Financial Infidelity Part 1: Why We Lie About Our Finances

Money is one of the leading causes of stress in relationships, however, it’s not necessarily money itself that causes the pain, but rather the lack of communication and transparency around money. Whether you are the financial cheater, the victim or just looking for ways to avoid it all together, it leads us to the same question – How do we prevent and overcome financial infidelity?
Often times our shame around money can lead us to behave in ways that are totally outside of our character. The shame of not being able to afford our lifestyle, the shame of being irresponsible with credit cards, the shame of not being as “together” as everyone thinks we are. You may be the ‘responsible’ person in your family. You stayed out of trouble, you got through school, you got a good job, but no one knows that even with your salary, you are barely getting by – and no one sometimes includes your significant other.
Often times in relationship arguments, there is the paradigm of the perpetrator (the person that did something wrong) and the victim (the unknowing recipient of the wrongdoing). We strongly suggest that perpetrator/victim could be the wrong paradigm in most cases of financial infidelity. First, let’s define financial infidelity and then talk about reasons why the perpetrator/victim model may not help you overcome it.

Financial Infidelity – The willful and deliberate concealment of financial transactions from a partner in a relationship in which there is financial interdependence.

Financial interdependence can be as simple as splitting the cost of a meal or complex as completely combining your finances. When people in a relationship begin to have joint financial transactions, it creates expectations which require communication and transparency.

The Perpetrator/Victim Paradigm

If someone is walking down the street and gets robbed. The victim has no responsibility to the thief. Anything the victim could have done differently to prevent the thief from robbing them is irrelevant. The thief committed the crime, gets 100% of the blame and goes to jail. Financial infidelity is often not that cut and dry, so before you condemn your significant other to relationship jail, consider there may be a different way to approach the problem.

We Are Often Irrational When it Comes to Money

We are constantly making irrational decisions with our money. For example, if a $100 item is on sale for $40, we’ll convince ourselves we saved $60. We actually spent $40 and saved $0. We spend hundreds of dollars per year on bottled water that in most cases are not measurably better in any significant way to the water in our kitchen sinks. So let’s begin with the idea that we are not purely rational beings when it comes to money.
According to recent studies, the median lifetime earnings for a U.S. college graduate is $2.3M (average of $57K/year for 40 years). That’s almost $5 million for a couple who are both college graduates. $10K in credit card debt or $100K in student loan debt may seem overwhelming, and definitely not helpful in building wealth, but let’s also keep it the context of a larger perspective of $5 million.
 

We Have Different Money Personalities

We also bring different habits and perspectives to money in our relationships. ‘Opposites attract’ also applies to perspectives with money. Many times in relationships you may have a rebel and a conformist dynamic. The rebel lives in the present, appreciates spontaneity and enjoys the discovery. So one of the reasons they didn’t tell you about the $500 purchase beforehand is because they literally decided to make the purchase in that moment. The conformist, on the other hand, is more likely the planner, the one that actually likes to budget and craves organization and doing things ‘a certain way.’ (a.k.a. My way is right and your way is wrong)
Even without financial infidelity, those different perspectives are bound to create conflict. In order to mitigate some of those inevitable conflicts, communication and transparency need to be at the forefront.
 

Our Foundation for Financial Transparency is Faulty

The foundation of financial transparency and communication is the responsibility of both parties. Have you had “The Money Talk” in your relationship? A few questions to assess your relationship’s financial communication:

  1. Have you recently (within the past year) seen each other’s credit reports (not just the score, but the detailed report)?
  2. Do you sit down together and discuss your budget monthly? quarterly?
  3. Do you have a dollar limit that you cannot spend without your partner’s prior knowledge/approval? (even out of your individual account)

In many cases of financial infidelity, the answer to those questions will likely be no, thus the seeds of deceit were planted. In heterosexual relationships, for example, there are often rules of conduct regarding interactions with people of the opposite sex. As an example, dinner and drinks solely with a co-worker of the opposite sex may be inappropriate. Those boundaries will typically be made clear in the course of a relationship. Financial boundaries, however, are less likely to be addressed and without those boundaries, both parties are setting themselves up for failure.
 

