Financial Planning for Earning Couples

Couple
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CoupleMarriages are made in heaven and so are the blessings and issues arising out of it. I am sure that every one would have heard the jokes floating around on pluses and minuses of a married life. I am not going to make situations even more interesting with yet another joke. However, lets try to discuss upon one of the issues associated with couples – FINANCES. Perhaps this is one of the most important causes of debate amongst couples, irrespective of they being married or otherwise. I have seen so many couples parting owing to finance issues, which if controlled would have never led to partition and painful consequences in the form of Alimony and family unrest. Be wise and make things straight right from the start.

To Share or Not to Share

Couples share a lot of information and they would talk about every thing associated with their lives such as buying a house, kids, education, employment and the list goes on. I so rarely find a justified amount of time and sincerity being allocated to the family finances. Even if they discuss, there are a lot of hidden items, secret bank and investment accounts. And the rationale behind such practices is often not clear in their heads. Guys you need to grow up and start sharing your financial accounts amongst yourselves. If you have taken vows at the time of marriage, why are you uprooting the trust factor of your family lives by keeping financial secrets which often gets wrongly linked to infidelity by the partners when they are in a hot mood !!

 

DINKS

You may have heard about the ‘DINKS’ (Double Income No Kids) couples. In short it refers to couples where both male and female partners are earning and don’t have kids – meaning fewer liabilities. In fact, if you are one of them, you are amongst the lucky ones who are better prepared to enhance their financial strength by quickly earning (and hopefully saving) a lot of money and creating productive assets. However at times the savings / financial planning takes a back seat and a lot of earning results in a lot of wasteful spending resulting in no or limited creation of money earning assets. I have tried to discuss in the next paragraphs few of those challenges which couples really need to tackle in order to enhance their financial standing.

 

Update financial documents

Upon being married, couples should give priority towards updating key documents associated with their financial and legal matters. Examples of such documents are changing of surnames in passport, PAN card, getting a marriage certificate, joining voter lists, updating bank accounts and the list goes on. Updating of bank accounts helps in building of credit history, however you need to be aware that if any of the couple is having a negative history, it would result in tainting the credit history of the other partner.

 

Likes and Dislikes

I am sure this happens in every house. Men complain that their wives are buying all sort of crap stuff, going into a shopping mall every now and then and buying bags full of dresses and accessories. And the wives complain that even though they shop 10 items worth x amount, their husbands would go into a shop or online and buy in one go an item or gadget worth ten times of her entire month’s shopping. If you notice, the arguments of both sides are fair and unfair. Fair because they are shopping items which they like and unfair because their partners don’t appreciate the value of their shoppings or likes / dislikes. It requires a good discussion and perhaps a compromise on both sides whereby each side needs to appreciate the likes and dislikes of their partners and avoid (as much as they can) expending on items in the dislike list. I agree that it is easier said than done, but trust me that even a discussion in this direction would add positivity in your financial plans.

 

Emergency fund

It is extremely important for couples to have an emergency fund which is sufficient enough to maintain their lifestyle in case of an abrupt impact on source of income of the bread earner(s). This is often confused and avoided whereby either couples don’t maintain their emergency funds or maintain it in the form of illiquid / long term investments like equity shares. It is vital to have a fund in most liquid form of investments such as money market funds or balances in saving accounts which can be tapped at no or very little notice. The amount of such fund should be able to support the lifestyle of the family for atleast 6 months.

 

Seperate bank accounts vs Joint accounts

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If both the members of the family are earning before they met each other, each of them would be having a seperate bank account. In all likelihood, seperate bank accounts continue even after marriage. I find very few cases where couples end up having a joint bank account account where the earnings of both are credited. It has never been clear whether the reason behind having a seperate bank account is owing to missing trust element between the members or requiring independence on the spending power. Some people have right reasons to have seperate bank accounts to have clear income trail for tax reasons. What ever may be the reasons, it is important for couples to have a clear mindset on why they have seperate accounts and if the family expenses are being overly charged to one bank account (often husband’s account). I have seen several cases where the household’s biggest cash outflow ‘Mortgage payments’ are charged to husband’s bank account even though the house is in joint name of the husband and wife. At month end husband’s account is left with peanuts while the wife’s account is barely untouched. On another note, if you have a joint bank account, it is important to have a clear understanding between the couples on withdrawing power of each person.

 

Monthly budgets

Having a family budget is often missing in couples. It is a well known fact that the expenses go up when people start living together. This is even more pronounced where bachelors get married. Earlier they were living in a bachelor accommodation by renting a small room and on squeezed monthly budgets. Once married, they take a flat on rent. Instead of taking public transport, they now require a car. If the other family member is not earning, some of the expenses double without additional income coming into the family kitty. Couples slowly realise that they are living beyond their means and in many cases this is once they have piled on huge levels of debt.

