Marriage and Spending

Knowing the magic number

Every household has a magic number. Single, married, with children, or without, the magic number is the lifestyle number. The value for every household is determined by a household’s assets, income prospects, tax responsibilities, and geographic location. The magic number is calculable, varies with age, and is the primary metric for a household’s financial decision-making. For one subscriber the magic number this year could be $65,000. For a wealthier subscriber, $350,000 this year. For a lower income household, $25,000. Households that know their magic number can set a budget and establish a lane to organize their spending and saving. The magic number promotes positive money talk. But, what is the magic number? The magic number determines whether to save or borrow and informs great financial planning.

Over the past couple of weeks, I have thought a lot about the absence of money management conversations in households. Parents of some of my students will tell their kids to take my life-cycle economics class to learn about a budget. These are not one-offs. I read and hear often that money management and financial literacy begin with understanding a budget. There is an implied restriction in the popular use of the term budget. “Get a budget so you don’t run out of money.” Yuck. Too imprecise. Knowing an arbitrary budget number and dialing back spending to its amount is like road-tripping with the family in the car from Fort Worth to El Paso and setting the cruise at 50 mph for the 600-mile journey when the speed limit is 75. Time and fun are lost in the trade-off. A lot of tension in the car if I were the governed driver.

The financial activities of couples are rarely as close as bucket seats. Families start and end most days together, but life goes on in solo time chunks. What happens with spending then? Do married’s talk about spending, but only if one misbehaves in the eyes of the other? Is there a division of labor among financial activities? Does every financial decision cycle toward uncertainty, anxiety, and tension? Are couples happier if they agree to the spending threshold number? Julia Carpenter recently wrote a piece on the topic in the Wall Street Journal. Left unwritten in Carpenter’s work is regardless of income or wealth, knowing the magic number informs spending and adds clarity to spending. Re-framing the solitary threshold number in the context of the best yearly budget could be marital financial bliss. If you know your best-targeted living standard, monthly surprises can be better managed and discussed. Ree Tucker Webb and Jesse Webb know this to be true.

Tucker and Webb

Five years ago, Ree Tucker and Jesse Webb walked down the aisle in Oklahoma City and then headed to the OKC Farmers Public Market for the reception. Both only 24, they met at OU in nearby Norman on a Saturday night of their junior year at an after-party following the Sooner’s drubbing of a D-2 school from Virginia. Another blowout victory over a team that earned its school 7 figures and sent their group of pint-sized players toward CTE-land. Brain injury chatter didn’t fit the moment when Jesse and his buddies were doing keg stands.

Fast forward to today where the Webb’s remain without children and with a substantial household income. Ree is one of those “lazy girls,” an accountant who peddles her consultancy for smaller businesses from the couch on her home in Deer Creek Village. Ree doesn’t bring home the bacon because lazy girls don’t leave home, except to work out and depress the work pedal just enough to obtain their work-life balance. She makes darn good money, about $90k a year, which is sufficient for Ree. Ree is the prototype for her generation: earn some money, but not yet ready to bust her butt for the highest living standard within her reach. Ree values leisure time.

Ree’s living standard is raised by her marriage to Jesse. Shared living has substantial economic benefits above the same two adults living separately. Jesse is a software engineer who earns $120k a year at Boeing. The Webb’s income above $200k permits a comparably high living standard in a city of relatively low cost, 16 points less than the median cost-of-living in the U.S. according to Sperling’s Bestplaces.net.

Financial Tension

What financial turmoil could exist today for a couple like the Webbs? Their financial life is generally good. Not much debt. Planning for a first home purchase and saving for retirement is in their plan. Typical topics most households would contemplate if pressed to talk about money. Indeed, buying a home and retirement planning are major ticket items that move a household discussion toward professional advice. More frequent are the between-the-wall discussions, stresses, and strains that govern day-to-day life. Single Ree or single Jesse have total control over how to spend their income. Spending is more complicated when other lives are involved and a major purchase by Jesse may be an opportunity lost by Ree.

