Just tied the knot? Here’s your guide to having the Money Talk.
09 Jun, 2017
Corresponding values, co-operation, forethought and accurate execution are some of the components that aid married couples in achieving financial success
Rhea Ahuja is an ENT specialist with a thriving practice and her husband, Jay is an executive in a premier pharmaceutical firm. With both earning a combined salary of greater than Rs. 4 lakhs per month, it’s a logical assumption that the couple wouldn’t be under any sort of financial pressure. However, an in-depth look into their finances reveals a story involving overspending, irregular investment, disastrous product choices and insufficient insurance. Thus, despite being seemingly secure, the Ahujas were under relative financial stress.
Married couples, especially newly married ones, are often at a risk of financial stress. Here are the tips that could guide a couple on their journey to financial prosperity.
Shared financial values and goals
With a lot of people, money tends to be a touchy topic, making people avoid discussing it transparently. A consequence of this is unfavourable outcomes of financial goals and in a few cases, an impediment to the marriage itself.
A difference in money-related values; being a cautious spender as opposed to a chronic one, one dedicated to saving for the future while the other believes in living for the day, etc. can cause friction between the couple. The key is to evolve a common minimum program, deciding the financial goal and mapping the road to achieving it.
Get reliable advice
Financial planning might seem easy in theory but a Do-It-Yourself approach is most likely to cause a detrimental effect on one’s finances. Some of the most common mistakes people commit when they take control of their finances without proper advice include having excessive exposure to real estate (which weighs them down with debt and offers little liquidity in case of need), investment in insurance-cum-investment plans (which give inadequate life cover and produce poor returns due to high fees), and so on.
It is my opinion that the ones who can afford to employ a reputed financial planner, should do so. With a financial plan in place and regular reviews, one can stay on track towards making profitable investments.
Get rid of high-cost debt
Single days are when expenditure is relatively carefree and hence a lot of people acquire high-cost debt such as personal loans and credit card debts. In spite of money being a rather touchy subject, this is the best time to repay these debts, either with or without your spouse’s help. This is because you won’t experience any prosperity if you’re paying 16-30 per cent interest on high-cost debt while earning only 12-15 per cent on your investment portfolio.
Set up a contingency fund
An important requisite prior to jointly investing in your goals should be to set up a contingency fund. This fund would act as bail in case of loss of employment, temporary disability due to an accident, etc. and prevent you from dipping into your investment corpus.
The contingency fund should equal six-10 months of personal expenditure, including EMIs, insurance premium and child’s tuition. The exact amount should be governed by stability of income and the risk profile of your jobs. Two months of savings may be kept in a savings account where it is accessible. The rest may be kept in the liquid fund of a mutual fund from where it can be withdrawn within a day.
Set a saving target
Cash flows keep fluctuating over time. Thus, what might seem easily attainable at one point is out of grasp at another. Double incomes whittle down to single incomes once a couple starts a family, there could be a loss of a job, etc. Hence, right from the start, there needs to be a cushion created for meeting any contingencies. At least 25-30 per cent of the couple’s combined gross income should be saved and invested each month. It is only disciplined saving that will help in meeting financial goals.
Buy life insurance
Adequate life insurance is a must once there is a dependant in the family. This could either be a non-working wife, a child or elderly parents. The rule of thumb is to have life insurance worth at least 10 times one’s annual salary. If one was to consult a financial planner, they would get the calculations of all the assets, liabilities and future requirements calculated and the sum assured in a scientific way.
If either of the partners is a dependent, the policy should be purchased only by the breadwinner. If both partners work and have dependants, they can both purchase policies, naming each other as nominees.
Term insurance policies must be bought to meet life insurance needs. One should avoid buying an insurance-cum-investment product where, despite paying a high premium every year, you may not have adequate life cover.
Buy health insurance
Buying health insurance policies for both partners (and child, if any), regardless of whether the employer provides it, is a must. This ensures that you’re covered in case of a loss of job or need emergency medical treatment. Once you pass the age of 40 and try to keep pace with rising health costs, purchasing a floater policy to compliment the stand-alone one is a good idea. Additionally, you could also buy accident cover and critical illness policy.
Prior to purchasing a health policy, consulting with a financial planner is a good idea. In case you wish to buy the policy on your own, keep in mind issues like the insurer’s policy regarding pre-existing diseases, sub-limits, exclusions, renewability and claim loading to avoid unpleasant surprises later.
Don’t go overboard with debt to create assets
It is best to observe prudency while taking loans to create assets. The total loan amount for their car and EMI’s should stay below 30 percent of the couple’s gross income to avoid cash flow problems.
Even while buying a car, be judicious in its size. Similarly, a house should be bought only when both individuals hold stable jobs, their income has reached a reasonable level and the house is in proportion to the couple’s salaries.
Investing to meet your goals
Couples should divide their investment goals into short, medium and long-term goals. Saving and investing to collect the down payment for the purchase of a car (which can be met within two years) is a short-term goal. Investing to start a family (when wife stops working and household expenses grow) or to collect the down payment for purchasing a house is a medium-term goal (two to five years). Saving for your child’s education and for retirement are long-term goals (above five years).
Short term goal: It would be best to invest in a fixed deposit scheme, where the risk of loss is nil.
Medium term goal: You may go with a hybrid fund (equity and debt in the ratio of 60:40 or 70:30).
Long term goals: You may invest primarily in equities if you have adequate risk appetite.
Conservative couples should decide on an asset allocation that is in keeping with their risk appetite (more in equities for those with higher risk appetite) and current wealth (a less risky portfolio if you are already comfortably placed). Once the asset allocation has been decided, divide the portfolio among diversified-equity funds for the equity portion and Public Provident Fund (PPF) and Employee Provident Fund (EPF) for the debt portion. About 8-10 per cent of your total portfolio may also be invested in gold.
The equity portion of your portfolio should be divided among large- and large-and mid-cap funds (70-75 per cent of total equity portfolio) and mid- and small-cap funds (25-30 per cent). If you are financially savvy and will monitor your investment portfolio periodically, then invest in actively-managed funds with sound long-term track records. If the performance of a fund falters (it under performs benchmark for three quarters), switch to another fund. On the other hand, if you don’t wish to keep close watch on your funds, go with passive funds (exchange traded funds and index funds) which will give you returns at par with that of their benchmark indexes.
Financial planning for couples is a detailed and meticulous exercise, difficult to capture in a short article. As said earlier, those keen on achieving financial success should use the services of a financial planner who can play the role of advisor and mentor and put the couple on the road to enduring financial freedom.