“Money is an opportunity to reach unity in marriage. When couples work together, they can do anything.”Dave Ramsey
Financial chemistry may be as important as personal chemistry for a long-lasting relationship. Today when both individuals in a relationship are earning and are financially independent, it is crucial to have a common ground for planning finances. Money is a sensitive subject and thus requires a good understanding and a holistic approach.
Have that money talk
Conversations about money can sometimes be uncomfortable between the two partners so it is important to open up that discussion and share each other’s perspectives. The way you both handle your finances will impact your children and also influence their behaviour. Some of the issues that should be addressed are:
- The expenses and share in it of each partner
- Approach to discretionary spending, including inculcating fiscal discipline in children
- Savings in various accounts (single, joint) considering taxation aspects
- Account access and information availability
- Financial planning and regular reviews of the plan
What to consider for financial planning
You and your partner should do financial planning and regularly review the plan. It is best to take the help of a qualified financial adviser to discuss your financial outlook, goals and how to achieve them. The adviser can also help you reconcile the differences in approach and help you achieve your individual aspirations while not compromising on your long-term common goals like kids’ education or retirement.
For example, one partner may prioritise short-term travel goals whereas the other partner may want to save for long-term retirement. Maintaining a healthy balance ensures harmony and staying on course in your financial journey.
Also, priorities change with different life stages such as having children, planning for their education, work transitions, etc. Your and your partner’s lifestyle changes as you both grow older and at each step, the financial plan should evolve to reflect the latest status.
Savings should be deployed in investments to create one or more portfolios according to the risk profile. The portfolio construction should consider short-term money requirements and create adequate liquidity.
The decision to invest in single and joint portfolios can be made based on individual preferences, risk profiles and tax considerations which also determine the asset allocation and choice of asset classes.
It is possible that your partner may not be comfortable investing heavily in the equity market, while you have similar views on including fixed income instruments such as fixed deposits, savings accounts, bonds, etc., in the portfolio. A positive outcome of this difference in viewpoints is to create a diversified portfolio with the asset allocation that suits you and your partner.
Both partners need to ensure that they have access to the information and review the portfolios regularly. It is advisable to map the goals to the constructed portfolios. In the case of single portfolios, ensure nominations are in place.
Agreeing upon insurance
Investing in life and health are also crucial points that you and your partner should agree upon. It goes parallel with all the other financial goals mentioned here. Whether it’s about term plan or health insurance, you and your partner should consider your family’s requirements at present as well as in the future.
I. Term insurance
No one likes to think about losing a partner and heading a life alone, but it is always better to discuss and decide on this topic to support your family in the absence of one partner. In your absence, this would also help your children achieve their long-term goals such as higher education.
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.
II. Health insurance
In addition to term insurance, you and your partner should decide on boosting health insurance as well for different life stages. Critical illness treatment can dig a deep hole in your bank account and come in the way of your financial goals. Adequate health insurance ensures that such a thing doesn’t happen.
With changing lifestyles, individuals are prone to critical illnesses from a young age. As per the Indian Heart Association, 50 per cent of Indians getting a heart attack are under the age of 50, while 25 per cent are under the age of 40.
Thus, investing in a health insurance plan with your spouse with generous coverage (0.5x-2x of your annual income is a good place to be in) should be a top priority.
You and your partner may already have health insurance coverage provided by your respective employer, but more often than not, that may not be sufficient to cover expenses given the increasing medical inflation and hospitalisation costs. Hence, it’s better to have more rather than less.
So start early and invest well.
Debt management including mortgage or other loans
As a couple, you should have a common understanding of what and how much debt you should take. Repayment plans should be clearly discussed and put in place before taking on any debt. Mortgage debt is preferable because you are buying an appreciating asset for it and there is a taxation benefit also. Other kinds of loans like car loans, personal loans and credit card loans should be minimised as much as possible.
While taking some debt is unavoidable, saving is superior to taking debts for things that are more ‘lifestyle upgrades’ rather than non-negotiables. A mortgage loan on average attracts 7-8 per cent interest; investing the same sum can yield better growth — equity investments for instance on average yield 11-12 per cent.
Will and estate planning
You and your partner should discuss the estate transfer plan and create individual wills. Sometimes this may also include contributions to your preferred charitable causes. The wills ensure that even if you have a single account, the transfer of assets is clearly determined in the unfortunate case of a partner’s death. The partners should make the financial data available and easily accessible to each other.
Different opinions are not uncommon; it takes time to adjust to each other’s preferences. The process of planning finances together might be a little frustrating in the beginning, but as you and your partner grow together, finding common ground becomes easier. Remember that you both are on the same team and want the best for your financial stability.
this article, written by Anup bansal, CIO, Scripbox was first published on Moneycontrol.com on June 1, 2022 here