Marriage is an event in the life of a person which almost changes many things for the couple including the financial planning aspect of the life. This changes the insurance requirement be it life or health insurance or even critical illness insurance. One has to look at the financial planning part post marriage. In this article I intend to cover the major area of financial planning which changes after marriage. In this article I do not intend to cover anything for financial planning for your honeymoon as the same would have already been planned by you before the actual marriage.
- Planning for Health Insurance:
The couple needs to review their health insurance after marriage. In most of the cases the health insurance for both of them would have been purchased by their parents and may not be sufficient enough to cover the hospitalisation expenses. The quantum of health insurance one needs depends on the city where when is working in addition to the health history of the family. Looking at the present medical cost each adult should at least have health insurance for Rs. 5 lacs. In the eventuality of higher costs of hospitalisation, a super top up plan can be purchased by each one of them for an equal amount to Rs. 5 lacs or more. The couple should buy individual health plan but in case they have liquidity problem, they may buy a floater policy and take additional super top up plan. It is always advisable to purchase the basic and super top up plans from the same insurance company to avoid any administrative hassles.
- Planning for life insurance
Since one does not need any life insurance as long as one does not have any person financially dependent on income of the person. After marriage there is change in the life style of the couple. In traditional family the man earns and the wife takes care of the household. Since the wife becomes financially dependent on the husband, the newly wed couple need to buy life insurance so as to ensure that the wife does not have to depend on anyone for her maintenance. Even in cases where both the persons are earning but may depend on income of each other to maintain the life style or for servicing of the any loan taken earlier. Moreover it is always advisable to buy life insurance as soon as you have a person financially depended as the premium rises substantially after 35 years as the premium for life insurance remain the same throughout the tenure of the insurance policy.
As a thumb rule the couple should buy life insurance equal to 12-15 times of their combined annual income. The exact quantum of life insurance to be bought will depend on value and liquidity of assets and liabilities of the couple. It goes without saying that the couple should buy term plan only for this purpose. Online term plans are preferable as there are cheaper than regular term plan. Online term plans are cheaper and thus are more affordable at the initial stage of earning career of the person.
- Planning for House purchase
In good old days people would get their house constructed with their retirement corpus. The trend has drastically changed now. In good number of cases the young generation buys the house even before tying the nuptial knots. So in case the house has already been purchased with home loan of course, what you need to plan to do is to budget your combined cash inflow and outflow so as to ensure regular payment of your EMI.
However in case the house has not yet been purchased, the planning would be different. Since you must have already exhausted your savings for marriage and honeymoon, in most of the cases it would not be possible for you to arrange for the margin money which is generally 20% of the cost of the house. It is most likely that your house purchase is not far away by not more than between three years and five years during which you have to accumulate the required 20% of the cost of the house. Since the time period available for you is between three years to five year it is not advisable to take the risk of investing in equity for this goal. In such a situation, you can start investing in debts schemes through monthly SIP. Alternatively you can start investing in debt oriented monthly schemes of mutual funds where around 10 to 15% of the corpus is invested in equity so as to give the scheme a chance to perform better in case the equity performs better during this period. This will ensure that in worst case scenario your returns may be lower than your regular debt schemes with a chance to get better returns during this period. While planning for margin required to purchase house in future, you need to factor into the price rise expected in the property at least equal to the average rate of inflation. So unless the price escalation in the property is factored into you will get shock to learn that the margin money accumulated by you is just not enough for the down payment of the property.
