Imagine that you and your partner want to buy a new house or car, work less hours or go to the Caribbean in the summer. How many documents and numbers would you have to sift and scan through to know if you can still afford that trip?
For better or worse
ING’s Think Forward Initiative Intra-household Dynamics project is looking at how they can reduce the hassle in managing household finances and help people make better financial decisions.
In a survey of 1,000 Dutch couples with a monthly net income of less than €3,000, ING researchers found that many household decisions – from choosing clothes for our children to looking for a new job or buying a house – are joint decisions with our partners, children or other family members.
Results suggest 86% of husbands say the purchase of durable goods is a joint decision. This might not be very surprising but a substantial group of people said they even consult their partner about buying personal items such as clothes.
As most financial decisions are made at home, the research looked at the different roles husbands and wives play in the financial decision making process. It found that women have stronger bargaining power while men are more likely to overestimate their influence.
Who’s in charge?
The most interesting finding is that men tend to overestimate their influence and claim that they are the main decision-makers. However their wives only agree in 59% of the cases. But, when the situation is reversed, 68% of men tend to agree that their wives are the main financial decision-makers.
Around 14% of women say they are the decision-makers when it comes to shared accounts, and this is more or less confirmed by their partners’ answer, as 10% of men admit this as well. Only five percent of men said they are the decision-makers on shared accounts.
The situation is similar concerning decisions on savings. Around 16% of women say they are the primary decision makers on savings while only nine percent of men think the same.
Men tend to overestimate their influence and claim they are the main financial decision-makers, however their wives only agree in 59% of the cases.
What to do when problems arise?
The research also looked into what couples do in order to reduce financial problems. Around 28% of the couples admitted they’ve had financial problems over the past year, such as not having enough money in their payment account.
One solution to reduce financial problems was mental accounting (or budgeting, that is, separating money into categories for different items such as food, clothes, rent or entertainment. Nobel Prize recipient Daniel Kahneman wrote in his book Thinking, Fast and Slow that mental accounting can be used as a shorthand way to control spending. If one spends too much in a given category, they spend less in that category for the remainder of the period.
Even though mental accounting can help with overspending, the results of the survey showed it doesn’t necessarily mean fewer financial problems.
Poorer households are more likely to practise mental accounting and divide money into separate buckets. In these households, 44.7% of people who “always” conduct mental accounting nevertheless faced financial problems in the past year, compared with only 11.8% of those who “never” do. This suggests that governments and financial institutions could learn a lot by considering how households make money decisions together.
The Think Forward Summit, sponsored by ING and partnering experts and academics from around the world, is being held today in Munich, Germany.
Find out more about the Think Forward Initiative here.