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Money Management for Couples: Combining Finances

Published Apr 03, 24
17 min read

Financial literacy is a set of skills and knowledge that are necessary to make good decisions when it comes to one's money. The process is similar to learning the complex rules of a game. The same way athletes master the basics of their sport to be successful, individuals can build their financial future by understanding basic financial concepts.

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Today's financial landscape is complex, and individuals are increasingly responsible to their own financial wellbeing. Financial decisions have a long-lasting impact, from managing student loans to planning your retirement. A study by FINRA’s Investor Education foundation found a relationship between high financial education and positive financial behaviours such as planning for retirement and having an emergency fund.

It's important to remember that financial literacy does not guarantee financial success. Some critics argue that focusing on financial education for individuals ignores systemic factors that contribute to financial inequity. Some researchers suggest that financial education has limited effectiveness in changing behavior, pointing to factors such as behavioral biases and the complexity of financial products as significant challenges.

One perspective is to complement financial literacy training with behavioral economics insights. This approach acknowledges that people do not always make rational decisions about money, even if they are well-informed. Strategies based on behavioral economics, such as automatic enrollment in savings plans, have shown promise in improving financial outcomes.

Key Takeaway: While financial education is an essential tool for navigating finances, this is only a part of the bigger economic puzzle. Systemic factors play a significant role in financial outcomes, along with individual circumstances and behavioral trends.

The Fundamentals of Finance

Basic Financial Concepts

Financial literacy starts with understanding the fundamentals of Finance. These include understanding:

  1. Income: Money earned from work and investments.

  2. Expenses = Money spent on products and services.

  3. Assets are the things that you own and have value.

  4. Liabilities: Financial obligations, debts.

  5. Net Worth: The difference between your assets and liabilities.

  6. Cash flow: The total money flowing into and out from a company, especially in relation to liquidity.

  7. Compound Interest (Compound Interest): Interest calculated based on the original principal plus the interest accumulated over previous periods.

Let's look deeper at some of these concepts.

You can also find out more about the Income Tax

You can earn income from a variety of sources.

  • Earned income: Salaries, wages, bonuses

  • Investment income: Dividends, interest, capital gains

  • Passive income: Rental income, royalties, online businesses

Understanding the various income sources is essential for budgeting and planning taxes. In many tax systems, earned incomes are taxed more than long-term gains.

Assets vs. Liabilities

Assets can be anything you own that has value or produces income. Examples include:

  • Real estate

  • Stocks and bonds

  • Savings accounts

  • Businesses

The opposite of assets are liabilities. Liabilities include:

  • Mortgages

  • Car loans

  • Credit Card Debt

  • Student Loans

A key element in assessing financial stability is the relationship between assets, liabilities and income. Some financial theory suggests focusing on assets that provide income or value appreciation, while minimising liabilities. You should also remember that debt does not have to be bad. A mortgage for example could be considered a long-term investment in real estate that increases in value over time.

Compound Interest

Compound Interest is the concept that you can earn interest on your own interest and exponentially grow over time. This concept works both for and against individuals - it can help investments grow, but also cause debts to increase rapidly if not managed properly.

Take, for instance, a $1,000 investment with 7% return per annum:

  • After 10 years the amount would increase to $1967

  • After 20 Years, the value would be $3.870

  • It would be worth $7,612 in 30 years.

This demonstrates the potential long-term impact of compound interest. However, it's crucial to remember that these are hypothetical examples and actual investment returns can vary significantly and may include periods of loss.

Understanding these basics helps individuals get a better idea of their financial position, just like knowing the score during a game can help them strategize the next move.

Financial Planning & Goal Setting

Financial planning involves setting financial goals and creating strategies to work towards them. It's comparable to an athlete's training regimen, which outlines the steps needed to reach peak performance.

Elements of financial planning include:

  1. Setting SMART (Specific, Measurable, Achievable, Relevant, Time-bound) financial goals

  2. Creating a comprehensive budget

  3. Develop strategies for saving and investing

  4. Regularly reviewing and adjusting the plan

Setting SMART Financial Goals

The acronym SMART can be used to help set goals in many fields, such as finance.

  • Specific goals make it easier to achieve. For example, saving money is vague. However, "Save $10,000", is specific.

  • Measurable - You should be able track your progress. In this instance, you can track how much money you have saved toward your $10,000 goal.

  • Achievable Goals: They should be realistic, given your circumstances.

  • Relevance: Goals must be relevant to your overall life goals and values.

  • Set a deadline to help you stay motivated and focused. Save $10,000 in 2 years, for example.

