One of my newly married friends asked me to suggest some pointers which he can consider while planning his post-marriage financial future. So, here are some points to ponder over as you and your spouse get over your honeymoon phase and get back to your routine. It is time to revisit the financial goals for both the partners formed while you were single. Now, these goals have to be revised keeping in mind your financial future together.here are the 8 Financial Planning Tips for Newlyweds.
1. Consult with each other
First and foremost element in every relationship is trust and honesty. Whether it is friendship or marriage.
Yet, we hear numerous stories where families have been torn apart due to the untimely death of sole bread earner and the grieving wife is forced to run from pillar to post trying to make some sense of the financial situation rather than grieving.
This situation arises due to lack of communication and involvement of both partners in financial decisions with respect to the family. People often argue that in this age of independence, every person is free to decide how and where they want to spend their money. Whether married or not, they do not want to seek the permission or share details with anyone before taking any financial decision or making investments.
While I can understand this view; it’s important to remember that transparency and openness is required in any marriage. We are no longer a solo ride. We have a partner who has joined our journey and it is important to consider their views whenever we are faced with important decisions which may have an impact on your future together, especially financial decisions.
Hence, please keep the lines of communication open; sit down together and chalk out your individual and collective financial goals as a team. You are not the lone ranger anymore, but have a backup. Try and the revisit of those goals together at periodic intervals to ensure that individually and as a couple, both of you are on the right track. This communication and involvement also help keep both the parties in the marriage fully aware of the financial situation and the details, the importance of which cannot be overemphasized especially in unfortunate tragic situations like the one described above.
2. Do you follow the maxim “Income – Expenses = Savings”
This old adage no longer holds true in my view. It only provides room for us to invest what we save after meeting our day-to-day expenses. Long-term wealth will seldom be created if we try to invest only what is left after our expenses. As you move from single status to a family together, the day-to- day expenses are expected to rise often without the corresponding increase in income streams. Hence, we need to seriously consider juggling this formula around to focus more on controlling expenses and saving more. It is time to juggle the formula around to “Income – Savings=Expenses”.
I can see a lot of people saying that this is easier to say than done. But believe me, it’s not impossible. It is important for us to realise that our wants and needs are very different. Often, in our monthly budget, we will find that there is a huge difference between the expenses that we incur on necessities and needs vis-a-vis expenses that we incur on our wants.
This urge to spend more money on our wants, which are nothing but forms of temporary gratification should be reduced and minimised as much as possible.
This is especially true for newlywed couples who are just trying to build their financial future together.
One way to do this is by keeping separate bank accounts for your incomes and expenses. After salary day, people can consider shifting a certain portion of their income to another account exclusively maintained to meet expenses. For example, give a standing instruction to your bank to transfer 30 Percentage of your salary to another bank account exclusively to meet your monthly expenses.
This way, you will be able to try to control your expenses to match the inflow for the same in this case 30 percentage of your salary. It also helps to make sure a disciplined and mechanical process whereby our money is compartmentalized and set aside for meeting expenses without compromising on our long-term goals.
3. Link your goals to your investments
It has been my personal experience that tagging our investments to our long-term goals helps to bring about a lot of discipline and perseverance in our thought process thereby helping us stay focused in our attempts at wealth creation. It doesn’t matter what your goals are; Foreign vacation, new car, new house, children’s education or retirement. If we can tag a goal for each of our investments; it creates an emotional connect between you, your goal and your investment.
This emotional connects often helps you stay disciplined and focused towards achieving your goal and thereby ensure wealth creation. It also helps to overcome the temptation to stay in the long road to achieving your long-term goals and helps to focus your collective energies towards an achievable goal.
To give you a personal example; when I started running I was very irregular and lacked Consistency and discipline in my training runs. For some weeks I ran for four days in others for two days; in yet others there were no runs. There was no consistency and focus to my efforts. This changed only when I enrolled in the Standard Chartered Mumbai Marathon training program with the sole aim of completing the 21 km half marathon.
Once I had put down the marker for me in the form of a goal, it became much easier for me to focus and work towards my goal with single-minded determination. My inconsistent practice runs were replaced with consistent three to four day week training sessions and preparations. This change in the approach of associating my effort to a goal; helped me to train and meet my goal of completing the half marathon.
4. Contingency reserve / Rainy day fund
Try to maintain at least a 6-month contingency reserve. We no longer live in an era like our parents where we would join a company in our first job and hopefully retire from the company after completing 35-40 years of service. We are also not living in an era where loans were a taboo and parents used to hunt for grooms from good old public sector units with their job security for their daughters.
We live in an age where loans have become a way of life. Home loan, car loan, etc., is an inevitable part of every couple’s life. We are also in an environment where job losses and retrenchments are very common. We cannot wish away the uncertainties, but can definitely plan for a rainy day. Just like the tiny ant saves for a rainy day. We too have to save for our rainy day, which may come in the form of job losses, death, medical emergencies etc.
