Using Systems Thinking to Navigate Your Finances Together
I've always had a knack for systems thinking. I love organizing information visually and flowcharts are my jam (I know, I know, I am really fun at parties 🙂).
Over the years, I've come to appreciate that not everyone shares this enthusiasm for systems thinking. However, using systems thinking when it comes to your personal finances is a practical skill that can help you reach your financial goals. And, it is especially useful when it comes to couples who are on a financial journey together.
In this blog post, I'll cover what I mean by system thinking, how systems thinking can be useful when it comes to managing your personal finances, and the three components of a couple’s money management system.
What is Systems Thinking?
Let's begin by defining systems thinking (this brings me back to my grad school days). Systems thinking is not about complex equations or one-dimensional perspectives; instead, it offers a more holistic view. Think of systems thinking as a way to approach problems by considering how various elements interconnect to create a bigger picture. Systems thinking isn't reserved for experts or academics; it's a versatile tool applicable in all aspects of life, whether you're managing your health, nurturing relationships, running a business, or, as you'll soon discover, handling your personal finances.
How is System Thinking Useful When it Comes to Personal Finances?
You might be wondering why we're discussing systems thinking in the context of personal finances. Well, personal finances are akin to a puzzle with numerous pieces—savings, investments, debts, budgets, routines and more—all intertwined. When you add the layer of managing finances as a couple, the complexity of the system increases even more. (As a money coach, I’ve yet to meet a couple who were on the same page about every aspect of their finances). To put it simply, adopting a systems approach can help you make more effective decisions, gain a clearer understanding of your financial situation, and find peace of mind.
What are the Components of a Couple’s Money Management System?
Now, let's get to the heart of the matter—how can a systems approach be applied to managing your finances as a couple?
Consider your money management system as having three essential components:
1. Your Accounts: These serve as the foundation of your financial world—the places where your money resides or where you may have financial obligations. You've got regular bank accounts (checking or savings), investment accounts (like RRSPs and TFSAs in Canada, or 401ks and IRAs in the United States), or maybe even some cash tucked under the bed. Other types of accounts are money market funds, certificates of deposit, and Guaranteed Investment Certificates (GICs). Don't forget about your debts— for example, mortgages, personal loans, credit cards, and car loans.
For couples, it's crucial to be on the same page about these accounts. For example, whether to have shared and separate accounts (or a combination of both), whether to keep cash on hand and how much, what types of investment accounts to open, or whether to take out a loan to purchase your next vehicle.
2. The Movement of Your Money: This is the choreography of money within your money management system. It encompasses the inflow of money in the system (your income), the movement of money between accounts, and the outflow of money from the system (for example, the payment of bills and purchases). For couples, discussing how money flows within the system is essential. Do paychecks go into individual accounts or a joint one? What portion of the paychecks is allocated to investments? When do you transfer money from your checking account to your savings account?
3. Your Routines and Plans: This component ties everything together. Plans can include your day-to-day plan for your money (aka your budget - and no “budget” is not a bad word!), a plan to save for a particular purchase, a debt repayment strategy, or a long-term financial plan. Routines can include your daily routines, such as updating a budgeting app like YNAB, your monthly routines, like paying the bills, and other routines like re-balancing your investment portfolio or meeting with a financial advisor or financial coach.
For couples, it is also important to figure out the division of labor. For example, who updates the budgeting app and how frequently, who pays the bills, and who is checking in on your investment accounts.
Here is a little graphic showing a fictitious couple’s simple money management system. Graphic designer I ain’t, but hopefully you can get the picture. I would encourage you to take out a big piece of paper and pencil and start sketching out your own system. Don’t worry about making it pretty to begin with. You could go even further with your own diagram than the one below and include the amounts and frequencies of the movement of money alongside the arrows. The process may spark a conversation with your partner or help you to visually “see” something that you hadn’t considered before.
A couple’s money management system
Conclusion
There you have it—a guide to applying systems thinking to managing your finances as a couple. It may sound a bit overwhelming, but believe me, it's worth it. By embracing this strategic approach and fostering open communication with your partner, you'll pave the way for a more successful financial journey.
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