Benjamin Franklin was right when he said, "Beware of little expenses: a small leak will sink a great ship." According to Statistics Canada, between 1996 and 2000 consumer credit in Canada, excluding mortgages, increased 47%, from $128 billion to $188 billion, while personal bankruptcies fluctuated between 73,000 and 80,000, after soaring 84% to 79,000 in 1995 over 1990. Meanwhile, in constant 1999 dollars, average earnings grew only 7% between 1996 and 1999.

Let’s review the context of these numbers. Consumer spending represents about 60% of Canada’s Gross Domestic Product. To maintain a high level of economic activity, governments and businesses encourage consumers to continually increase spending: governments try to boost personal disposable incomes directly by lowering taxes and indirectly by reducing interest rates; businesses encourage spending by reducing prices and through clever advertising. We oblige by buying non-durable items with easily available but expensive credit that generally we can’t afford. The result is enormous stress on individuals, couples and families!

Listen to James describe his and Janice's predicament: "We were excited about our pre-marital counselling, particularly the brief session on finances. Because Janice took an accounting course in high school, and I hated figures, she agreed to manage the household finances. Six months into our marriage, we had bought some items for the home on credit: VCR, stereo system, and video camera. We got great payment terms: deferred payments and low interest rates! We were shocked, however, after 18 months when we owed $10,000 on our credit cards and were barely able to make minimum monthly payments! We argued about money constantly, which bothered Janice more than me. She worried a lot and couldn't get a good night's sleep for months. She was severely depressed!

Today we never discuss our finances without a major argument! I seldom get to buy things I want, but she buys whatever she wishes! We have no savings and stuff we bought on credit is worth less than our debt! We don't go out because we have no money: I don't understand where the money went! Our marriage is failing, so we have shelved plans for the baby. What a mess!" Regrettably, James and Janice's situation is common to many married couples. When they raced from the hotel for Hawaii they were euphoric. They never realised that already they had planted the seed for financial troubles. The first and major error they made was to decide that one partner would "manage" the household finances. Doreen and I had a similar experience briefly, during our 32 years of marriage. Because I am a professional accountant, she insisted that I manage the budget, which I was happy to do. However, she did not participate in creating it. Thus, when she wanted to buy a specific item, unless it was budgeted, I "disallowed" it because I didn't want to overspend: precisely the situation that caused frequent disputes with James and Janice.

Eventually, we decided that both of us would be fully involved in managing the budget: to develop it, and weekly, to review progress. However, I recorded all transactions. Further, we agreed that both had to approve spending on individual items greater than $100. It worked! We stopped quarrelling about money.

Marriage is a significant partnership. Like all successful partnerships, husband and wife must consent to key guiding principles to apply consistently during the journey. To reduce financial stress, couples should develop written guidelines for critical items such as these:

View Of Money

Our worldview influences how we manage money; this in turn determines our choices, and ultimately our behaviour! Consequently, couples must develop a common view of money: particularly regarding the use of credit generally, and specifically with respect to purchasing major items such as a car or furniture. They also should agree on other areas, such as giving, savings and financing children’s education. Failure to do this will cause major conflicts.

Doreen and I believe in the GAS Principle[1]: essentially, God owns everything and we are merely managers. This view impacts how much we spend, including giving, and how much we keep. We use our credit card like a cheque: charging only items that are budgeted with corresponding funds in the bank. We pay monthly balances in full.

Conquering debt requires a simple system to accumulate funds regularly to buy major items. Most folks find it almost impossible to do this, especially since the economic system encourages the use of credit. Consequently, in my book “Managing God’s Money—The Basics,” I introduced the concept of the Capital Fund. It is simple and it works!

First, decide to pay cash for all items except for a home. No other exceptions! Next, compute today’s cost of major items, such as a car or furniture, that both husband and wife decide they will need to buy over the next five years (or other period greater than two years). Divide this cost by 60 (number of months) to determine the amount to save monthly. If the estimated cost of all items was $6000, save $100 monthly for five years. After buying an item, continue saving until the fund is sufficiently large to cover other necessary future purchases. Do not buy any major item unless cash is available in the Capital Fund: review the fund annually.

The main goal of the Capital Fund is to avoid debt and the consequential interest expenses. Based on my experience, the Capital Fund is the only technique that facilitates buying items outside the routine budget without incurring debt. Doreen and I have used a Capital Fund for over 20 years.

Another critical item to decide initially is a dispute resolution mechanism. This may entail counselling by a third party, trusted friend, or pastor; it may not. Whichever, a couple needs a process, because there will be disputes!

Over the years, Doreen and I have developed a procedure which works for us: if after prayer the disagreement remains, one of us will decide based on predetermined criteria.

Assets & liabilities

Treatment of assets and liabilities in a marriage is another major area of potential dispute. Couples must avoid the my-money-your-money-syndrome! Marriage is a lifetime commitment, therefore, pool assets and liabilities brought into and acquired during the marriage. Like 21% of Canadian married couples, try living on one income: initially allocate the other to the Capital Fund. Certainly, a couple intending to start a family should save 100% of the wife’s income since it will be stopped if she will stay home to raise the kids. Ultimately, if dad will stay at home, save 100% of his income instead. The bottom line is this: learn to live on one salary early if either husband or wife will stay home to raise the kids.

Goals, plans & budgets

If you don't know where you are going, you will get there! Likewise, if two individuals in a partnership are pulling in opposite directions, they will drift toward the direction the stronger is pulling—ultimately arriving in discord! In 32 years in business, serving on boards of directors of several companies in many different countries, I have not seen a business operating successfully without goals, a business plan and a budget. Yet individuals seldom prepare goals, plans and budgets. Individuals and companies face similar issues, although their motivation may be different: both must achieve specific goals using limited resources.

The goal is the destination: where you wish to go. The plan is the journey: the steps to achieve the goal. The budget reflects the cost of the plan. Individuals and couples need goals to help to focus their effort. Otherwise, spending will be enticed towards products and services with slick advertising, instead of to activities necessary to achieve specific targets.

Often, issues that cause financial problems would disappear if couples had developed goals and plans. I advise couples to follow the PEACE Budgetary Control System[2] ("PEACE") that I describe in detail in “Managing God's Money,” to plan and implement projects and to manage their finances.

PEACE emphasises achievement of goals. It has two parts: Planning (P) and Estimating (E), which together constitute the budgeting phase. The Control phase has three parts: Acting (A) on what you planned to do, Comparing (C) what you actually did with what you planned and understanding the differences, and Executing (E) changes, if necessary, to get back on plan.

Had Janice and James prepared goals, plans and budgets, they would have agreed on key goals, particularly for the use of credit. Further, they would have established checkpoints to see how they were doing as they progressed. Then they would not have been surprised by large credit card balances. PEACE has several strengths, all of which promote stress reduction: particularly comparing actual results with the plan, which eliminates surprises and allows early corrective actions to remain on course to achieve goals.

Summary

To reduce financial related stress, couples must implement a system, such as PEACE, based on mutually agreed principles, with a feedback mechanism. This process, used with the GAS principle will remove financial stress from the marriage.

First printed in IF: The Money Issue, January/February 2002.

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Copyright 2002-2008, Michel A. Bell, (michelbell@managinggodsmoney.com). All Rights Reserved.
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