Financial planning for couples is a detailed and meticulous exercise. Goal-based planning can put a couple on the road to enduring financial freedom.
Money is a touchy subject. Most couples tend to avoid discussing it transparently. This results in sub-optimal outcomes vis-à-vis achievement of financial goals and, in some cases, even becomes an impediment to marital bliss. A lot of times, two people come into a marriage with different money-related values: one may be a cautious spender while the other may spend as if there is no tomorrow; one may be dedicated to saving and investing to meet financial goals, while the other might live just for the day and believe that the future will somehow take care of itself.
In due course, the couple should have an exchange regarding their money-related values and evolve a common minimum programme, comprising financial goals that they hope to achieve and a roadmap for achieving it. Here are a few tips:
Get rid of high-cost debt
During your single days, you may have spent rather too freely and hence acquired high-cost debt such as personal loans and credit card debts. Though this could be a touchy subject, after marriage it is best to pay off these debts first—either with the help of your spouse or without. You will not make any progress on the road to prosperity if you are simultaneously 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
Another prerequisite before you can begin investing to meet your goals is to set up a contingency fund. This fund could bail you out in case of loss of employment, an accident that leads to temporary disability, and so on. It will save you from dipping into your investment corpus. 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 The rest may be kept in the liquid fund of a mutual fund from where it can be withdrawn within a day.
Buy life insurance
As soon as there is a dependent within the family (non-working spouse, elderly parents or a child), the couple must ensure that they have adequate life insurance. If only one spouse is working, the policy should only be purchased by the breadwinner. If both work (and they have a dependent child or parents), both may purchase policies, naming the other as the nominee. Buy a term insurance policy (online policies are less expensive) to meet your life insurance needs. 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
Even if your employers provide health insurance, buy individual health insurance policies for both partners (and child, if any). That way you will still have insurance cover in case you give up your job or need medical treatment when you are between jobs. Once you have crossed the age of 40 and to keep pace with rising healthcare costs, supplement these stand-alone policies with a floater policy. You may also buy accident cover and critical illness policy for added protection.
Keep in mind issues such as the insurer’s policy regarding pre-existing diseases, sub-limits, exclusions, renewability and claim loading to avoid unpleasant surprises at a later date.
Don’t go overboard with debt to create assets
Even when taking a loan to create assets, couples should stick to prudent limits. The total of their car and home loan EMIs should not exceed 30 per cent of their gross income, otherwise, they could face cash-flow problems. When buying a car, be prudent regarding its size. Similarly, buy a house only after your income has reached a reasonable level and you are in stable jobs. Buy a house of a size proportionate to your combined incomes.
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) could be a short-term goal. Investing to start a family or to collect the down payment for purchasing a house could be a medium-term goal (two to five years). Saving for your child’s education and retirement are examples of long-term goals (above five years).
Financial planning for couples is a detailed and meticulous exercise. Goal-based planning can put a couple on the road to enduring financial freedom. It is important to get professional advice to do financial planning. You can find some good online solutions too. Whichever way you choose, be sure to adopt a goal-based approach to planning and investing. Shared values, co-operation, careful planning and meticulous execution are some of the elements that can help married couples achieve financial success.
(By Amar Pandit, CFA, and Founder, Happyness Factory)