One of the family’s medium term goals should be to build up a rainy day fund, which will help sustain you and your family for at least six months to tide over emergencies such as those described above. The fund should be enough to take into account repayment of Home loans and other such important expenses which you just cannot afford to default on during the emergency period.
This fund will help provide you with a temporary shelter to cope with life’s unforeseen emergencies during which time you and your better half can try to rebuild again for your collective long-term future. Also, as your lifestyle improves and your disposable income increases, please keep increasing your contribution to rainy day fund upwards.
5. Life Insurance
As you begin your new life together, please purchase adequate life insurance to cover loss of income due to loss of life of either partner. This is especially true if you have a home loan repayment responsibility or any such long-term liabilities. Sadly, a lot of educated people are under insured. They end up purchasing unwanted insurance policies which give them inadequate sum assured while at the same time extract a heavy premium for such policies. The miss selling of insurance policies have also not helped.
Term insurance plans are the least remunerative for insurance agents. Hence, they are one of the least marketed policies. Term Insurance plans are amongst the best insurance plans that available in the market to cover risk of life.
Nowadays, lots of companies have also started coming out with online term plans where you can purchase a significantly higher life cover at a relatively low premium.
One common complaint of people with respect to term insurance is that there is no money back at the end of the term period. People should understand that insurance is a security cover that you purchase to cover risks to you and your family in case of the untimely death of the earning members.
Hence, please do not look at insurance as an investment and look at your return on investment. If you are sufficiently insured, the benefit will accrue to your family who will be able to sustain and live the same lifestyle before your demise.
Hence, please ensure that your insurance cover is sufficient. There are several formulas which can help you decide on the minimum insurance cover that you require protecting yourself and your family.
- e.g. – Multiple of your long-term liabilities
- e.g. – Multiples of your annual take home salary
6. Medical insurance
You just can’t do without one these days. It’s most important to ensure that the couple is adequately insured to take care of any medical emergencies. A family floater cover or an individual cover for both family members would be ideal. Do not be stingy in keeping the cover low. At the end of every claim free year, people think that it is money down the drain. A total waste of our hard-earned money. We cannot be further away from the truth in this respect.
Medical insurance helps to safeguard your savings and investments from being used up or spent for unforeseen medical emergencies which can be very draining financially. One serious hospitalisation or medical emergency is enough to set you back by a few lakhs of your hard-earned savings when it hits you.
Hence, please go for the maximum amount of medical insurance cover that you can afford; especially in this age where treatments in good private hospitals cost a fortune and with the tax benefits available for medical insurance premium.
If your employer provides you with medical insurance on a group basis, it is still prudent to have an individual or a family medical cover at a personal level. You never know when you may be faced with a situation like that of a friend who had a bad fall while he was on holiday. Unfortunately, he was in between jobs and had taken a mini vacation while the fall happened. He was hospitalised for a couple of weeks and ran up a bill of a few lakhs. Did it come out of insurance? No, since he did not have his own personal medical or family floater insurance to deal with such situations. The end result is several years of savings and investments went down the drain.
Nowadays, several companies are giving the option to employees to purchase additional medical insurance for their parents, in laws etc., by paying additional premium. Such benefits are a boon. Hence, please make the most of such beneficial policies on behalf of your employing entity. Even if your employer does not provide parental insurance cover, it makes sense to purchase a medical insurance policy for them to take care of any medical emergencies that can arise as they grow older.
7. Maintain a Black book of all your Savings and investments
Keep a master document or file which contains the full history of your savings and investments. Ensure that the same is updated at least on a quarterly basis. Also, both partners should be aware of the black book and its contents to ensure that they are able to retrieve it and manage it if the need arises. Keep backups of these documents to be on the safer side. This transparency will help ensure that your near and dear once are aware of the financial status in case of unforeseen emergencies.
8. Draw up a will
The importance of preparing a will cannot be overemphasised. Will is probably the most important document which you should have prepared and executed to take care the needs of your near and dear ones. This is more so in case of joint families where the wealth is distributed. This helps resolve a lot of legal issues in the case of the untimely death of the earning member of the family. Despite this, people tend to display a sense of casualness and procrastination when it comes to drawing up their wills. It is as though, they do not want to deal with the situation of what would happen after their death.
If you have not already prepared your will, please do so at the earliest. It needs not be a legal document, but must express your wish with regard to who should enjoy the benefits of your assets, savings, and investments etc., Post your demise.
As you embark on your new journey of life together as man and wife, it is my wish that you have the best of everything that life has to offer in terms of peace, happiness and financial security.
The Author is a Chartered Accountant by education and has been working in Securities Industry for more than 13 years with Stock exchanges and institutional brokerage firms. He is an avid reader and enjoys volunteering in his spare time.