April 13, 2020

Why You Need to Be Familiar with Your Family Finances

If your marriage ultimately ends by divorce it may not be important, as between you and your spouse, which of you was primarily responsible for doing the laundry, mowing the lawn or hiring the repairmen and contractors. But you owe it to yourself to make sure you are familiar with the family finances, even if your spouse assumes the day to day responsibility. Katy McLaughlin’s article “Deciding Who Becomes the CFO of the Home“, published in the April 10, 2020 edition of the Wall Street Journal, explores this important topic.

How do couples decide which partner is going to handle money issues? You might assume that whoever is smarter about finances should get the job.

But that’s not what researchers discovered in a 2014 study. It turns out that the job generally goes to whoever “hates it less,” according to one of the study’s authors.

Adrian Ward and co-author John G. Lynch, both psychologists and professors of marketing at the University of Texas at Austin and the University of Colorado Boulder, respectively, published their findings last year in the Journal of Consumer Research.

The researchers queried 313 couples in early stages of relationships on each member’s financial literacy, credit score, income, and time spent on household work. They then rated them on each factor.

What they found was that there was no correlation between financial acumen and who got the “household CFO” job. Instead, the major determinants were who had the time, didn’t already do lots of other household tasks and disliked the role less than their partner, Mr. Ward said. There was some gender-bias favoring men, Mr. Ward said, even when controlling for other factors (including income and financial literacy).

Through another series of surveys and studies that examined 1,184 people, the authors found that after five years, “household CFOs” develop significant financial literacy compared with their partners.

Non-CFO partners, by contrast, either stagnated or became less financially literate the longer relationships lasted.

If a couple stays together for years and a dramatic knowledge gap grows, divorce or widowhood can create “a lot of vulnerability” for non-CFO partners, said Mr. Lynch. That’s particularly true because holes in financial knowledge are hard to patch. In 2014, Mr. Lynch co-authored a meta-analysis of over 200 studies, published in Management Science, that found that financial educational interventions, such as college courses on personal finance or employee-sponsored seminars about retirement, explain an average of 0.1% of “good” financial behavior.

The authors argue that people develop expertise on a “need to know” basis, meaning that they pay attention to issues like capital-gains taxes and mortgage rates when they are the ones making investment and refinancing decisions.

But in light of how circumstances can change—say, a long marriage that ends in divorce—partners who don’t hold the purse strings may be wise to assume they do need to know. 

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