Financial planning tips for newly married couples

Getting married is a time of bliss, hope and optimism. As spouses, each individual sets out to spend their life with the other. However, while exchanging wedding vows, consolidating debt and salaries may be the last thing on your mind. Why? Well it is a delicate and tricky situation that most of us believe is best to be put off for another time.

In reality, people get married to individuals with different financial habits and experiences. Asset and income levels can also vary significantly. Managing your finances together through proper planning from this moment on is as crucial as fulfilling your marital vows. InvestmentYogi tells you how and why.

What is financial planning?
Financial planning is a process of identifying your future goals, quantifying them in money terms and making plans to achieve them. There are many elements which are involved in financial planning: budgeting, insurance, investment, taxes, retirement and estate planning. Financial Planning varies for individuals in different life cycle stages as it highly depends upon an individual's age, income level, number of dependants, risk-taking capacity, investment horizon etc.

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In today's world, newlyweds face a variety of challenges. Firstly, many couples find themselves married to a person with very different thoughts and habits concerning money. Financial planning and goal-setting become essential when a two people get married and start sharing income. They need to learn to run a household together.

Furthermore, they will be tested during times of hardship when a spouse may have lost a job or is taking time off, for example to have a baby. They need to take care of and manage expenses which are the basis of financial planning.

Financial planning means realising your dreams in a structured way. Without a structured plan in place, you may splurge on un-prioritised needs, thus preventing you from achieving your bigger, long-term goals.

InvestmentYogi receives lots of queries from newlyweds about their finances who aren't sure how to go about putting together an initial financial plan. Below are few key financial planning tips for such couples:

Update financial documents
A marriage certificate is the first important document that needs to be made and filed by the couple. They may even opt to write a Power of Attorney in favour of each other to save themselves from legal problems in future. (A Power of Attorney is a legal instrument that is used to delegate legal authority to another person to act on his behalf and in his name.)

To merge or not?
There is no universal right answer to the question of whether to merge your accounts or keep them separate. What's most important is to agree on what works for you both.

Open communication is the key to a happy union
Before marriage, both partners need to be completely honest about their debt, income and spending habits. Total income needs to be disclosed before marriage as financial surprises post marriage can be perceived as deceit.

Discuss money matters 'regularly'
There is no rulebook on how a couple 'should' manage their finances once the wedding is over; there is no 'one-size-fits-all' answer. Try to figure out what works for both of you.

For instance, sometimes, one of the partners is probably naturally suited for money management, so let that person take the lead. Communicate with each other on important financial information. Trust is the building block as in any other aspect of the relationship. However, make sure both of you are informed of all that is going on financially and each of you is able to manage things if the other is sick, unavailable or in a crisis situation.

Make each dream a reality
Every couple has hopes and aspirations such as buying a new home, taking an overseas trip, etc, but may not be decisively working towards these goals. Quantifying your goals into money terms and giving them a timeframe will help reach your goals more efficiently.

Let's look at some questions that a newly married couple faces:

Are we going to buy a new home/new vehicle if yes, then when? You might want Rs 40 lakhs (in today's value) for a house today, Rs 8 lakh (in today's value) for a car next year. The longer-term goals may be -- child's education and marriage, your retirement, etc.

How much should we aim at saving each month? Once your goals are written down, you can clearly see what you need and find out how much you need to save today in order to meet these goals. When you quantify your future goals into monetary terms, the idea of 'savings' changes from 'what's left over' to 'a target that needs to be reached every month'.

The couple's current investible funds (after adjusting for inflation) may be deployed into various investments as per their risk profile as explained later in the article.

Create an emergency fund
The first step to financial freedom is to create an emergency fund. Why an emergency fund, you may ask. Look at the world around you. Job security has declined in recent times. During the last economic recession, many lost their jobs. A job loss can cause severe cash flow problems for a working couple forcing them to alter their lifestyle and causing a dent in their investment plans. The scenario becomes even worse in case of a single-income couple.

An emergency/contingency fund keeps life on track if there is a temporary loss of income of either or both partners. One should maintain an emergency fund to take care of the couple's monthly expenses for at least six months, ideally. Maintain the emergency fund in an investment where you can easily withdraw it in case of need you may opt for your bank's savings account (by way of auto-sweep facility) or invest in liquid mutual funds. Often a liquid mutual fund will offer more interest and is worth using.

Maintain a monthly household budget diary
A monthly budget diary? Is it even necessary? We can keep track of our monthly expenses through credit card bills, you may argue. But a budget diary does more wonders than you think. It assists in managing your household monthly cash flow efficiently.

It is a great tool to track impulsive purchases made by you, analyse your spending patterns, and see where money is being wasted and where lifestyle changes are possible. This way, you can divert unproductive expenses into investments suited for your specific goals.

