred to myself as the non-McArdle Megan. I'd rather my last name weren't associated with my blog. I don't care either way about being Megan Non-McArdle, and at this point there's continuity for it.
Posted by: Megan at Sep 18, 2006 7:21:19 PM
A couple thoughts.
1) My guess is that fights over money are a proxy for other problems a high enough percentage of the time that worrying over the separation isn't a big deal. At one extreme, where one side get's in trouble/spends out of hand, separating the money isn't going to prevent them from running up big debt. I think a prenup is more important.
2) The women initiating divorces. Of course the women initiated the divorces, it usually cost the men lots of money. The blame to the men comes from all the cheating or abusing they probably did before the divorce.
Posted by: BillWallace at Sep 18, 2006 8:25:07 PM
I've never understood separate money monagement (we're married 16 years, started young without significnat assets and substantial debts, and doin gfine now). Do you also shop and cook separately? The economic virtue of division of labor in a relationship favors consolidating finances. If one partner is more interested or more competent in financial matters, then the other partner can concentrate on other aspects of life. There's also an economy of scale: with twice as much to play with, the manager of money for both has more investment options.
Posted by: arthur at Sep 18, 2006 10:00:38 PM