Have Ree and Jesse agree about how much either can spend individually on an item without sparking the need for permission from the other? If Jesse has a penchant for a deer lease, can he pull the trigger without first running it by Ree? If Ree wants a Hermes handbag and the joint savings account is flush, can she buy it?

For efficiency in living, it makes sense that Ree and Jesse agree to a threshold amount above which a purchase would require a conversation and total individual freedom if a purchase price is below the threshold.

There are obvious extremes. The purchase of a new car, a club initiation fee, and a 5-carat diamond ring. Discussion needed. Food staples and other non-discretionary purchases should not need discussion. However, even seemingly trivial financial discussions can be full of stress. Do couples use threshold amounts to control behavior? If couples talk about money is it stressful? Lee, Kelley, and Lee (2023) studied financial anxiety and financial stress using individuals who participated in the National Financial Capability Study (NFCS). The authors’ findings indicate financial anxiety and financial stress are correlated with less financial satisfaction among individuals, and financial anxiety has a stronger, negative association than financial stress. Financial satisfaction is higher among those who are married, but anxiety and stress still play an important role. The positive economics of shared living among married households is important, but its benefits do not ameliorate financial stress.

The Webb’s Magic Number

Threshold rules and the attainable highest living standard are compatible. The Hermes handbag requires threshold thinking. The magic number gives the purchase amount financial rationality. Threshold numbers fit handily with the annual magic number because the latter acts as the annual ceiling living standard. A $10,000 handbag is not a good idea for a person with a $25,000 annual magic number. The purchase is not much of a concern for a person with a current year $600,000 magic number. Higher assets and better prospects lift a living standard and a Hermes handbag fits. Maybe your preference would be a new set of custom PXG irons. The magic number accommodates taste.

The Webb’s magic number represents the highest living standard of their household this year given their financial condition, prospects, and considerations for inflation, taxes, and future social security benefits.

The Webb’s magic number is $201,990. The number is for this year only and is calculated using economics-based financial planning methods. I am gearing up to offer a short course to subscribers on these methods by early fall and will drop details in the coming months.

A copy of the Webb’s plan is available here. A couple of items of note about the graphic below. The Webb’s known fixed commitments for this year are their housing, income taxes, social security employment taxes, Jesse’s contributions to his 401(k), savings of $10,000 to help with the down payment on a home, and life insurance premiums on both their lives. The orange-highlighted row is crucial because it represents the best living standard value into which all other expenses fit. Utility bills, car payments, fuel, groceries, restaurant tabs, luxury goods, a deer lease, and all the other expenses defined by the Webbs as their “fun expenses” can total no more than $81,395 this year.

The methodology to produce the number is the work of economists and mathematicians, but all the machinery is under the hood.¹ Marvelous is the result! A single number informs the Webbs that their magic number for this year is $201,990.

A $10,000 Hermes handbag may fit. It may not. A planned vacation to Miami may fit. It may not. There will be trade-offs. If Ree chose to work more or Jesse had a higher income, then the discretionary spending number would be higher.

That is the best living standard this year considering the balance of their lifetimes, financial resources, and exogenous factors such as income tax and social security benefits. Incomes, needs, and financial circumstances change, so the magic number calculation needs to be done annually. That is financial planning.

Your Magic Number

Some CFPs have built practices and financial plans that involve calculating the magic number for clients. Most CFPs are not there yet but will be over the next 10 years. The magic number drives economics-based financial planning that will become the new normal as its knowledge set drifts into practice.

I alluded to a short course on the topic that will be accessible to individuals of all backgrounds. You will hear more about this educational opportunity as a subscriber. Whether you enroll or not, I intend to always make Personal Finance Economics worthwhile to you. Thank you for subscribing.

1. The magic number is the annual living standard, this year’s optimal living standard, produced by a process of financial modeling that includes all a household’s financial attributes. The value of this number requires professional software (cost is about $150). My students use the software regularly to answer financial planning questions.