Valentine’s Day is almost upon us. This is a special day for some of us. It could mark the start of an exciting contractual arrangement to co-invest in each other’s labour productivity and future financial security. It could result in significant future stream of ongoing financial commitments such as mortgage repayments and educating and caring for children. Hopefully, you have thought of all of this as you checked out that hot guy/girl in real life or Tinder. As the passion wears off, you may want to consider conducting a rigorous due diligence process to assess if that person you have nicknamed ‘Snookie’ would be the ideal investment partner in your home, retirement and children. Also, you would want to assess if you would have economic complementarities that can allow both of you to smooth out economic uncertainty such as unemployment, starting new business ventures or looking after your parents. If you’re still not convinced on the value of due diligence, maybe just being happier will make you scrutinise your potential life partner a bit more closely. This article will explain some economic and financial concepts that will be useful in implementing your due diligence. Happy Valentine’s Day!
If you have found Mr/Ms Right and have decided to enter the long-term contractual arrangement called ‘marriage’, have you asked the question if they will be an ideal investment partner? This is more than a question of income capacity, although obviously that could expand the set of investment possibilities (i.e. you could buy a larger house). Do your aspirations match your future funding capacity? Are you on the same page on what you want, such as number of children? How credible are they as an investment partner? This last question goes to the character of the person. While you may love them to bits, you don’t want to be disappointed if they flake out on you. After all, financial strain can lead to a premature termination of the marriage contract.
Marriage not only allows you to pool resources, it also allows you to diversify risk. It can help both of you manage unexpected events such as recessions or health problems. One of you may get sacked or fired but it is unlikely that both of you would be exposed to the same risks. That is, unless you work in the same company, in the same roles and do absolutely everything together. In that case you have married yourself and you need to take a good look at yourself. If you did marry someone very similar to yourself, you have effectively increased your exposure to the same risks. So, marrying someone else would you allow both of you to diversify away the idiosyncratic risks that are inherent in your socio-economic profiles.
Your due diligence shouldn’t be restricted to just your partner but should also include their family. Sounds a bit old fashioned and sort of Games of Throne-ish? If you have ever watched this series, you will know that marrying into another family can bring some risks (e.g.[spoiler alert] getting murdered). But there are also benefits from marrying into another family. You can also further diversify your idiosyncratic risks by spreading it across both your extended families. For example, both your parents may want to provide free child care service. So understanding how your potential beloved influences your risk profile can help you manage the future better.
Finally, risk diversification can provides you way of exploiting future opportunities. You may have a great business idea but if you were single, it would be difficult to spend time working on it. But if you were married, your partner could work while you grow your business. In the long-term, both of you may be financially better off.
For those of you not swayed by perfectly rational economic arguments, but marry for ‘happiness’, you may be interested to know that marriage results in greater happiness according to recent research by the National Bureau of Economic Research. There is a one-off increase in happiness when people get married. It is true, that their happiness declines over time, but it is still higher than non-married people. However, it depends on who you marry. The authors assert that you should marry your best friend to maximise your happiness. Hopefully, your best friend feels the same. Due diligence in this case may needed to be undertaken sensitively to avoid unfortunate misunderstandings.
For those of you who are thinking of getting serious with that hot guy/girl you have been dating for a while, hopefully you have found this article of value. Due diligence can be executed by slipping in questions during a date. This can be done on a qualitative basis so advanced skills in spread sheet programs are not necessary. Recording answers may be advisable for future reference and/or divorce proceedings. Do not avoid meeting the parents. While that may be initially uncomfortable, it would be critical for completing a thorough due diligence. And remember, have a good time!