Ritu is a dentist with a flourishing private practice while her husband Ajay is an executive with one of India’s top manufacturing conglomerates. With earnings of above INR 3 lakh per month flowing into their combined kitty, one would imagine that this couple would have no financial worries. Alas, a close look at their finances told a sad tale of overspending, sporadic rather than regular investment, disastrous product choices, and inadequate insurance. Here are tips that could set this couple, and many other affluent ones, on the road to financial prosperity.
Shared financial values and goals
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.
Shortly after marriage, once the couple has got to know each other fairly well, they should have an exchange regarding their money-related values. In due course, they should evolve a common minimum programme, comprising financial goals that they hope to achieve and a roadmap for achieving it.
Get reliable advice
Financial planning may seem like a rather simple thing to do. But in my career I have seen numerous couples who adopted the DIY [do it yourself] approach and paid a heavy price. Some of the common mistakes that couples commit are 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.
In my view, those who can afford to, should find a reputed financial planner in their neighbourhood, get a financial plan prepared, and go for regular reviews to ensure that they stay on the right track.
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.
The contingency fund should equal 6 – 10 months of personal expenditure, including EMIs, insurance premium and child’s tuition. The exact amount put in the contingency fund 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
When cash flows are high, people walk on air. Anything that they desire appears within grasp and the tendency to splurge on high-cost purchases is high. But couples must remember that cash flows may not always remain high. Double incomes get whittled down to single income when the couple starts a family. A high-paying job can be lost for no fault of yours. So right from the start, couples must save to have a cushion for meeting contingencies. Moreover, only disciplined saving will help them meet their myriad financial goals.
At least 25 – 30 per cent of the couple’s combined gross income should be saved and invested each month.
Buy life insurance
As soon as there is a dependant within the family [non-working wife, elderly dependent parents or a child], the couple must ensure that they have adequate life insurance. A rough rule of thumb is that you must have life insurance worth at least 10 times your annual salary. If you go to a financial planner, she will calculate your assets, liabilities and future requirements [in case of death of the bread winner] and then calculate the sum assured. This is a much more scientific way of calculating your insurance needs.
If the husband works and the wife is dependent on him [or vice-versa], the policy should only be purchased by the breadwinner. If both the husband and wife work [and they have a dependent child or parents], both may purchase life policies, naming each 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 [when your chances of falling ill grow], and to keep pace with rising healthcare costs, supplement these stand-alone policies with a floater policy. 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] 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].
To meet short-term goals, it would be best to invest in a fixed deposit scheme, where the risk of loss is nil. For a medium-term goal you may go with a hybrid fund [equity and debt in the ratio of 60:40 or 70:30].
For long-term goals such as child’s education and retirement, 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-cap 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 underperforms 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.
This article was first published in June 2013 issue of Complete Wellbeing.