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Dual Income at Home? Here's How to Use it Wisely
11 May 2014, 06:08 PM IST 
After you get married, you not only share your life with your spouse but also your income and expenses. The biggest challenge that most young earning couples face is to manage their finances.
Here are some of the best postnuptial financial planning tips that every couple should consider using:
It is essential to have a short-term, medium-term and long-term financial plan that can be used as a yardstick for measuring financial success. By doing this, it will be easier to keep a tab of the road map you have set for achieving your joint goals. These goals may be further categorised into needs and wants to mark their importance.
Let's look at a general financial goal:
| Time frame | Goal | Need/Want | Points to note |
|---|---|---|---|
| Short term | Accumulate savings | Need | Income of 6 months 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 as soon as the child's birth |
| Realty investment | Need | Consider prepaying the loan and investing some other property | |
| Streamline retirement plan | Need | Assess the accumulated retirement fund and continue investing the surplus towards the same | |
| Incidental expenses | Want | Create a selt-sustaining corpus to regularly fund incidental expenses | |
| Long term | Assess retirement corpus and liquidity | Need | Continue the assessment of your retirement corpus and reconsider investment funds allocation to more stable sources to earn guaranteed returns (e.g. less equity, more bank deposits) |
| Children's higher education | Need | Must begin at an early stage and continue right up to the point when the actual expenses occur | |
| Children's marriage | Need | Can begin at a later stage 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-retirment expenses | Want | Should begin along with good investment for the retirement fund |
Finances become more complicated after a family becomes larger.
1. Debt-free living:
The main issue that most young couples deal with is debt. Whether it is credit card, personal loan, home loan, education or car loan, the first priority should be to pay it off.
Paying off your debt earlier than scheduled relieves you of mental anxiety, can save you on hefty interest that you pay to the financier over a certain period and also makes you cash-rich.
As per instructions by the Reserve Bank of India, lenders are not charging prepayment penalty on floating rate home loans. (Read more) This gives freedom to the borrower to prepay their loans.
Let's look at a scenario wherein you have availed multiple loans such as home loan, car loan, credit card loan etc. In this situation, we suggest you an action plan to on how to pay down your debt:
- Make a budget: Budgeting has to be proper and - more importantly - realistic. The surplus has to be saved or invested towards your goals. Ideally, you should try to be slightly 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.
- Choose which debt to pay first: Debt management experts advise paying off the loans with higher interest rate first. This is termed as 'debt ladder' or the 'ladder method' of debt repayment. The other option allows you to pay down debt starting with smaller principal balances, which will quickly free up money to put toward other loans with larger principal balances. This is called '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: The method given above is very effective in case of no prepayment 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. Buying/investing in real estate:
You can plan to buy your own property if you already don't have one. Buying your own dream house can save you the rent that you were paying and also help you create an asset for a lifetime.
Availing a home loan is easier for a married couple as joint home loans not only help you share your debt-burden but also allow you to get a higher loan as income of 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 has yielded 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 such as future selling price, rental income etc.
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 behavioral choices are aligned with our deepest values. There are a few things that money can buy and bring happiness like a dream car, vacation to an exotic destination, designer jewellery and so on. Buying these things can make you happy for a while and there is nothing wrong if you want to prioritise in 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 the 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 discussed above involve medium to long-term planning for a couple.
However, the comprehensive financial planning is much more than reviewing your investments. It also involves 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 realise your goals, dreams and financial security.
4. Short-term contingency fund:
An emergency or contingency fund is used to cover expenses in case a sudden loss of income or other financial emergency occurs. Most experts suggest a household to have 3-6 months' expenses available for the possibility 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 in liquid form like 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 two policies you may want to consider investing in:
- 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. After marriage, however, the dependency factor comes into play and therefore the need for a life insurance policy comes in focus. 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.
- Medical insurance: If you and your spouse are both working, both of you will probably be covered by the medical insurance that your respective companies are offering you. But you can still check for additional riders if required.
6. Retirement planning: To be sure, saving and planning for retirement is a real and urgent need. People blessed with longer life need to plan well if they want to continue with the lifestyle they had before retirement. Now, how much you should save for retirement? If your company offers a provident fund, you should save at least an equivalent amount to take advantage of the same. These matching programs can be anywhere from 3 to 5 per cent 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 per cent, although the closer you are to retirement, you may be shooting for 20-30 per cent depending on your current savings.
7. Children's education and marriage:
Financial planning for children is essential to make their future secure and help them achieve more in life. As a parent, you may not only want your child to have a sound education, but also have a decent wedding. The sooner the parents start planning for their children's education and marriage, the better. This is because if you start saving and investing early, you get a larger time horizon, resulting in a bigger corpus.
Setting goals and achieving them together is a wonderful way to bring your marriage to new heights. It is important for couples to make strategies regularly, even if they are aware of the steps that must be taken to secure their future. If both partners are earning, both should invest in long- and short-term savings. They need to chart out their current income strategically and invest wisely in the areas that give the highest returns.
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