After you get married, you not only share life with your spouse but your income and expenses too! The biggest challenge that most young, earning couples face is managing their finances. Here are some of the best post-nuptial financial planning tips that every couple should consider using.
It is essential to have short-term, medium and long-term financial plans that can be used as a yardstick for measuring your financial success. It also keeps a tab of the road map you have set for achieving your joint goals. These goals may be further categorised into needs and want to mark their importance.
The table below is an example of a general financial goal.
|Time frame||Goal||Need/Want||Points to note|
|Short-term||Accumulate savings||Need||6 months’ income is generally used as a yardstick.|
|Buy insurance||Need||Adequate cover as per your needs|
|Purchase assets (car, home etc.)||Want||Assess cost benefits as opposed to the amount to be borrowed|
|Retirement planning||Need||Disciplined long-term investment|
|Incidental expenses (vacations, monthly expenses etc.)||Want||Should be made after savings and investments from the surplus to avoid over-spending or borrowing|
|Medium-term||Children’s education||Need||Start accumulating funds from the child’s birth|
|Real Estate Investment||Need||Consider prepaying the loan and investing some other real estate property|
|Streamline retirement plan||Need||Assess the accumulated retirement fund and continue investing surplus towards the same|
|Incidental Expenses||Want||Create a self-sustaining corpus to regularly fund incidental expenses such as holidays, random purchases etc.|
|Long-term||Assess Retirement corpus and Liquidity||Need||Continue the assessment of retirement corpus and reconsider investment funds allocation to more stable sources to earn guaranteed returns. (eg. Less equity more bank deposits etc.)|
|Children’s higher education||Need||Must begin at an early stage and continue right up to the point when the actual expense occurs.|
|Children’s marriage||Need||Can begin at a later phase after buying a house|
|Estate Planning||Need||Should be effective from the stage where you have accumulated enough assets and your family is settled|
|Post-retirement expenses||Want||Should begin along with investment for retirement fund|
It is wise for families to start planning for their income, expenses, savings and investments from the onset of their married life since finances tend to become more complicated if and when the family grows larger.
1. Debt-Free Living: The main issue that most young couples deal with is debt. Whether it is a Credit Card, Personal Loan, Home Loan, or Car Loan, the first priority should be to pay it off. Paying off the debt earlier than scheduled relieves you of mental anxiety, can save you interest that you pay to the financier over a period of time and also makes you cash rich. As per RBI’s instructions, banks don’t charge a pre-payment penalty on floating rate Home Loans. This gives freedom to the borrower to repay their loans.
a) Make a budget: Your budget has to be logical and more importantly, realistic. The surplus has to be saved or invested towards your goals. Ideally, try to be a little strict with yourself. Among your expenses, you must be prepared to make viable cuts that you can stick with in order to make a difference to the overall state of your finances.
b) Choose which debt to pay first: Debt management experts advise paying off loans with higher interest rates first. This is called the debt ladder or the ladder method of debt repayment. The other option allows you to pay down debt starting with the smaller principal balances, which will quickly free up money to put toward other loans with larger principal balances. This is called the reverse ladder or the snowball method because you build momentum and confidence as you pay down debt.
Review your finances thoroughly, crunch the numbers, and see which method would be the most effective for your situation. The rule of thumb is, you must prepay something each month to get rid of the debt as soon as possible.
Please note that the above method is very effective in case of no pre-payment penalties. Please check with your financier in advance on the charges and penalties involved. You might have to do your math to understand the benefit of early repayment once you check for the charges.
2. Buy or invest in property: You can plan to buy your own property if you don’t already have one. Buying your own dream house can save you the rent that you were repaying and also help you create an asset for a lifetime. Availing a Home Loan is easier for a married couple as a joint Home Loan not only helps you share your debt burden but also allows you to get a higher loan since the income of the co-borrower is also considered for your loan eligibility.
If you already own a property, you might think of investing in a second property to generate additional rental income. Experts believe that the real estate in India gave good returns over the last 10 years. Before you do that, we recommend assessing cost-benefit as opposed to the amount to be borrowed and consider other factors like future selling price, rental income etc.
