India is entering its biggest and busiest wedding season in three years. Beginning in the middle of this month, millions of couples will enter wedlock and take a vow for a completely new innings in their life. According to Indian folklore, weddings in India are a marriage between two families rather than two individuals.
However, in the modern world of financially independent brides and grooms with their own bank accounts, credit cards, home and personal loans and life ambitions, a wedding is also a marriage of two financial streams. It’s more like a merger of two equal-sized companies – to use the stock market lingo.
And like any corporate merger of equals, the future success and prosperity of a new household depends a great deal on the quality of financial management.
While love and trust are the foundation of a happy married life, bad financial decisions can become a recurring irritant and end up hurting or even breaking the bond. In contrast, financial prudence will strengthen the ties and allow the couple and their families to enjoy life to the fullest.
Here are five tips to help newlyweds start their new life on a strong financial foundation.
1. Create a family budget
Creating a monthly budget or an expense plan is necessary and essential for prudent financial planning. It can either be watertight like a corporate plan or a set of verbal understandings with clear-cut boundaries on the nature and quantum of general living expenses.
A plan is especially crucial for new couples who have just moved in together and are not sure about the expenditure pattern and lifestyle of each other.
A clearly defined budget with maximum allowable expenses on key items such as rent, groceries, eating out, holidays and shopping will help you and your spouse compare and contrast the likely monthly income with your expenses. Budgeting will also help you to save for big-ticket expenses such as foreign holidays, buying a car, jewellery and ultimately your own family home a few years down the line.
2. Chart some common financial goals
Money and spending can become a bone of contention between couples and a key source of marital discord if one partner feels left out of a key financial decision that has big long-term implications. That’s why it’s crucial to draw a set of common finances that requires monetary sacrifice from both spouses so that both of you can work together to reach the goal post. These common goals could be moving into their own house within a certain timeframe, buying a family car, creating a savings and investment pool for children's education and marriage, creating an emergency fund or saving for a foreign holiday.
This will also create the financial headroom for both partners to pursue their individual goals and pursuits such as travelling, photography, gadgets and other expensive hobbies.
3. Make a savings and investment plan
Making a savings and investment plan is as important as budgeting for essential expenses every month. After accounting for monthly expenses, you as a couple must agree to save a minimum amount every month to fulfill your long-term financial goals. Many financial planners suggest that this amount be set aside every month before accounting for living expenses. However, this can be decided mutually by the couple based on their financial situation. For example, savings can be more important for couples with little or no inheritance of fixed assets like a house or jewellery.
Savings should be deployed in various financial instruments to create one or more portfolios according to the risk appetite of both partners.
The portfolio construction should consider short-term money requirements and create adequate liquidity. It could be the case that the husband wants to invest in risky but high-return assets such as equity and mutual funds while the wife prefers traditional assets such as bank fixed deposits, life insurance and gold jewellery.
Also Read: Top 10 large-cap mutual funds for investment
Both must sit together and decide on a common set of portfolios that meet their short-term as well as long-term goals. Both partners need to ensure that they have access to the information and review the portfolios regularly. In the case of single portfolios, ensure nominations are in place.
4. Buy family health insurance
The COVID-19 pandemic was a rude reminder for many families that having an adequate health insurance policy is of utmost importance. Healthcare costs in India are soaring and a medical emergency becomes a financial catastrophe that may take years to fix.
Cashless family health insurance is a good way of dealing with any unforeseen health emergencies without causing fatal damage to your long-term financial goals.
At the same time having an emergency fund with an amount equivalent to around six months of your family's living expenses provides an added layer of financial security to your family in case of unexpected shocks such as a job loss. Invest emergency funds in safe and liquid instruments such as a savings bank account or money market mutual funds.
5. Invest in a suitable life insurance plan
Agreeing upon a life insurance plan is crucial to ensure the long-term financial health of your partner and your family. A right life insurance plan will ensure that the untimely demise of one of the partners doesn’t put the other partner and other dependents in the family such as children and your parents.
Term life insurance is one of the best and the most cost-effective ways to secure the financial future of your family. In your absence, this would also help your children achieve their long-term goals such as higher education or pay for the home loan. Decisions related to a term plan include whether you and your partner prefer separate term covers or a joint cover.
A joint cover is also known as spouse term insurance—both partners are covered under one policy, making it easier to keep tabs. You can consider various factors such as costs for both plans to arrive at a decision. Compared to separate term plans, a joint cover is less pricey. You and your partner can also choose additional riders (a kind of add-on cover) for permanent disability, accidental death, critical illnesses, etc., with mutual agreement.
Happy Financial planning!
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).