“The happiness of most people is not ruined by great catastrophes or fatal errors, but by the repetition of slowly destructive little things.“Ernest Dimnet
Yes, investment returns matter. But your basic assumptions about and behavior toward money will probably impact your finances – and your eventual wealth – more than you currently imagine.
As modern studies increasingly confirm, none of us deals with money from a completely rational perspective. Like many other aspects of our lives, financial behaviors are learned over time, sometimes by direct experience, but initially and importantly from our families and our immediate cultural context. Yet because such learning is so deep and feels so fundamental, we tend not to be aware of it. Like the proverbial fish swimming in water, it doesn’t occur to us to imagine that other creatures might run on land or glide through the air.
Because our financial habits are such important drivers of financial outcomes over time, it is empowering to more deeply understand our own unconscious choices as well as those of other people we interact with, especially our spouses. Once we recognize and understand these patterns, we are free to make reasoned choices about them: to fully embrace what was once unnamed, to continue as previously but adjust other aspects of our lives in response, or even eventually to make changes that enable better outcomes for ourselves and our families. Over the years working with clients, I’ve learned to recognize several distinct “money cultures.” Like many such things, none of these are good or bad per se. Indeed, they have all arisen because they are useful in different contexts and social surroundings. Each of them can, however, present challenges if practiced absolutely or regardless of people and circumstances. Sometimes it helps to take a fresh look, reassess the fundamentals, and decide for ourselves.
Responsible Family Money
I once had a client describe his early experiences around spending in terms of a “family money jar.” There was literally a clear glass jar holding cash in the kitchen that everybody in the family had access to. But there was also a clear understanding that everybody in the family was paying attention, and that everyone would feel the impact of each family member’s actions. So even without many formal rules, individuals developed a natural sense of how to balance their own needs with those of other family members. There was joint decision-making, but also an understanding that individuals could benefit appropriately from family resources.
Such flexible financial collaboration within a close-knit group can have many advantages. In particular, it seems to lend itself well to pooling family resources and concentrating them on different individuals over time, especially as goods esteemed by the group (e.g., education) arise at different times for different individuals.
Given different contexts than the ones in which they arose, however, such practices can create unanticipated pitfalls. For example, in some countries it is normal for bank accounts to accommodate multiple ‘owners.’ The formal rules surrounding these financial structures simply mirror social norms. There is an assumed fluidity of access among owners, including few formal restrictions on how much each owner is allowed to deposit or withdraw. In other words, the concept of “responsible family money” is loosely enshrined in the banking system as well as in the culture.
Individuals accustomed to this kind of sharing are surprised – even shocked – to learn that such practices can easily conflict with US laws. For example, under US regulations each individual signatory is assumed to be a full owner of such accounts. So having your name on a foreign bank account that supposedly “belongs to” your parent, cousin, or brother can result in financial reporting and/or tax liability under US law. Similarly, funds deposited to such an account can be considered a taxable gift in the US if the co-owner is not a (US citizen) spouse. In addition, the requirement that non-monetary gifts between family members be valued at their “fair market price” for tax purposes can come as a complete surprise to some. As unintuitive as it can feel if you’re used to a family money system, some adjustment is typically the best approach if some or all of the family members reside in the US or in other countries with different legal systems.
“Community money” also assumes a quasi-communal right to enjoy financial resources, but in my experience it is much more loosely organized and exists within larger and less cohesive social networks. A system of community money seems to arise within social networks that typically experience (or have historically experienced) various degrees of scarcity. Its function is to distribute scarce financial resources that happen to arise – frequently by chance and without warning – among members of the network. For example, suppose there are many day laborers in the network and it’s impossible to tell who will be chosen for work at any time. In that case, it can be very helpful to have informal ‘sharing rules’ that tend to benefit everybody over time.
Such an informal system can run into trouble, however, if network members stop being similarly likely to receive financial rewards. If that happens, some individuals may simply begin to take advantage of others while not contributing to the whole. They learn that they can milk the system. And social ties can make it difficult to exclude them from the network.
Alternatively, if financial rewards become less serendipitous and more associated with individual decisions and effort, then high-performing individuals are likely to feel unfairly treated. I once interviewed a young doctor who was the first in his family not only to attend college, but also the only person to have made it through medical school. During our interview, it became clear that he was struggling to keep current with his student loan payments, much less devote any funds to saving for his future. Among his extended family, there was zero comprehension for what it was going to take for him to pay back the $400,000 of student loans that he had accumulated during his studies. There was also a universal belief that everyone could count on him for all of their own needs: houses, trips, weddings, cars, business ventures, etc. He had found it nearly impossible to explain to these well-meaning family members that there was a limit to his wealth. As a result, he was deeply frustrated but had largely resigned himself to a life of ‘barely getting by’ financially, not markedly dissimilar from his life growing up.
Another example of this dynamic occurs with lottery winners, many of whom declare bankruptcy within several years of winning their money. Notably, many such individuals report having been happier before they ‘struck it rich.’ Why? Because once it becomes known to their social network that they have money, everybody shows up on their doorstep expecting their cut of the pie. And if the lottery winner doesn’t comply and share their earnings as expected, they can become a pariah in the group, cut off from the friends and social connections they have long known and valued. It’s an impossible choice. Is it possible to change if you find yourself in a situation like this? Yes, but it requires great courage along with a modicum of family understanding and support.
The default system for most professionals in the US, “individual accounting” simply means that, by and large, each individual has a right to his own earnings but also is solely responsible for self-created obligations. Unlike responsible family money or community money systems, there is currently no assumption – other than our progressive tax system – that others have a specific right to one’s earnings or existing wealth. Individuals used to more family or community-oriented systems may experience individual accounting as unfair, cold, or impersonal. But upon closer inspection, that isn’t necessarily the case. Individually oriented financial systems can create social stresses that arise from differences in income and wealth. Yet they also address the uneven outcomes that arise when some group members benefit from available resources without commensurately contributing to the whole. Moreover, it’s important to remember that underlying social connections still exist, even in a system of individual accounting. Many family members routinely and voluntarily share their wealth. And that’s over and above the approximately $500,000,000,000 (yes, billion) Americans donated to various charities in 2022.
So which system is best? As is so often the case, it depends on your individual perspective as well as your economic and social background. Individual accounting has been the most prevalent model in the U.S. for many years. Yet family money practices are common among certain immigrant groups. And community money also continues to be widespread.
Whatever your personal history and experience, knowing the differences can help you evaluate some of the choices you may be called on to make regarding your own financial affairs. All of these choices entail social as well as economic considerations.
As always, we at Griffin Black are here to discuss a broad range of topics that may impact your current and future finances. Let us know if we can help.