It is very vital for families to have a family budget in order to develop a clear understanding of where they stand financially and how much expenses they can afford on a monthly basis. This would help in limiting the avoidable luxuries which would end up piling debt upon the family finances and eventually crushing the bread earners. As a part of the budget, it is also important to have a x% allocated towards future savings, insurances (again overlooked as people end up living in the present and avoid their future.) !

 

Securing Dependents

Red Cross, Sickness, IllOnce couple live together, sooner or later they also have dependents. The situation is more vulnerable where there is only one member of the family is a bread earner with over 1-2 dependents. Being in such a situation, have you ever thought what would happen if the bread earner is no more there or suffers from a critical illness which severely impairs his / her ability to earn. Matters become worse where the family is faced with a significant debt burden in the form of a housing loan, car loan, personal loan, etc.

Couples hence need to secure themselves with adequate amount of insurances such as :

1. Term insurances (on a minimum for bread earner);

2. Critical Illness insurance – for ALL members of the family;

3. Medical Insurance – for ALL members of the family [insert links].

4. Nomination & Will – Till date your finances would have been just yours and you may not have thought about what happens if you are no longer there. Perhaps you have now started earning much more than you used to earn before having a family member in your family. Ofcourse you have your parents, but once you are married and have children you may want to rethink about whom you would want to leave your fortunes once you are no longer there. Couples seriously need to think about nomination in all their assets and creating a will to avoid any disputes in future. You may want to read our article Importance of Nomination.

 

Family versus Individual Portfolio

It is good to have your family investments split amongst members of your family for various reasons. Till date you may be investing all your money in your name and after marriage you have decided to invest it partly in your spouse’s name as well. However, it is important to avoid a common pitfall of looking your and spouse’s investment portfolio as two seperate investment accounts. While both of the investment accounts are seperate, they in totality form a part of your family investment pool and should complement each other in achieving the required diversification rather than contradicting each other. For example, you may want to hold equities in your portfolio, while debt in name of your wife for tax reasons. But these two should be viewed in totality to determine if the overall family investments are diversified and invested in appropriate avenues.

 

Tax Planning

If family expenses increase when you live with some one, it comes with a positive element of having possible tax efficiencies. This is more evident where one member of family is having a lower income (e.g. in 10% tax bracket while other is in 30% bracket). Families can make the best usage of this by investing more in the name of the member who is paying lower or no taxes. A couple of examples which can be explored are :

– Invest in real estates in names of husband and wife seperately to make best use of the available wealth tax allowances.

– PPF limit is Rs. 1 lac per person. For couples, this doubles;

– Exempted income deduction under section 80C is Rs. 1 lac per person. Again, via tax planning you could invest in a manner to reduce your overall family taxable income;

 

Debt Handling

Before coupling up with a people don’t really ask about the level of debt he or she is  sitting on. Their lifestyle is taken on face value – a flashy car may sound like a rich person’s asset. However, it can also be bought with a loan. At times you may end up with a person who is sitting on a large debt which makes the family cash flow suffer as majority of the income may be going towards servicing the loan repayments. However it does not mean that your counterpart is a bad person. Debt like everything else can be sorted by having a close look at your family cashflows and sacrificing any short term luxuries and living on a squeezed budgets. Both the members of the family need to sit and chalk out a plan on what expenses need to be curtailed to reduce the debt – trust me that in long term it would be beneficial for your family and would avoid disagreements on financial issues.

 

Harmonised Financial Goals

It is so common – one member may have a goal to buy a property while other may want to invest in Fixed Deposits as a low risk asset, go on a foreign vacation or buy gold. If you would notice, each of these goals are different and require a consensus between the family members else none of them may be fulfilled. Or if fulfilled, it would result in strained relationships as fulfilling one may require a sacrifice of other. Having financial goals is a good thing, but having them harmonised between the family members is vital. Both the members need to agree upon what goals need to be fulfilled over a short, medium and long term. It would be based upon these goals an investment plan need to be prepared to achieve such goals.

 

Planning for Children

If you are planning for kids, make sure that you are aware of the rocky road ahead. I am not trying to scare you off, but it is good to know the aspects waiting for you before you are actually into the scenario. Kids are amazing fun loving creatures but unfortunately they are expensive to maintain (apologies if I have hurt some one’s feeling here). A few things to keep in mind are :

1. Maternity expenses;

2. Day care expenses if the wife chooses to join work;

3. Loss of wife’s salary if she chooses to take care of the baby

4. Ongoing child related expenses such as medical, schooling, clothing extra activities – they can easily go over Rs. 10,000 per month.

5. Saving for their higher educations (if you amongst them who would like to save for their child’s future rather than letting them take a loan to finance their education).

 

I would like to wish you all a every lasting happy married life. Hopefully none of the issues mentioned above may hit your in person. However, it doesn’t harm to be better prepared – isn’t it ?

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3 Replies to “Financial Planning for Earning Couples”

  1. sanyam jain says:

    Excellent… very informative article….

  2. Nice sharing. Thanks for taking efforts to explain these in simple words so even people from non finance sector can understand it

  3. Thank you. That is my aim to put across financial words in simple words.

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