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‘Household Chief Financial Officers’ can ruin financial literacy
Photo courtesy: CU Boulder

By Source: CU Boulder

As couples mature together, they often grow apart in their level of interest and skill in handling their finances. A disparity in financial literacy that may be small or even nonexistent at first can increase over time depending on how much responsibility one partner undertakes, according to researchers at the University of Colorado Boulder’s Center for Research on Consumer Financial Decision Making and the University of Texas at Austin.

Adults are often ignorant about the most basic facts about money, such as the effects of compound interest and inflation, or how long it will take to pay off a debt. Many times, financial education to reduce financial illiteracy is ineffective. Why?

The new research recently published in the Journal of Consumer Research showed that when it comes to skill in handling finances, people evolve—or stagnate—on a “need-to-know” basis, driven in large part by relationship roles.

“A lot of financial illiteracy comes from the fact that one member of a couple relies on his or her partner to handle the household finances,” said author John Lynch, director of the Center for Research on Consumer Financial Decision Making, which funded the study.

Lynch and lead researcher Adrian Ward of the University of Texas at Austin launched the study to better understand why so many Americans lack money know-how—and why financial education is so ineffective at solving this problem.

The research shows that early in relationships, when couples assign the role of a “household Chief Financial Officer,” they unknowingly set each other on divergent paths—the responsible partner embracing and growing in financial knowledge over time, as the delegating partner’s financial ability and interest stagnates.

The study found that couples usually begin these paths on equal footing, and the partner who initially accepts financial responsibility has no greater financial experience, expertise, or aptitude than the one who does not.

But the longer couples stay together, the more the partner who is completing financial tasks grows in proficiency, even more so in households where that partner takes on a much larger share of these duties.

“Though members of a couple start out knowing a similar amount about money, after decades together, there are wide differences in knowledge between the household CFO and the non-CFO,” said Lynch.

Although such specialization is natural—even practical—researchers say that it could spell trouble for those who have delegated the financial role. In fact, the study found that partners with low financial responsibility actually decline in financial literacy over the years.

When researchers asked married consumers who had relied for decades on their partners, they struggled to make financial decisions or even read new financial information independently. So after divorce or widowhood, when these partners are suddenly thrust into the financial driver’s seat, they may be unable to successfully manage their personal finances. 

Previous research has tried to explain financial ignorance by analyzing individual differences, such as age, personal interest or prior knowledge, but Ward says what consumers learn is best understood in a social context.

Differences in what partners know, learn, and even notice are not just reflections of each individual’s idiosyncratic preferences, according to Lynch and Ward, but are in fact created by the existence of the other person.





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