- Financial planning for annual holidays
An average Indian is holidaying more in recent times than what he has been doing in the past. Moreover foreign holidays are in vogue and which needs more money and therefore more planning for arranging for the resources for undertaking such holidays. The exact planning for the annual holidays will depend on when you want to undertake the holidays. For accumulating the funds for annual holidays in next five to seven years, you should start investing in debts funds and balanced fund schemes through the medium of SIP (systematic Investment Plan). For holidays to be undertaken after seven years, you can start investing in good equity fund scheme through SIP only. In respect of your investment in balanced fund and equity oriented funds, you should transfer the money from these funds to debt funds or liquid funds through STP (Systematic Transfer Plan) so as to ensure that your plans for going for annual holidays specially a foreign holidays does not get jeopardised in case any sudden drop in the equity markets. In case you have the flexibility of changing the time of undertaking such holidays, you can stay invested in balanced funds and equity oriented schemes and withdraw the money required for the holidays from these schemes. Such a strategy may help you accumulate better corpus in the long run but you will have to be content with skipping an annual holiday or having to take two holidays in a year in case you want to maintain average of the holidays under taken.
- Planning for education and marriage of your child
Since the average age of marriage has gone up significantly across all the communities in recent past, the couple is forced in terms of having child earlier than what was possible earlier. So as soon as you get married, you need to plan for education expenses as well as for marriage of the children. Planning for education expenses is very important due to two reasons. Firstly, the overall cost of education has gone up more in recent times as the rate of increase in education cost is far higher than the average inflation. Secondly, nowadays dual qualification is the norm rather than exception. Due to these twin reasons the amount of money required to meet education expenses has become huge and can not generally be met unless concrete and concerted steps are taken to accumulate the fund so required. The major cost of education is incurred after the secondary school education and planning for which is a must. Since the money required for such goal is at least 16-18 years away, you can accumulate the corpus required for this goal through investment in equity oriented funds. Among the equity oriented funds allocation can be made amongst large cap, mid cap. Since the money required for this goal is not required at one go and is needed over five to seven years, the funds needed in next two years should ideally be transferred to debts funds so that the same is insulated from the volatility of equity markets.
- Planning for retirement
This is the most important of the goal and the most ignored one at least during the young age of a person. For other goals like annual holidays or marriage of children can be scaled down. Since retirement is reality and with disappearance of concept of joint family and children going away for perusing their career, one is left to fend for himself during retirement. So ideally you need to plan for your retirement from the day you receive your first pay check. So in case you have not yet planned for it, better plan it now looking at the importance of it in overall scheme of the things.
Since retirement is far away, you can invest the money in equity schemes allocated amongst diversified, large cap and mid cap fund. With life expectancy having gone up without any extension of the working life, the retirement life is almost equal to your working years in terms of number of years. Against the advice of other financial planner, I would not advise you to shift your corpus to debt funds once you reach retirement. However in order to reduce the volatility from the retirement portfolio i would advise you to shift the portfolio to good performing balance funds.
Please do not invest anything in the so called retirement or pension plans of insurance companies because due to higher expenses, the rate of return achieved on these investments is not even sufficient to meet the inflation. Even after retirement if you are able to manage your portfolio, you need not buy any annuity from an insurance company. You can treat you mutual fund portfolio of balanced fund as annuity and redeem the money required on monthly basis.
- Planning on allocation of joint income
Budgeting is very important tool for rational allocation of resources. This applies to the monthly salary as well. In case both of you are working, you may need to sit together and spell out in clear terms as to the allocation of the joint salaries for different goals as discussed above. Based on the amount of salary, one salary may be assigned for the purpose of running the day today expenses and the other salary can be used for the purpose of making investments for various goals as discussed. The actual budgeting will depend on facts and circumstances of the case.
- Some documentation aspect may also be covered to avoid any dispute in future
Though prenuptial agreement are not in vogue in India and is still not acceptable norm of behaviour in average Indian society there are still some documentation aspect which needs to be taken care of. First of all in case you open any new bank account of make any fresh investment, the same should be done in joint names so as to ensure smooth succession in case of any untoward event happening. In respect of your existing bank account and investments in single names, please submit nomination form to the bank/mutual fund/depository. In respect of the life insurance policies , please ensure that the other spouse is appointed as nominee in the records of the insurance company. In respect of bank accounts and investments the mode of operation ideally should be either or survivor for smooth operation as well as for succession.
(The author is a CA, CS and CFP. He can be reached at jainbalwant at gmail.com and @jainbalwant)