Creating a Comprehensive Budget

A budget helps you track your income and expenses. Here is a brief overview of the budgeting procedure:

  1. Track your sources of income

  2. List all expenses, categorizing them as fixed (e.g., rent) or variable (e.g., entertainment)

  3. Compare income to expenditure

  4. Analyze the results, and make adjustments

One popular budgeting guideline is the 50/30/20 rule, which suggests allocating:

  • 50% of income for needs (housing, food, utilities)

  • 30% for wants (entertainment, dining out)

  • Save 20% and pay off your debt

It's important to remember that individual circumstances can vary greatly. Some critics of these rules claim that they are not realistic for most people, especially those with low salaries or high living costs.

Savings Concepts

Saving and investing are key components of many financial plans. Here are some related terms:

  1. Emergency Fund: A savings buffer for unexpected expenses or income disruptions.

  2. Retirement Savings: Long-term savings for post-work life, often involving specific account types with tax implications.

  3. Short-term savings: Accounts for goals within 1-5years, which are often easily accessible.

  4. Long-term investments: For goals that are more than five years away. Often involves a portfolio of diversified investments.

It is important to note that there are different opinions about how much money you should save for emergencies and retirement, as well as what an appropriate investment strategy looks like. The decisions you make will depend on your personal circumstances, risk tolerance and financial goals.

The financial planning process can be seen as a way to map out the route of a long trip. The process involves understanding where you are starting from (your current financial situation), your destination (financial goal), and possible routes (financial plans) to reach there.

Risk Management and Diversification

Understanding Financial Risks

The risk management process in finance is a combination of identifying the potential threats that could threaten your financial stability and implementing measures to minimize these risks. The concept is similar to the way athletes train in order to avoid injury and achieve peak performance.

Key components of Financial Risk Management include:

  1. Potential risks can be identified

  2. Assessing risk tolerance

  3. Implementing risk mitigation strategies

  4. Diversifying investments

Identifying Potential Risks

Financial risk can come in many forms:

  • Market risk: The potential for losing money because of factors which affect the performance of the financial marketplaces.

  • Credit risk (also called credit loss) is the possibility of losing money if a borrower fails to repay their loan or perform contractual obligations.

  • Inflation is the risk of losing purchasing power over time.

  • Liquidity: The risk you may not be able sell an investment quickly and at a reasonable price.

  • Personal risk is a term used to describe risks specific to an individual. For example, job loss and health issues.

Assessing Risk Tolerance

Risk tolerance is the ability of a person to tolerate fluctuations in their investment values. It's influenced by factors like:

  • Age: Younger adults typically have more time for recovery from potential losses.

  • Financial goals: Short-term goals usually require a more conservative approach.

  • Stable income: A steady income may allow you to take more risks with your investments.

  • Personal comfort. Some people are risk-averse by nature.

Risk Mitigation Strategies

Common strategies for risk reduction include:

  1. Insurance: Protection against major financial losses. Health insurance, life and property insurance are all included.

  2. Emergency Funds: These funds are designed to provide a cushion of financial support in the event that unexpected expenses arise or if you lose your income.

  3. Maintaining debt levels within manageable limits can reduce financial vulnerability.

  4. Continuous Learning: Staying in touch with financial information can help you make more informed choices.

Diversification: A Key Risk Management Strategy

Diversification, or "not putting your eggs all in one basket," is a common risk management strategy. By spreading investments across various asset classes, industries, and geographic regions, the impact of poor performance in any single investment can potentially be reduced.

Consider diversification like a soccer team's defensive strategy. To create a strong defensive strategy, a team does not rely solely on one defender. They use several players at different positions. Diversified investment portfolios use different investments to help protect against losses.

Diversification Types

  1. Diversification of Asset Classes: Spreading your investments across bonds, stocks, real estate, etc.

  2. Sector diversification is investing in various sectors of the economy.

  3. Geographic Diversification: Investing in different countries or regions.

  4. Time Diversification (dollar-cost average): Investing in small amounts over time instead of all at once.

Diversification in finance is generally accepted, but it is important to understand that it does not provide a guarantee against losing money. All investments carry some level of risk, and it's possible for multiple asset classes to decline simultaneously, as seen during major economic crises.

Some critics say that it is hard to achieve true diversification due to the interconnectedness of global economies, especially for individuals. They claim that when the markets are stressed, correlations can increase between different assets, reducing diversification benefits.

Diversification is still a key principle of portfolio theory, and it's widely accepted as a way to manage risk in investments.

