Among most married Indian couples, it is common to see one spouse take complete charge of money matters. The other spouse is usually a lot less involved in this regard. There may be various reasons for this. Regardless, it is still vitally important for both spouses to be aware of certain key aspects of the household’s money matters. There are two major reasons for this :
- There may be situations that necessitate the less involved spouse taking charge of the household’s money matters. Examples of such situations include :
- Divorce
- Temporary or permanent disability of the spouse in charge of money matters
- Death of the spouse in charge of money matters
- The less involved spouse can oversee the financial decisions taken by the spouse in charge. Every financial decision would, therefore, be taken with both spouses being aware of it. This also lowers the chances of financial decisions being made impulsively.
About the author: Akshay holds an MBA in Finance from Great Eastern Management School, Bangalore. His website is akshaynayakria.com. His articles on personal finance and investing can be accessed here: akshaynayakria.com/blog. Akshay is a member of fee-only India*
* Fee-only India is an informal association of pure fee-only financial advisors. Launched in Sep 2017, it helps connect investors with SEBI-registered investment advisors without conflict of interest. Dr M Pattabiraman is a founder-patron of fee-only India.
There are a number of areas regarding the household’s money matters that both spouses need to be aware of. The key ones among them are listed below :
- Understanding cashflows
- Insurance
- Investments
- Retirement planning
- Planning children’s education
- Tax planning
- Documentation and transmission of assets
Let us now understand what both spouses must be aware of with regard to each of these aspects.
Understanding Cashflows
To holistically understand the household’s cashflows, both spouses must fully understand three things. The first of these is the income and expenses of the household. Both spouses must have a clear idea of the various income sources of the household. They must then understand the various heads of the household’s monthly and annual expenses. This would help them gain clarity on the spending patterns of the household. It would help them judge whether or not they are spending enough on things that are of genuine value to the household. Wasteful spending can therefore be identified and curtailed.
Secondly, both spouses need to be aware as to whether or not the household has an adequately sized emergency fund. In general an emergency fund worth 6 to 24 months of monthly living expenses is considered adequate. Both spouses must also know the specific circumstances under which the emergency fund is intended to be used.
Finally, both spouses must have a clear idea of how effectively the household’s available savings are being employed. In case of young couples, they must know how much is being saved and/or invested towards each of their financial goals. They must then assess whether or not the amounts they are investing for their goals puts them on track to achieve them. Their assessment and findings must be based on solid evidence. A few examples of such evidence include :
- A spreadsheet prepared and maintained by the couple
- Output from a financial planning software or goal calculator
- An objective assessment and opinion from the household’s financial planner
If the couple find that they are currently not saving/investing enough for their goals, a review and appropriate corrective action may be required.
Both spouses of a couple in retirement must keep track of their annual spending patterns. They must then understand whether or not their retirement corpus is sufficient to sustain their spending over the rest of their retirement. Their findings must again be supported by sound evidence. In case of unsustainable spending patterns, corrective action may be required.
Insurance
With regard to the household’s insurance needs both spouses must have clear answers to the following questions :
- Do we have adequate life and health insurance coverage? (Life insurance – 15 to 20 times annual take home income for each income earning spouse; Health insurance – Rs 10 to 15 lakh per member of the family, excluding corporate health cover)
- From which companies have we purchased our insurance policies?
- Where and in what form are our insurance policies located?
Readily knowing the answer to question 3 above at all times is crucial. The eventuality of having to file an insurance claim can be stressful for those filing it. Knowing the answers to both these questions helps avoid the additional stress of having to search for the policy documents while filing the claim.
In the case of couples with children, there may be a special nuance to be considered. There may be cases where one spouse earns and the other takes care of the child on a full time basis. In such cases it may make sense to purchase life insurance coverage for the spouse providing childcare. The death of the spouse providing childcare would mean that the household must replace the childcare support. This would obviously come at a cost. Any lumpsum received as death benefit can be used to cover the costs of providing childcare.
Both spouses must check to see whether their health insurance policies are ideally suited to their needs at least once a year. This is because most health insurance policies are renewable on an annual basis. If the couple finds a new policy that is a better fit for their needs, they can consider switching policies at the time of renewal. In the case of couples with children, another nuance may need to be considered. In some cases one of the family members may be diagnosed with a disease. An individual policy must then be purchased to cover the member who has been diagnosed. The rest of the family may be covered under a separate family floater policy.
