How family members manage household money

Posted on October 02, 2018

"To pool or not to pool: Allocation of financial resources within households" is one of the long-term projects supported by the Think Forward Initiative.

Households can manage their finances in various and complicated ways. One could wonder when households decide to keep their resources separated and when they share them. Merike Kukk (Tallinn University of Technology) and Fred van Raaij (Tilburg University) examine which factors predict the use of individual and joint accounts and suggest households to have both to cover different financial needs throughout the life cycle.

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Households are like businesses; they may look alike from the outside, but inside they differ profoundly in the way they manage their finances. Some decide to keep their resources separate, others share everything they own, borrow or owe by pooling their income and financial resources in joint accounts. In this study, Merike Kukk, associate professor at Tallinn University of Technology, Estonia, and Fred van Raaij, professor of economic psychology at Tilburg University, the Netherlands, link the use of individual and joint accounts to four factors:

  • Age or generation of household members.
  • Having children or not.
  • Total income level of the household.
  • Type of financial products households are using.

The study analyses anonymised customer data from ING Bank in the Netherlands. However, the findings are expected to also be relevant to other developed countries as household’s preferences and financial choices are quite similar across the countries.

About the factors in focus:

1. The younger, the more flexible

Let’s zoom in on the first factor, concerning the age or generation of household members. The study reveals that…

(1) … young people in their twenties have a more diversified way of money management compared with older consumers in their 60s;

(2) … young people use more commonly both individual accounts and joint accounts ;

(3) … young people transfer money between joint and individual accounts more often;

(4) … the extent of pooling - sharing money in a joint account - is mainly determined at an earlier age, until the 30s. Later changes in the use of joint accounts are induced by other specific triggers such as having children.

“As the family expands parents have more and more joint resources on their joint checking and saving accounts.”

2. Kids: they change it all

Having children requires a long-term joint commitment of both partners, dramatically affecting financial household planning. Although couples usually open a joint payment account before having children, family expansion means they also start ‘pooling’ or accumulating common savings in joint accounts: couples tend to open a new joint savings and investments account when they become parents.

A bigger family also means more joint resources on joint checking and saving accounts. Having children – and spending money on them, which is seen as a common expenditure – leads to more income sharing and also to holding more funds in a common pot. The shift from separate to joint accounts begins with the first child; with the third or fourth child, even more financial resources are shared. Households also shift to more joint products for saving purposes.

3. Higher income? Less pooling

When the income of a household increases, the probability of holding joint accounts (checking, saving and investment accounts) also increases, but surprisingly the share of income going into the joint account drops. This means households with higher incomes tend to extend the range of financial products (including joint accounts) into their portfolio. However, holding more joint products does not mean higher income pooling. On the contrary, the study results indicate that the relevance of joint accounts decreases for couples with higher income. As for the households in lower income brackets, an income increase leads to more money flowing into their joint payment and saving accounts. However, for the higher income brackets, the contrary takes place. This happens because household with lower incomes gain from efficiency when pooling their money, whereas households with higher income levels tend to prefer keeping additional resources on individual accounts.

4. To pool or not to pool

The extent to which households pool their money depends on their different needs. We find that the more a couple pools its incomes in joint checking accounts, the more it also spends from joint accounts. But the household pooling of resources on checking, saving or investment accounts is not related to the pooling of mortgage or consumer loans. The results suggest that money pooling behaviour differs across financial needs.

In the end there are as many households as there are financial management styles. The ways to run a household’s financial management are much more complex than assumed, because households cannot be treated as one unit, nor can they be seen as a group of members each operating only on an individual level. This study suggest that households need to have both separate and joint financial products, allowing them to cover different financial needs throughout their life cycle. So tell your partner: let’s pool – at least some of our money -, honey!