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?

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.

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.

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.

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.

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.

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.

"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...

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".

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.

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.

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?

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.

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.

Separate accounts together with shared bills is a sort of fiscal federalism. This makes perfect sense in a marriage. I experienced another model, which assumed that the man would be responsible for earning the money while my ex had all the decision making power over spendings. What a piece of idiot I was to agree with common finance. Nevermore. No taxation without representation.

When we were getting married and going through the stress of wedding planning, my wife read in one of the typical advice-for-the-new-bride books the suggestion that we maintain separate finances. Why? "It is highly recommended by divorce attorneys."

It was a transformative moment as we both wondered... "Why are we taking advice about marriage from divorce attorneys?" The stacks of bridal books and magazines went into the shredder as we took control of our own decisions about both the wedding and the marriage. In the ceremony we pledged our lives to each other and committed to a partnership until death do us part.

Game theory supports our decision to use a commitment strategy. Joint ownership of assets is one aspect of that commitment strategy. As Angus points out, we have also adopted each others' utility functions into our own, although that process had begun long before the commitment was established. As a consequence, we have a stable partnership that provides for our mutual benefit in ways that would not happen if we were simply exchanging fees for service with each other.

Clearly many marriages end in divorce, including some who never expected that outcome when they got married. But why take an action from the outset (separating finances) that only pays off if the marriage ends, unless you are expecting it to happen? Perhaps the willingness to enter a prenuptual contract is a signalling mechanism to indicate the type of marriage one wishes to enter.

Bravo Angus & Eddie ... very well said.

I understand that one can have a meaningful discussion re: the economics of marriages / personal finances in the abstract, the comments here are well reasoned examples of that. Ultimately, however, marriage is about two individuals coming together and acting for the benefit of the collective. These discussions seem to be the antithesis of that. Of course I've been married only once (14 years so far) which may explain my lack of cynicisim.

If only Karl Marx would have been referring to marriage when he said "From each according to his ability, to each according to his need," at least then I would have found something that I could agree with him about ;-)

Other variables that could apply include trust, which is the root for most of the issues. If the other person cannot be trusted with income, then there is a problem. Forget the fact that the person should not be with a partner that he/she cannot trust, because it happens more than we want to admit. Reviewing the variables that were presented leads one to believe that there could be instances in which separate accounts could be valuable, but as in a large corporation, there may be separate companies under the umbrella; however, the financial results will affect the entire organization. If couples mismanage money individually it will affect the couple as a whole, while possibly undermining the overall trust of the union. Portfolio risk should be borne through diversification, which will apply whether the accounts are joint or separate. Diversification does not have to have a different name on the account.

Why don’t rock concerts increase the price of their shows?

I have always had this question on mind†¦. “Why don’t the rock concerts, increase the price of their shows?† (Armchair Economist)

Regardless of the the fact that prices are high, rock concerts are always crowded. So if the management is aware that people would still visit rock concerts †¦ why do they not increase their price further? If they do they are sure to make more profit.

Such concerts are visited mostly by the young crowds. They come for the shows and are prepared to pay any price, as far as they make it for the show. Also, there is a lot of satisfaction they derive from such events that turn around once or twice in a year. This is also another major reason that they do not mind purchasing tickets however expensive they are. It is an instance where in they get to see their favorite star perform live. Besides this the band that performs also have their other relating products like their t-shirts, caps other mementos sold there which is again an added business.

Am sure there is certainly more reasoning to this!

All of the monies should go into a joint account accessable that can be watched by both parties. My husband kept "losing" his paycheck which ended up financing a string of whores, while I paid all the family bills. If we did not split our finances, some in separate, some in joint accounts, I would have found out before I was too old and broken to support myself.

My husband's family thinks I'm selfish and "have major issues" because I believe that keeping our checking accounts separate and splitting the bills makes the most sense. We share a savings account, and I have a Roth IRA. I love to travel and want to be able to afford a plane ticket to Ecuador to visit my girlfriend in the Peace Corp. My husband is a musician and says he can live on very little. I make more money because I seek the optimal situation and go for it. He prefers to work 29 hours a week and earn $8 hr., which I think is ridiculous for a man almost 30. I prefer little niceties, like a comfortable home, haircuts and colors, good coffee, and being able to buy what I need. Letting him have my extra hard earned money would mean I have no freedoms. A wife should not have to desert her dreams to satisfy her husband. We are equals. I'm not willing to give up my identity for old fashioned ideologies. His family relies on the grandparents to help them with loans when they need it. I prefer to rely on myself, as I am a capable woman with a good head on her shoulders. Actually, I didn't go to Christmas at his family's today because it has been a huge issue lately, and I'd rather be happy at home researching others who believe similarly. Thank you for this opportunity to know that I'm not the only one who thinks this makes the most sense. Merry Christmas!

Vice Presidential hopeful, Alaska Governor Sarah Palin, has been getting more of a bad rap from the mainstream media, than she has in praises. Last weekend, for example, she made her late-night entertainment debut on NBC’s long-running pop culture mainstay, Saturday Night Live. Instead of praising her for the good sport she was, or noting that her appearance gave SNL its highest ratings in 14 years, she has been highly criticized by the press for her appearance. For several weeks now, jab after jab has been taken at Palin, bashing her on everything from questioning her performance as the Governor of Alaska, her seventeen-year old daughter who got pregnant out of wedlock, and even sleazy attacks on her character. Some in the media, including many liberal pundits, have stooped so low as to insinuate that our country would fall to shambles if Palin was forced to take over the office of Presidency if something should happen to Republican Presidential Candidate John McCain. Contrary to the popular belief, virtually all of these attacks are chock full of half-truths, low-blowing character attacks and outright lies. Furthermore, a large number of people admire Sarah Palin for her relentless efforts to better things in her home state of Alaska. Others point to her unwavering support of the disabled demographic, her work in the interests of children and people with special needs and widely misunderstood ailments such as autism and Down syndrome; many of which never have gotten the attention they deserve. Many more put their faith in Sarah Palin, considering her advocacy for personal responsibility and financial freedom. Much of this even includes her opposing to do away with cash advances, a legitimate and invaluable resource that lots of real, responsible, working people have relied on to get out of dire straits once and for all.

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Great post! Really good insight. It’s always difficult to discuss finances and share money in relationships. Thanks for your advice. I recently stumbled upon this blog like I stumbled upon yours. I think they offer some good points and laughter about the topic: http://burisonthecouch.wordpress.com/2010/09/22/dolla-dolla-bill-yall/

Thanks for the post! I’d like to see more like it.

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