How to do it?
Figure out your aggregate income and expenses and divide them into fixed and variable, this is an easy way to know which costs need to be cut down. Set targets and priorities for each. You can create a budget diary yourself or it can be done online. (InvestmentYogi offers a monthly budgeting tool where you can manage your monthly record of income and expenses.)

Financially secure your dependants
One of the most important steps towards a sound financial plan for newly married couples is to get each other insured. Family needs vary for each lifecycle stage. For a young, unmarried person with no dependants, life insurance is not a priority. But the minute he gets married, he has a dependant in the form of his wife (dependant or not) and so, life, health and accident/disability insurance become priorities.

When kids come along and your parents too become your dependants, the outlay on your life and health insurance will increase. However, even when not married, always keep health insurance so that if you incur a major illness or accident, your family will not be burdened.

Ideally, one should purchase an additional health cover and not depend only on the one provided by one's employer. This holds ground on periods of unemployment. Besides, the younger you are when you buy a health and life plan, the cheaper it will come. Add-on policy riders such as physical disability/critical illness even though it may increase the premium.

Please note that even if both the partners are financially independent, it is wiser to purchase life insurance on each other's name. Once children come into the picture, the nomination can always be changed in their favour without affecting any increase in premium. However, when children are young, the life insurance payment would still need to go to the surviving spouse who would need that money to raise the children.

Your savings need to be invested to earn you returns in order to achieve your broader goals. Ideally, a couple must invest as per their risk profile. Good planning also lies in the right asset allocation ie the choice of assets you invest in. Have a mix of assets, like post-office saving schemes, bank term deposits, gold, mutual funds, company shares, real estate etc. This will help steady your returns and reduce the total risk of loss, even if one investment goes bad. Depending on your risk profile you could opt for a mix of debt and equity assets.

Re-evaluate your financial plan at regular intervals
Is it enough to plan once in a lifetime? No. A financial plan needs to be revisited whenever there is any change in your life addition in your family, change in job, when your family moves from a double income structure to a single income one or vice-versa. In all such circumstances, you must have a solid plan in place to keep tab of your goals.

Example:
Raj and Rajini are a 'just married' couple. Let's take a look at their financial situation and chalk out a financial plan for them.

Age: Raj 28 yrs; Rajini 26 yrs;

Number of dependants 0;

Occupation: Raj is a software engineer; Rajini is an accountant;

Monthly income: Raj -- Rs 60,000 pm; Rajini -- Rs 30,000 pm;

Monthly expenses: Rs 30,000;

Monthly savings: Rs 60,000 pm;

Assets: Own house;

Insurance: No insurance policies taken yet;

Investments: Bank FD of Rs 5 lakh, gold worth Rs 5 lakh; mutual funds worth Rs 3 lakh; balance in bank savings' account is Rs 3 lakh.

Future financial goals

(a) Buy a car in 2 years; down-payment required is Rs 2 lakh (in today's value);

(b) Holiday in Europe in 5 years; amount (in today's value) Rs 6 lakh;

(c) Provide for couple's retirement in 30 years; amount required is Rs 50,000 pm (in today's value) for 20 years after retirement; 

Scenario 1: Double-income couple (assuming both spouses are working)
Raj and Rajini have surplus funds lying idle in their bank account to the tune of Rs 3 lakh. To start off, they can create a contingency fund by putting away 6 months' expenses (amounting to Rs 180,000) in liquid mutual funds or auto-sweep facility in their savings account to counter any sudden emergencies in future.

The balance in the savings account (Rs 120,000) maybe diverted into buying adequate life and health insurance for the couple and investing the rest (either through lump sum or regular contributions) to reach their above specified goals.

For the purpose of purchasing a car (in 2 years' time) and holiday in Europe (in 5 years' time), they can stash away part of their monthly savings into a recurring deposit account, and/or systematic investment plans (SIPs) of equity and debt mutual funds.

For their retirement goal, they may invest as per their risk profile, in a basket of equity and debt products for better asset allocation, risk diversification and tax benefits.

When only one partner is earning (in our example, Raj) and assuming the same level of monthly expenses (at Rs 30,000 pm), the savings made by the couple comes down to Rs 30,000 pm (Rs 60,000 pm in case of double income). The couple may find it difficult to achieve their retirement goal with the restricted savings. They will have to cut down on expenses to help them meet all their goals. Here's where maintaining a monthly budget record comes handy.    

Conclusion
Finances fluctuate and needs change over time, but with sound financial planning, most couples can weather the storms. The choice of a good life today or one tomorrow does not have to be made. It is possible to have both. Couples must learn money management by setting monthly budgets and making financial plans together. Their dreams and goals will be within reach, with a bit of smart planning and the will to build steadily.