Love and Finance
I knew nothing about finance until I met my husband, Sam. My metric for success was meeting the minimum monthly payment on my Victoria’s Secret credit card.
Try as I might to understand his very enthusiastic explanations, my eyes would eventually glaze over. I just couldn’t grasp the concepts.
Over time I realized that I was most engaged in what he was saying when I could relate an investing term to my own life, namely my romantic life.
Sam used the term compounding so much that it became ingrained in my head. When I was writing my wedding vows, someone recommended addressing the moment I knew I wanted to marry him. I realized that no moment like that existed for me, so I said this:
“There wasn’t a particular moment when I knew for sure. It was more like one good thing on top of the other on top of the other. You might say that my love for you was compounding over time.”
I got a good laugh from that one, but more importantly, it was perfectly applicable to my love for Sam.
The following is a guide to investing terms as they relate to my own relationship experiences. By using romantic analogies, it will be easy for the novice to truly understand, and amusing for the seasoned investor to see it from a new perspective.
Definition: Refers to a cost that has already been incurred and cannot be recovered. In other words, a sum paid in the past that is no longer relevant to decisions about the future.
The hands-down biggest sunk cost in any relationship is the length of the relationship. I dated my ex-boyfriend, Tom, for eight long years from age 21-29. You don’t date someone for most of your 20s and think you’re not going to end up with that person. I thought about marriage, kids, and putting my first name with his last name.
We lived together, moved across the country together, and spent holidays with each other’s families. It was a huge investment.
But time spent together is NOT a reason to stay with a person if you’re not happy. I found myself saying, “But we’ve been together for EIGHT YEARS. Doesn’t that mean something??”
The answer is yes, but it doesn’t mean you’re supposed to stay together. Just because you’re willing to walk away from a sunk cost doesn’t mean you can’t learn from it. An 8-year relationship will teach you a lot about yourself and who you are and what you need from a partner. A long relationship will prepare you for the next relationship, which I promise will be a better one.
Barriers to Exit
Definition: Obstacles or impediments that prevent a company from exiting a market or industry. Typical barriers to exit include highly specialized assets, which may be difficult to sell or relocate, and high exit costs, such as asset write-offs and closure costs.
That same ex-boyfriend and I grew up in the same town in New Jersey and had big dreams of “making it” in the film industry. I wanted to act; he wanted to direct. It made sense, then, that we moved to Los Angeles.
Even then, five years in, I knew our relationship wasn’t healthy. I knew I was using Tom as a crutch because I felt like I needed him to move across the country. I didn’t know anyone in LA. I certainly didn’t want to live with a stranger, so it prolonged our relationship.
Toward the end of our eight years, Tom and I shared my car. I could ride my bike to work, but he needed my car five days a week. I didn’t realize that I was subconsciously laying the foundation for our break-up, but I became insistent that he get his own vehicle. It was a couple months after he bought his car that I moved out.
I got stuck in a bad relationship because of barriers to exit. First because I was scared to go it alone and second because I was worried about Tom and how it might look to leave him high and dry without a car. It felt like the cost to exit the relationship was too high, but breaking up was clearly the right decision long-term.
Definition: The decision that businesses must make between catering to their customers’ current needs, or adopting new innovations and technologies which will answer their future needs. Businesses are constantly faced with two choices – they can either continue doing what they know is currently working well, or adopt disruptive advancements in an attempt to stay relevant.
A recent example of innovator’s dilemma is Kodak: a business that stayed in the film industry while the rest of the world was going digital.
Here’s what happened (and how it relates to love):
“The first digital camera was created by an engineer working for Kodak, but spotting something and doing something about it are very different things. Kodak invented the technology but didn’t invest in it.”
This is when you start to recognize red flags in your relationship. You see a glimpse of a better future without this person, but choose to ignore it. Just pretend it doesn’t exist and everything will be fine.
“Companies often see the disruptive forces affecting their industry. They frequently divert sufficient resources to participate in emerging markets. Their failure is usually an inability to truly embrace the new business models the disruptive change opens up.”
Even though you can see how bad the relationship is, you divert your attention and energy to other things to distract yourself. You refuse to embrace the possibility of a different and better life.
“Kodak remains a sad story of potential lost. The American icon had the talent, the money, and even the foresight to make the transition. Instead it ended up the victim of the aftershocks of a disruptive change.”
To sum up, the innovator’s dilemma in relationships is complacency because you’re not willing to embrace self-disruption for long-term survival. Anything that feels like a gamble or risk is scary. It feels like it’s not worth it to try something new when something already appears to be working. But “working” too often means living in the same space and not killing each other.
The thought that scares us is, “I’ll never be able to find something better, which means I’ll end up alone.”
Writer Ashley C. Ford sends a message that we all deserve the best and biggest kind of love:
“My husband tells me I’m beautiful every day, and acts like I’m beautiful not because of the way I look but because of the way I am. It’s really important to me that every person in the world know that that kind of love is out there and it’s available, because I think a lot of people are at risk of giving up because they think, ‘Well this is good enough.’”