Shame and Guilt Can Cause Us to Rationalize Deceit

If lack of communication and transparency are the seeds of financial infidelity, guilt and shame are the fertilizer.

“Shame is a soul eating emotion.” – C.G. Jung

Shame is a very difficult emotion to overcome and can often be at the heart of financial infidelity. For example, if the way one presents themselves to the public is connected to their financial success, admitting financial trouble is like admitting one is a complete fraud. This is another reason why the perpetrator/victim model is flawed. There may actually be multiple victims. It is often difficult to admit failure to yourself, much less a partner or spouse.

“The difference between shame and guilt is the difference between “I am bad” and “I did something bad” – Dr. Brene Brown

Shame can make a liar out of even the most honest person. The extent to which we internalize our actions makes it more difficult to discuss with others. If racking up credit card debt in our mind makes us a terrible human being (as opposed to someone that made poor financial decisions), we are much less likely to admit to someone we are a terrible human being.
Shame lives in hiding, through secrets and deceit. Anger, judgment, blame and contempt only make it worse. The only real way to overcome shame is through vulnerability in an environment of empathy, understanding, kindness and respect. If that sounds too mushy for you, then ask yourself two questions:

  1. Who have you revealed your deepest secrets to?
  2. Were they someone who you knew would be empathetic, kind, understanding and still love you regardless?

If you haven’t created a loving and open environment for your significant other, then you should have no expectation your significant other will be transparent about their shame.

It Takes Two

The perpetrator/victim model doesn’t often work with financial infidelity because the victim doesn’t have any responsibility to the perpetrator. There are certainly extreme cases of gross deceit, identify theft, fraud and financial abuse where perpetrator/victim model does apply (many of these cases are actually illegal). However, in most cases of financial infidelity, both parties have a responsibility to develop a foundation of open communication and financial rules of the road for their relationship. Both parties also have a responsibility to create an environment of mutual respect and empathy from which shame cannot grow.
Financial infidelity, particularly early in a relationship, can be a wake-up call and catalyst for both parties to grow together with their finances. That was certainly the case in my relationship with my wife, which we will share in Part 2.

Credit Cards – To Use or Not To Use

Credit cards have dramatically changed consumers’ saving and spending habits. It would not be an exaggeration to say that credit cards have impacted personal finance as much as cell phones have impacted personal communication. Whether you are pro or anti-credit card, the impact of credit cards is indisputable, but it is important to understand common myths, as well as the pros and cons of credit cards so they don’t derail your financial goals.
We won’t go through the history of credit cards, but as a financial product, it’s relatively young. Credit cards as we know them today are a little more than 50 years old. That means Gen Xer’s grew up with them as they became prominent, and Millennials have never known a world without them. Let’s use this as an opportunity to quickly debunk some myths about credit cards:

  1. I have to have a credit card as some places won’t accept a debit card or cash

    Credit cards are not a necessity! If we stop and think about that thought process, that’s basically saying that we cannot survive without borrowing from Visa, AMEX or MasterCard. Insanity. Despite popular belief, cash is still king and debit cards are accepted everywhere credit cards are. To be fair, there are some caveats on debit cards for places like hotels and rental car companies that may put a hold on your debit card for the full amount until the transaction is complete (though you shouldn’t be using a debit card if there are insufficient funds in your bank account).I have to have a credit card in order to build my credit

