How well do you really know your spouse’s money habits and aptitude for managing finances?
These days, more couples are handling some, or all, of their finances separately, making the probability of hidden issues much greater. But not knowing how your husband or wife manages money can be a ticking time bomb, seriously compromising your financial future. Believe me, I know from experience.
When I got married, I had known my husband for nearly six years and thought I understood him pretty well. It was my first marriage and his second. We were both financial advisers. Trouble was, our personal financial planning was forever put on the back burner.
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A $30 Million Fleecing
We kept our savings separate. I paid my bills and he paid his — or so I thought.
I was pretty complacent about his financial life because he was a Certified Financial Planner (as am I) and had three teenage boys (I had a cat), making his financial responsibilities far greater than mine. I didn’t want to push him, because I was sensitive to the painful financial negotiations involved with his divorce process. In addition, I was financially independent when I entered the relationship and planned to stay that way.
Five years later, he confessed to stealing $30 million from his own clients over a 20-year period. Despite my innocence in his illegal activities, the resulting investigation and legal proceedings wiped me out of my hard-earned savings. I lost my TV reporting position and morning drive-time radio show due to the publicity, interrupting my income for years. It was a financial disaster for me, not to mention emotionally devastating.
If I had pushed my husband for the same financial planning procedures that I put my clients through, would I have figured out what he was up to? Probably.
The Importance of Sharing Financial Info
You see, effective financial conversations between spouses require full disclosure about assets, debts, income and spending. In retrospect, it is likely that thorough discussions about money with my ex would have sent me down a path of probing questions and raised red flags, potentially revealing his illicit behavior sooner — rather than when he had blown through all of his victims’ funds.
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Hopefully, you’ll never find yourself in a situation like mine. But financial dysfunction in a marriage is more common than you think and one of the leading causes of divorce. That’s why an annual financial checkup will keep you and your significant other on the same page and help ensure that you’re both on track to reach your financial goals.
Even if you and your partner have a wonderful, trusting relationship, it’s still important to go through the exercise below so each of you have a full understanding of the family’s finances. After all, you never know when something might happen to either of you. (See the Next Avenue blog by Money & Security Editor Richard Eisenberg about the lessons one man learned after being financially blindsided when his wife died unexpectedly.)
So grab your partner; your bank, brokerage, mutual fund and retirement statements and your calculator and start a frank financial dialogue.
The Two-Step Process
Your first step is for each of you to prepare fairly simple individual financial statements: An Income/Cash Flow Statement and a Balance Sheet/Net Worth Statement. You’ll want to do this at least annually and upon any major life changes, such as a death, birth, job change or disability.
Your Income Statement has your salary, self-employment earnings, dividends and interest and leads to Your Cash Flow Statement, which has your total income minus all of the expenses you pay, including your share of any that are joint (such as a mortgage or rent, utilities, food, medical bills, entertainment, clothes and personal care). Some couples may find it easier to do combined statements representing all of the income and expenses of the household.
When you complete these cash flow statements, are the numbers positive or negative? If one of them is negative, most likely that person is spending too much money and better budgeting is in order. A negative number, or one that’s shrinking month-to-month or year-to-year, requires you both to delve a little deeper and ask the question: “Why?”
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Be sure to review all credit card statements for the year, especially if there is a cash-flow problem. This is not only to see how money is being spent, but also to determine whether unpaid balances are growing and how much of your cash flow is being spent on costly interest and late fees. It’s frightening how quickly these can add up and snowball out of control. Annual reviews of credit reports will also help you understand whether your spouse is underperforming in the bill-paying department.
Your Balance Sheet shows what you own (real estate, bank accounts, investments, retirement accounts) and when you subtract what you owe (mortgage, home equity, credit card debt, student loans, etc.), you’ll come up with your Net Worth. Many couples will find it easier to do a combined balance sheet due to jointly-owned assets and obligations.
Again, this should be a positive and growing number. If it isn’t, you are distancing yourself from your financial goals.
While a negative or shrinking net worth can be a symptom of cash-flow problems, it might signify something else. It could be an indication of too much or too little risk in your investments. Or it could be showing you that debt is spiraling out of control.
Questions Worth Asking
Review with your spouse your investment and retirement account statements, as well as your debt balances. Then, answer these questions: Do you each understand the investments you both have and the risks involved with what you own? Are the investments appropriate for your timeline and risk tolerance? Are your accounts wildly fluctuating or barely budging? Is enough money going into your accounts to get you to where you want to go? Is the amount you owe growing faster than the amount you own?
If either of these net-worth numbers is significantly positive and rapidly growing, it could be symptomatic of someone who is perpetually putting away for a rainy day. While saving is generally a good thing, when taken to the extreme it can cause resentment and bitterness between mates.
If your own comprehensive review fails to get you on the same page as your spouse, then it’s probably time to sit down with a financial adviser who can help you identify the issues, facilitate communication and put together an action plan for your finances.
Whether or not you bring in professional help, getting your financial house in order and keeping it that way is a huge stress reliever and can actually promote emotional intimacy. If nothing else, you will learn a lot about each other and possibly spot some red flags of damaging behavior worth addressing.