So the planning has to begin quite early. Sad it may sound, but sitting with your spouse post-marriage to work out the finances is one of the first things that you need to do. It starts with the monthly budget and other financial goals. The latter would definitely include purchase of your own house/car, foreign holidays, having children and planning for their future, your own retirement and supporting other dependants.
The budgeting has to be proper and more importantly, realistic. The surplus has to be saved or invested towards your goals. Ideally, try to be slightly strict with yourself.
Discipline is something that will come over the years. But then, it is a learning process, especially if you are one of those who has not been thrifty before marriage.
On the other hand, if you are marrying early it is the perfect time to set financial goals that may stress your finances a bit more. For instance, a retirement home in Alibaugh or aiming for a foreign education for your child may not be a bad idea at all.
Begin with insurance needs for the working spouse/s. The ideal solution would be to calculate the present value of all expected earnings till retirement and take out a term insurance policy of this amount. Here, we are suggesting term policies since they are the cheapest form of insurance and provide large risk covers for very low premiums. Along with the policy, opt for additional riders such as accidental death, disability and critical illness benefit as well.
This ensures income protection for oneself and family in case of a serious illness or untimely demise. Add to this insurance cover with a medical insurance policy for the entire policy. A family floater policy would come cheaper.
If buying a home is included in your financial goals, start saving for the initial down payment. The idea is to try and put down as much initial payment as possible to help you to keep the installment repayment obligations lower. Remember that once you have children, both expenses as well as obligations to save for their future will further burden your finances. So the best time to make that huge financial decision towards the purchase of a home should be just before or after marriage. That means there has to be a great commitment.
Now comes the tricky part of working out the surplus after all these commitments and then, investing it wisely to achieve your other goals. Investing the monthly surplus is the ideal way of going about it without bothering much about the bonuses or windfalls you are likely to have during the year. Obviously, that means that the monthly investing plan has to be worked out.
The predominant asset class of choice at an early age should be equities, preferably through the mutual fund route. Equities provide superior returns over the long term of 5 to 10 years over other asset classes, along with the fact that both long-term capital gains as well as dividends are tax-free. Along with this, you should also create and maintain a contingency fund for at least six months of expenses, which you can access in emergencies or during a temporary loss of income. This money can be parked in liquid funds or bank fixed deposits with overdraft facilities, for timely access.
Fiscal prudence has to be big factor in your life in these initial years. And it will keep on increasing with the rise in the responsibilities. However, the bright side is that ideally your disposable income would be rising constantly allowing you to keep pace with the growing demands.
An important thing that you have to take account here is that if both the spouses are working, saving for financial goals becomes a much easier task. For example, let us consider two couples A and B. Let us make certain assumptions for the sake of uniformity in comparison. Let us assume that the husbands are all aged 26 and the wives are all aged 24. Couple A is a double income family, while couple B is a single income family where only the husband is working. Both couples plan to have a child after 3 years. Couple A is earning Rs 11 lakh a year, while couple B is earning Rs 8 lakh a year.
Both have the same yearly expenditure of Rs 5 lakh a year before the child is born and an additional Rs 2 lakh a year after childbirth, for 21 years, till their children have access to their own funds. All the working members will retire after 35 years. Inflation is assumed at 6 per cent a year and the growth in their assets, in a mixed portfolio at 12 per cent a year. Also, the income and expenses are expected to grow at 15 per cent a year.
An analysis of the returns from this shows that the double income couple attains a total corpus of Rs 6.95 crore in today's value, with Rs 74.5 lakh for the child and Rs 6.2 crore for retirement. The single income couple can only reach a total figure of Rs 2.6 crore in today's value, with Rs 18.6 lakh for the child with the rest Rs 2.4 crore for retirement.
These figures have been arrived at without considering taxes on investment income and assuming that these families invest all of their surpluses after having purchsed the car or house.
The writer is director, Touchstone Wealth Planners.