  2. I have to have a credit card in order to build my credit

    Credit cards are not the only way to develop your credit or to improve your credit score. A college student came in for a financial counseling session. She was considering getting a credit card before she graduated. She wanted to build her credit to get a car loan and an apartment in the future after she graduated and got a job. We pulled her credit report and it turns out she had an 800+ credit score. (Credit scores range from 300-850, the higher the better. Anything over 720 is considered to be excellent credit). Upon review of her credit report, it showed she had a credit card account in good standing since 2006. Now since she was born in 1995, I was pretty sure that she didn’t open a credit card when she was 11. I simply told her to call her parents, make sure it wasn’t a fraudulent account and then thank them for giving her the gift of great credit. Also, she shouldn’t even think about getting a credit card until she had a full-time job for at least one year.
    Her parents made her an authorized user on one of their credit cards as a child. They never told her, obviously didn’t give her a card, and most importantly they keep the card in good standing. As a 20-year-old college student, she had 9 years of positive credit history never having used a credit card before. Much like using your parents’ Netflix or cable password, you can (legally) piggyback on someone else’s credit by becoming an authorized user on their account. Make sure it’s someone you trust and the account remains in good standing (paid on-time and in full).
    Another way to build credit without a credit card is by paying installment loans (loans with a regular payment for a fixed period) such as car loans, student loans, mortgages. Paying the required payments on time will count towards your credit history and improve your credit score.
    Finally, fixing errors on your credit report is also a way to improve your credit without getting a credit card. Errors are prevalent in credit reports and you shouldn’t be punished because of an erroneous entry on your credit report. Review your reports from the three major credit bureaus quarterly to ensure accuracy.

  3. Carrying a credit card balance improves my credit score

    I’m not sure how this one got out into the ether, but having a credit balance in no way improves your score. Credit bureaus measure utilization rates meaning what percentage of your available credit are you using. Your credit score will begin to go down if you are using more than 30% of your available credit, but you are not penalized for paying off your cards in full each month.
    While we are at it, the number of cards you have is also not a factor. The average length of time you have a card is a factor, so you may see a slight decline after signing up for a new card, but the pure number of cards is not a factor.

So we’ve debunked some common credit card myths, let’s get into the pros and cons of credit cards:

Pros

  • Ease of transactions
  • Grace period to pay for charges
  • Easy to track spending
  • Protection for fraudulent transactions and ID Theft
  • Rewards points/Cash back/Airline Miles
  • Can be used to build credit score[/col-md-6][col-md-6]

Cons

  • Significantly reduces the ‘pain’ of transactions, increasing spending
  • Masks overspending with grace period
  • Charge cards are designed to pay interest
  • Interest rates are high (average 15%+)
  • Credit cards rewards incentivize additional spending not saving
  • Late payments and high utilization rates can significantly reduce your credit score

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It is not an exhaustive list, but we captured some key aspects of how credit cards can be positive and negative. Personally, we are not a fan of credit cards because they incentivize spending and reduce saving. A cash back reward or miles is an incentive to spend, whereas a 401k match, for example, is an incentive to save.

‘The more you spend, the more you save’ does not pass the smell test.
IN FACT IT SMELLS A LOT LIKE BULL.

 
Also, there is a real difference between pulling $50 cash out of your pocket and swiping a card. Pulling the $50 cash involves a bit of psychological pain. It forces you to observe how you are reducing the total amount of cash in your pocket instantaneously and may cause you to make a different decision. Have you ever been hungry and ate way too much? Well, it takes about 20 minutes for your brain to register that your stomach is full. That delay can cause us to overeat. When you use credit cards, that delay can be 30 days! You may not realize you overspent until the statement comes in a month later. Pain is actually a sensation that gives us an indication that there may be something wrong. Removing the pain of financial transactions is not all positive. Keep that in mind as we further reduce the pain by moving from credit cards to electronic payments such as PayPal, ApplePay, and Android Pay.
Our purpose is not to say credit cards are evil and should be banned entirely. However, the average US household had just under $16,000 in credit card debt in 2015. That means thousands of dollars in interest payments each year paid to MasterCard and VISA and not to savings or investments. Giving your hard-earned money to credit card companies is not the way to financial independence.
Personal finance is just that, it’s personal. You need to know what’s best for your own situation. In our opinion, the benefits of credit cards do not outweigh the costs. Spend less than you earn with cash and build an emergency fund, and if there is an emergency; borrow from yourself, not VISA.