Investment Strategies and Asset Allocution

Investment strategies are plans designed to guide decisions about allocating assets in various financial instruments. These strategies can be compared to an athlete's training regimen, which is carefully planned and tailored to optimize performance.

The key elements of investment strategies include

  1. Asset allocation: Investing in different asset categories

  2. Diversifying your portfolio by investing in different asset categories

  3. Rebalancing and regular monitoring: Adjusting your portfolio over time

Asset Allocation

Asset allocation is the division of investments into different asset categories. The three main asset classes include:

  1. Stocks: These represent ownership in an organization. Stocks are generally considered to have higher returns, but also higher risks.

  2. Bonds (Fixed income): These are loans made to corporations or governments. In general, lower returns are offered with lower risk.

  3. Cash and Cash Alternatives: These include savings accounts (including money market funds), short-term bonds, and government securities. They offer low returns, but high security.

Factors that can influence asset allocation decisions include:

  • Risk tolerance

  • Investment timeline

  • Financial goals

There's no such thing as a one-size fits all approach to asset allocation. Although there are rules of thumb (such a subtracting your age by 100 or 110 in order to determine how much of your portfolio can be invested in stocks), they're generalizations, and not appropriate for everyone.

Portfolio Diversification

Diversification can be done within each asset class.

  • Stocks: You can invest in different sectors and geographical regions, as well as companies of various sizes (small, mid, large).

  • Bonds: You can vary the issuers, credit quality and maturity.

  • Alternative investments: Some investors consider adding real estate, commodities, or other alternative investments for additional diversification.

Investment Vehicles

There are many ways to invest in these asset categories:

  1. Individual Stocks, Bonds: Provide direct ownership of securities but require additional research and management.

  2. Mutual Funds are professionally managed portfolios that include stocks, bonds or other securities.

  3. Exchange-Traded Funds, or ETFs, are mutual funds that can be traded like stocks.

  4. Index Funds: Mutual funds or ETFs designed to track a specific market index.

  5. Real Estate Investment Trusts (REITs): Allow investment in real estate without directly owning property.

Active vs. Investing passively

In the world of investment, there is an ongoing debate between active and passive investing.

  • Active Investing: Consists of picking individual stocks to invest in or timing the stock market. Typically, it requires more knowledge, time and fees.

  • Passive Investing: Involves buying and holding a diversified portfolio, often through index funds. It is based upon the notion that it can be difficult to consistently exceed the market.

The debate continues, with both sides having their supporters. Advocates of Active Investing argue that skilled manager can outperform market. While proponents for Passive Investing point to studies proving that, in the long run, the majority actively managed fund underperform benchmark indices.

Regular Monitoring and Rebalancing

Over time some investments will perform better than other, which can cause the portfolio to drift off its target allocation. Rebalancing involves periodically adjusting the portfolio to maintain the desired asset allocation.

Rebalancing can be done by selling stocks and purchasing bonds.

It is important to know that different schools of thought exist on the frequency with which to rebalance. These range from rebalancing on a fixed basis (e.g. annual) to rebalancing only when allocations go beyond a specific threshold.

Think of asset allocation like a balanced diet for an athlete. A balanced diet for athletes includes proteins, carbohydrates and fats. An investment portfolio is similar. It typically contains a mixture of assets in order to achieve financial goals while managing risks.

Remember: All investments involve risk, including the potential loss of principal. Past performance is no guarantee of future success.

Retirement Planning: Long-term planning

Financial planning for the long-term involves strategies to ensure financial security through life. It includes estate planning and retirement planning. This is similar to an athlete’s long-term strategy to ensure financial stability after the end of their career.

Long-term planning includes:

  1. Understanding retirement options: Understanding the different types of accounts, setting goals and estimating future costs.

  2. Estate planning - preparing assets to be transferred after death. Includes wills, estate trusts, tax considerations

  3. Consider future healthcare costs and needs.

Retirement Planning

Retirement planning involves understanding how to save money for retirement. Here are some important aspects:

  1. Estimating Retirement Needs: Some financial theories suggest that retirees might need 70-80% of their pre-retirement income to maintain their standard of living in retirement. This is only a generalization, and individual needs may vary.

  2. Retirement Accounts

    • 401(k), also known as employer-sponsored retirement plans. They often include matching contributions by the employer.

    • Individual Retirement Accounts, or IRAs, can be Traditional, (potentially tax deductible contributions with taxed withdraws), and Roth, (after-tax contributions with potentially tax-free withdraws).

    • SEP IRAs and Solo 401(k)s: Retirement account options for self-employed individuals.