The point is not that there is someone out there who will treat you like gold. The point is you should never settle for anything less than happiness.
The only way to discover something new and better is to take a leap of faith and go for it. If you’re not willing to take a chance, or you’re not willing to value yourself, then you may end up like Kodak.
Definition: The process whereby interest is credited to an existing principal amount as well as to interest already paid. Compounding can thus be construed as interest on interest - the effect of which is to magnify returns to interest over time, the so-called "miracle of compounding."
Relationships either get worse over time or they get better. It isn’t noticeable on a day-to-day basis. It happens so microscopically, so incrementally, that it’s difficult to notice until it’s either really bad or really great.
In a good relationship, this idea applies to Jim Collins’ flywheel effect, which states that, “Each turn of the flywheel builds upon work done earlier, compounding your investment of effort.”
When there’s negativity in a relationship, love psychologist John Gottman refers to this as the whirlpool effect.
“In good relationships, [couples] have so much of a cushion of positive emotion, that they can easily escape when negativity hits. They can exit as well as enter. In unhappy relationships, negativity is like one of those whirlpools that just spiral down. They can enter, but they get sucked into it and they can’t get out.”
In my 8-year relationship, we weren’t nice to each other. We didn’t know how to communicate. We were both incredibly defensive and as soon as one person would say something interpreted as mean, the other person would feel attacked and retaliate.
In my relationship with my husband, things are always moving in a positive direction, more like the flywheel effect. That’s not to say we don’t argue, but there is an overwhelming feeling that it’s safe to be vulnerable. And when you can be vulnerable with your partner, it opens the door to a type of loving communication that wouldn’t be possible otherwise.
The power of compound interest is often overlooked or underappreciated, but if you put in the money - or work - little by little, you can watch your money - or love - grow exponentially.
Once you can do that, it’s on to the next step.
Mergers and Acquisitions (M&A)
Definition: The process of combining two companies into one. The goal of combining two or more businesses is to try and achieve synergy – where the whole (new company) is greater than the sum of its parts (the former two separate entities).
A merger is a big commitment that should not be taken lightly. Approach a marriage the same way you’d approach a merger, as explained in this Forbes article:
“Get to know your potential partner. You want and need to know the person (and their company) from the inside out. Don't jump into things without fully vetting the individuals. Do background checks. Require references and talk to all of the references.”
Not only is it important to get to know your partner, it’s equally important to get to know the people in their life. Then, even after you’re sure this person is “the one,” marriage doesn’t always end happily. The article continues:
“History shows that after the party is over, and the hard work begins, things rarely turn out as anticipated.”
Post-merger, some companies find great success and growth, while others fail spectacularly. One study suggests 60% of M&A deals destroy shareholder value. Compare that to the often-cited statistic that 50% of marriages in the US end in divorce.
I’m no marriage expert (Sam and I have only been married for one year), but I like to look at the successful M&A transactions.
“The most successful merger or acquisition has full buy-in from all parties. This includes not only the owners and stockholders, but the employees and customers. All parties need to understand the vision of the merged companies and see the upside.”
Not only do both individuals have to be willing to do whatever it takes to make the marriage successful, it helps to have friends and family on board. That’s not to say that you shouldn’t be married to each other if everyone isn’t supportive, but it certainly won’t make the transition easy.
Don’t get too caught up in the magic and beauty of the wedding day - it's just the beginning milestone. A successful marriage can only occur when both parties are willing to put in the work on a daily basis:
“It's less about the day you pop the corks and celebrate, and more about next month and next year. Never underestimate the amount of time that will be required to operate a successful melding of the best of both companies.”
A successful marriage - like a successful merger - takes constant work and effort.
Love and Finance
There’s a lot to be gained from applying investing concepts to your romantic relationships. Even in the finance world where numbers and spreadsheets rule, it’s imperative to still listen to your gut. We all hear that voice inside; we just don’t always listen and act.
Don’t let sunk costs, barriers to exit, and innovator’s dilemma keep you in an unhappy relationship. Embrace the positive aspects of compound interest and the flywheel effect to promote a healthy and loving merger.
Now that I’ve taken a deep dive into investing terms, I’d like to amend my wedding vows. Borrowing from Jim Collins, this would have been a way better description of the moment I knew Sam was the one:
“The good-to-great transformation [didn’t happen] in one fell swoop. There was no single defining action, no grand program, no one killer innovation, no solitary lucky break, no wrenching revolution. Good to great [came] about by a cumulative process—step by step, action by action, decision by decision, turn by turn of the flywheel—that [added] up to sustained and spectacular results.”
...Damn that’s good.
So pay attention to the similarities between love and finance and look for the overlap. Who knows? A little understanding of finance could help you find happiness in your personal life.
Special thanks to Adam Zuercher, Adam Tank, Jen Vermet, and Juan David Campolargo for reading drafts and providing feedback.