Marriage is one of the most dramatic phases of a person’s life. Among the many changes that occurs post marriage, one of the most important one is how money is spent, saved and invested. In case both the partners are working there is an addition of income, in case there is just one earning member then things are a bit different.
Nevertheless one has to balance every aspect of this phase of life including finances. Let’s take the scenario of a young couple who has just got married and still hasn’t planned raising a family. Let’s try to see how best such a couple can manage their finances so that when they are ready to plan for a family, they are financially ready too.
Basics of Financial Planning for a young couple
- List the combined assets and liabilities of the couple: One of the first steps is to make a note of all sources of income one and his spouse earns. This may be the income from salaries in which case there would be two salaries if both are working. There could also be income from other sources such as an inherited property given on rent. This could also be gold, real estate or even investments in stocks, bonds or mutual funds.
- Avoid debt: One needs to list out all the liabilities or what is commonly known as debt one and his spouse face. This could be the EMI’s on the house or the car. One of the most dangerous pitfalls a newly married couple faces is the debt trap.
Debt is basically spending based on the hope that one’s future earnings would compensate for these current expenses. However any future income has uncertainty attached to it. One should resort to debt only for emergency funding mainly a personal loan taken for tiding over a costly medical procedure or availing of a home loan for building an asset such as a house necessary for ones stay or an additional house used as a source of income earning rent currently or in the future and has tax saving benefits. It can be classified as good debt even though availing of debt should be ones last resort.
What is bad debt? A personal loan availed for ones extravagant spending and indulgences can lead to one falling into the debt trap. One might fall behind on his EMI payments and his credit record would be in shambles. Investing in stocks with borrowed funds is never a good idea. Heavy losses in the stock market could lead to debt bulging out of control.
- Make a budget, and stick to it: After realizing the assets and liabilities one and his spouse might have the next big worry is the day to day expenses which might be the purchase of the daily grocery or the purchase of consumer durables such as the fridge, TV, washing machine or a laptop. One also needs to make a provision for unplanned expenses that might come his way. One needs to factor in unexpected expenses by creating a buffer basically an additional sum of money set aside to cater to these sudden expenses.
Planning a bit more
- Insurance planning: One of the most important components in financial planning is life insurance planning. Untimely and sudden death of a partner can cause a big financial loss apart from emotional loss. To offset such a scenario one should take an insurance policy called term life insurance. One gets mortality protection or coverage in a term plan for a fixed time duration which might be ten years, twenty years or thirty years in exchange for a single payment or a fixed rate of payments known as a premium.
If one dies young his spouse gets the sum assured and this proves to be an efficient method of wealth transfer. One can also opt for rider benefits such as an accidental rider or a critical illness rider on paying a slightly higher premium. One might not die in an accident but might suffer temporary disablement leading to him being unable to work for a period of time. These policies also have tax benefits where the premium paid is tax deductible up to a sum of INR 1 Lakh under Section 80 C. The amount obtained on maturity is not taxed under Section 10 10(D).
- Investment planning: After saving for an emergency, additional funds can be set aside for investment. One and his spouse need to decide which investments they would invest in and in what proportions. Ideally a balanced portfolio should have both a debt and an equity component.
The couple needs to decide that if they invest in debt which instruments should they choose as the choice is vast. Should an investment be made in a fixed deposit, public provident fund or a debt mutual fund? Should an investment in equity be made in equity diversified mutual funds or shares? These decisions need to be taken in agreement with one’s spouse.
One also ideally needs to have an investment in gold perhaps up to 10% of the portfolio. Investments ideally need to be made for the long term with a small proportion set aside for emergencies mainly in short term debt such as liquid mutual funds. Finally an investment in real estate cannot be ignored.
- Tax planning: One needs to plan the use of various tax saving deductions and exemptions available under various sections of the income tax act and how best they can be used to obtain maximum benefit. Should a home loan be jointly availed to take advantage of tax benefits? Are Section 80 C deductions utilized to the outmost? Are the insurance plans tax benefits being utilized? These questions can only be answered when decisions are taken in agreement with one’s spouse. Remember nothing is more certain in this world than death and taxes.
There is famous quote stating that “If one fails to plan then one plans to fail”. This saying is apt when it comes to financial planning. For a young couple it becomes even more important to plan for their lives ahead as they are just starting their married journey and the initial years are very important to build a strong foundation for their relationship, both emotionally as well as financially.