Additional Reading: Guide To Buying Property In Tier II, III Cities
3. Dreams that money can buy: While money doesn’t buy happiness, there is a strong correlation between happiness and the degree to which our financial decisions and behavioural choices are in alignment with our deepest values. There are a few things that money can buy that can bring happiness like your dream car, a vacation to an exotic destination, designer jewellery etc. Buying these things can make you happy for a while and there is nothing wrong with it if you want to prioritize achieving these things first.
To manage money and marriage together, spouses must understand each other’s ideas about finances and aim to align their financial goals and achieve them together. With the dual income in the household and proper financial planning, it is relatively easier to achieve your monetary dreams. It is important that both partners in a marriage are on the same page about finances. If they aren’t, they need to reach a compromise that they are both comfortable with. The best way to assess this is to talk openly about your dreams, aspirations, goals, spending habits etc.
The points that we discussed above involves medium to long-term planning for a couple. However, comprehensive financial planning is much more than reviewing your investments. It’s also insurance, taxes, educational funding, employee benefits, retirement and estate planning. Through planning, you develop a complete picture of your financial situation, with a written plan to help you realize your goals, dreams and financial security.
4. Short-term contingency fund: An emergency or contingency fund is used to cover expenses when there is a sudden loss of income or other financial emergencies. Most experts suggest a household to have between three and six months worth of expenses available in the event of an emergency. So, if your monthly obligations total Rs.50,000, you should try and keep between Rs.1,50,000 and Rs.3,00,000 in your emergency fund. These funds should be accessible like a Fixed Deposit or any other short term investment that is easy to withdraw in case of emergencies.
5. Insurance: Since you have worked hard to build a solid financial footing for you and your family, you want to be sure that everything is protected. Accidents and disasters can and do happen, and if you are not adequately insured, it could ruin you financially. You need insurance to protect your life, your ability to earn income, and to keep a roof over your head. It offers peace of mind, security and a safety net. Having insurance policies in place is extremely important for every couple. Here are some that you should consider investing in:
a) Life Insurance – As both the partners stay with their respective families before marriage, there might not be a real need for a Life Insurance policy as there is no dependency. However, after marriage, the dependency factor comes into play and therefore the need for a Life Insurance policy is absolutely necessary. We suggest a pure life protection cover or a term policy as it is the cheapest form of insurance and provides a large risk cover with a very low premium. Ideally, you should aim for a coverage amount that is equivalent to the present value of all your earnings till retirement.
b) Medical Insurance – If you and your spouse are both working, both of you will probably be covered by Medical Insurance that your respective companies are offering you. But you can still check for the additional riders if required.
Additional Reading: Does Insurance Help You Save On Tax?
6. Retirement Planning: To be sure, saving and planning for retirement is a real and urgent need. With people living longer, they need to plan well if they want to continue with the lifestyle they have before retirement. When it comes to how much you should save for retirement, if your company offers a provident fund, you need to save at least an equivalent amount to take advantage of that. These matching programs can be anywhere from 3-5% of your gross pay, but your retirement savings should not stop there. Younger people who have more time to save should strive for a minimum of 10%, although the closer you are to retirement, you may be shooting for 20-30% depending on your current savings.
7. Children’s Education and their marriage: Financial planning for children is essential to make their future secure and help them achieve more in life. As a parent, you not only want your child to have a sound education but also a grand wedding too. The sooner the parents start planning for the child’s education and marriage the better. This is because if you start saving and investing early, it will give you a larger timeframe to build a bigger corpus.
Additional Reading: Are You Financially Responsible Towards Your Children?
Setting goals and achieving them together is a wonderful way to take your marriage to new heights. It is important for couples to make strategies regularly, even if they are aware of the steps that need to be taken to secure their future. If both partners are earning, both should invest in long-term and short-term savings. They need to chart out their current income strategically and invest wisely in those areas that give the highest returns.