  3. Social Security: A government program providing retirement benefits. It's important to understand how it works and the factors that can affect benefit amounts.

  4. The 4% Rules: A guideline stating that retirees may withdraw 4% their portfolio in their first retirement year and adjust that amount to inflation each year. There is a high likelihood that they will not outlive the money. [...previous text remains the same ...]

  5. The 4% rule: A guideline that suggests retirees can withdraw 4% of their retirement portfolio in their first year and adjust it for inflation every year. This will increase the likelihood that they won't outlive their money. This rule has been debated. Financial experts have argued that it might be too conservative and too aggressive depending upon market conditions.

You should be aware that retirement planning involves a lot of variables. Factors such as inflation, market performance, healthcare costs, and longevity can all significantly impact retirement outcomes.

Estate Planning

Estate planning consists of preparing the assets to be transferred after death. Among the most important components of estate planning are:

  1. Will: A document that specifies the distribution of assets after death.

  2. Trusts are legal entities that hold assets. There are many types of trusts with different purposes.

  3. Power of Attorney: Designates someone to make financial decisions on behalf of an individual if they're unable to do so.

  4. Healthcare Directive: A healthcare directive specifies a person's wishes in case they are incapacitated.

Estate planning is a complex process that involves tax laws and family dynamics as well personal wishes. Laws governing estates may vary greatly by country or state.

Healthcare Planning

The cost of healthcare continues to rise in many nations, and long-term financial planning is increasingly important.

  1. Health Savings Accounts (HSAs): In some countries, these accounts offer tax advantages for healthcare expenses. The eligibility and rules may vary.

  2. Long-term Care Insurance: Policies designed to cover the costs of extended care in a nursing home or at home. The cost and availability of these policies can vary widely.

  3. Medicare: This government health insurance programme in the United States primarily benefits people 65 years and older. Understanding Medicare's coverage and limitations can be an important part of retirement plans for many Americans.

The healthcare system and cost can vary widely around the world. This means that planning for healthcare will depend on where you live and your circumstances.

The conclusion of the article is:

Financial literacy encompasses many concepts, ranging from simple budgeting strategies to complex investment plans. In this article we have explored key areas in financial literacy.

  1. Understanding basic financial concepts

  2. Developing financial planning skills and goal setting

  3. Diversification is a good way to manage financial risk.

  4. Understanding the various asset allocation strategies and investment strategies

  5. Planning for long term financial needs including estate and retirement planning

Although these concepts can provide a solid foundation for financial education, it is important to remember that the financial industry is always evolving. Changes in financial regulations, new financial products and the global economy all have an impact on personal financial management.

In addition, financial literacy does not guarantee financial success. As discussed earlier, systemic factors, individual circumstances, and behavioral tendencies all play significant roles in financial outcomes. Critics of financial education say that it does not always address systemic inequalities, and may put too much pressure on individuals to achieve their financial goals.

A second perspective stresses the importance of combining insights from behavioral economy with financial education. This approach recognizes that people don't always make rational financial decisions, even when they have the necessary knowledge. It is possible that strategies that incorporate human behavior, decision-making and other factors may improve financial outcomes.

Also, it's important to recognize that personal finance is rarely a one size fits all situation. Due to differences in incomes, goals, risk tolerance and life circumstances, what works for one person might not work for another.

Given the complexity and ever-changing nature of personal finance, ongoing learning is key. This may include:

  • Keep up with the latest economic news

  • Regularly reviewing and updating financial plans

  • Look for credible sources of financial data

  • Consider professional advice in complex financial situations

Remember, while financial literacy is an important tool, it's just one piece of the puzzle in managing personal finances. To navigate the financial world, it's important to have skills such as critical thinking, adaptability and a willingness for constant learning and adjustment.

Financial literacy's goal is to help people achieve their personal goals, and to be financially well off. It could mean different things for different people, from financial security to funding important goals in life to giving back to your community.

By developing a strong foundation in financial literacy, individuals can be better equipped to navigate the complex financial decisions they face throughout their lives. But it is important to always consider your unique situation and seek out professional advice when you need to, especially when making major financial choices.


The information provided in this article is for general informational and educational purposes only. It is not intended as financial advice, nor should it be construed or relied upon as such. The author and publishers of this content are not licensed financial advisors and do not provide personalized financial advice or recommendations. The concepts discussed may not be suitable for everyone, and the information provided does not take into account individual circumstances, financial situations, or needs. Before making any financial decisions, readers should conduct their own research and consult with a qualified financial advisor. The author and publishers shall not be liable for any errors, inaccuracies, omissions, or any actions taken in reliance on this information.