Albert Einstein is often credited with saying, “Compound interest is the eighth wonder of the world. He who understands it, earns it: he who doesn’t, pays it.” He is referring, of course, to the phenomenon of interest accumulating on both an investment’s principal and previous interest earned.
There’s another type of compound interest, though, that is often overlooked or even actively avoided. Married couples have the unique opportunity to accelerate financial success through a singular, compounded financial interest.
Unfortunately, most squander this opportunity. Instead, money is regularly cited as the most frequent reason that couples fight. It’s also a major contributor to divorce.
Being Valentine’s Day, it’s worth exploring ways to avoid the relational infighting and deploy this compound interest. There are four practical steps every couple can start immediately for a better relationship with their money and each other.
Tell Your Story
One reason we fight so much about money is that the cliché that opposites attract is mostly true. Savers, spenders, nerds, free spirits, spendthrifts, misers… whatever your preferred terminology, opposites do tend to end up together.
Additionally, research shows that we carry fundamental values and beliefs about money we inherit from our parents. I wrote more about these formational money memories on the blog here. Uncover these underlying beliefs by asking your significant other simple questions like, “What was money like when you were growing up?” “How did receiving the paycheck from your first job make you feel?”
Sure, it’s hardly groundbreaking that communication is a key factor in successful relationships, but the answers and conversations around these questions uncover the mental structures leading to monetary excess, thriftiness, avoidance, or even shame and guilt. Experiencing a family bankruptcy, for instance, may lead to the desire for an excessive savings balance. A parent’s early death may be the reason for a “spend it while you can” approach.
Understanding what motivates behavior and habits around money is the first step in creating a compound interest with your spouse.
Don’t Keep the “Y” To Yourself
My wife told me not to buy her flowers for Valentines’ Day this year. I know the reason why. As a florist, she has more flowers than she wants or needs. In contrast, as a financial advisor, I’d be more than happy if she wanted to gift me money. By not buying her flowers, we both get what we want. Voilà, compound interest. Okay, okay, before the messages start rolling in, yes, I’m still buying her a gift.
The point is, that compounding only works if we include others in our goals. Early in my marriage I made the mistake of formulating personal financial goals, but not thoroughly sharing the reason for them with my spouse. Different formative money memories made for very different financial priorities.
Instead of collaboratively creating shared goals, I imposed my financial framework on my spouse. Unsurprisingly, it didn’t work.
It wasn’t until we started sharing the “why” of our goals that we created a compound interest in achieving them. Couples that fail to share the “Y” simply never move a “your” goal to “our” goal.
Make A Plan
Once you’ve created shared goals, create a plan to achieve these goals together. This starts with the b-word: a budget. To avoid the stigma, let’s just call it a spending plan. Goals have inherent weaknesses. One of them is that they usually lack a plan of execution (you can read more about making better goals here).
A spending plan is one step toward creating a plan of execution. In the process, avoid the CFO approach. I’ve also fallen prey to this mistake. By effectively nominating myself as the household CFO, I removed my wife from the equation. Finalizing and monitoring a spending plan was solely my responsibility.
Fire the CFO, ditch the spreadsheets and don’t make the spending plan too restrictive. Since opposites attract, it will be difficult enough for one spouse to engaged without forcing them to adhere to a complicated spread sheet – no matter how sophisticated your formulas. Start simple and create freedom by setting a dollar threshold for when purchases need to be discussed.
Plan To Date
Finally, financial responsibilities of spending, saving and investing should be shared. Both individuals need skin in the game to accomplish true compound interest. To stay on track together, schedule monthly financial check-in dates.
Let the least enthused individual determine the venue to help them stay engaged (provided it facilitates productive conversation). Monthly check-ins are times to review your spending plan, celebrate successes and reevaluate financial priorities.
Compound interest may very well be the eighth wonder of the world. Don’t let another Valentine’s Day pass without tapping into the “magic” of compound interest by creating a unified financial plan with your spouse.