Investments
Before assessing their investments, both spouses must have clarity about their various financial goals. They must then introspect and decide if they are comfortable with their exposure to various asset classes in their portfolio. Where goal based portfolios are maintained, they must first understand the asset allocation of each portfolio. They must clearly know which goal each investment product they own is mapped towards. In some cases the equity component of a portfolio may consist of stocks. It then becomes important for both spouses to know the weights of each stock in the portfolio.
They must then assess whether the current asset allocation of the portfolio is reasonable given the nuances of the goal it is mapped towards. If the asset allocation of any of the portfolios is lopsided, rebalancing would have to be considered. The costs associated with each product in the portfolio would have to be evaluated and understood. Finally, both spouses must check to see if their existing portfolios can be simplified further. Simple portfolios would reduce time and effort with regard to portfolio management for both spouses. Shifting from stocks and actively managed mutual funds to index funds is one of the most common examples of portfolio simplification.
Retirement Planning
Both spouses need to solve for two aspects of retirement in order to plan for it holistically. These are money in retirement and time in retirement. Solving for money in retirement involves a number of things. Both spouses in a young couple must know how much money would be required to retire comfortably. They would then need to agree on an investment plan to build the corpus required.
Older couples who are close to would need to be clear on their expected spending patterns in retirement. This would have a major bearing on how their retirement corpus would be structured post retirement. Some key considerations to be made here include :
- Would the size of our corpus allow us to sustain our expected spending patterns throughout retirement?
- How much immediate liquidity do we need from the corpus?
- How much of the retirement corpus should we annuitise?
- How much of the corpus should be in equity?
This covers the financial aspects of the couple’s retirement plan. But both spouses also need to solve for time in retirement. This answers the question as to how both spouses would spend their time on a daily basis in retirement. This aspect of the couple’s retirement plan would have nothing to do with finances. But it is much more important than solving the financial aspects of the goal.
Studies on human psychology have shown that most individuals require two things to genuinely feel content with their lives. These are :
- Close personal relationships
- Doing something that they enjoy and/or are good at
For most of us our jobs play a significant role in fulfilling these needs. Therefore once we retire, both these needs may not be adequately met. Those in retirement would also have a lot more time available to them on a daily basis. Both spouses must therefore have a clear plan for what they would do with all that extra time. Retiring without this may leave couples leaving unfulfilled even though they may be able to afford retirement financially. Both spouses must therefore plan their time in a way that allows them to build close relationships while doing what they enjoy. This increases the chances of the plan being sustainable for long periods of time.
Planning For Children’s Education
In the case of couples planning their children’s education, both spouses would need to know the current cost of the preferred course each child wishes to pursue. The costs associated with the child’s preferred institution must also be estimated. The estimate arrived at must naturally account for the cost of tuition for the length of the course. It must also account for the cost of travel, accommodation and food (in case the institution is located in a different city or country).
Prioritising between funding retirement and children’s education is a highly contentious nuance of planning this goal. A purely logical approach to making this decision would suggest that the onus of providing for retirement falls solely on each spouse. India does not offer individuals viable sources of external financial aid (a government guaranteed system such as Social Security for instance) to help fund retirement. But any inadequacies in a corpus for our children’s education can be funded through various other means. These include education loans, scholarships and so on. The natural outcome would seem to be that retirement planning must receive priority.
But it also must be considered that there is a significant emotional element involved here. A lot of parents may strive to prioritise their children’s needs. They may be willing to do so even at the cost of prioritising their own goals. Such sentiments must also be respected. The decision of prioritising between these two goals is therefore best left to the couple’s own discretion.
Tax Planning
When planning taxes, both spouses must have clarity on their choice of tax regime. Today most individuals would benefit from opting for the new tax regime on a permanent basis. Those who are eligible for significant deductions under Section 80C, 80CCD, 80D, HRA and home loan interest may still consider the old tax regime.
Both spouses must also ensure that they make optimal use of retirement contribution schemes offered by their employers (EPF/NPS). Such contributions represent an excellent avenue for sustained, tax advantaged growth. They must also ensure that they fully understand the tax implications of each product in their portfolios. This would prove useful especially when structuring withdrawals from their portfolios.
Documentation And Transmission Of Assets
As regards documentation of assets, a password protected file can be created giving details of the following :
- PAN and Aadhaar details of all family members
- List of important email IDs and online accounts with login credentials
- List of bank accounts with account numbers and IFSC codes of each account
- Details of various insurance policies with policy numbers and names of each insurer mentioned
- Itemised details of various investments (quantity, acquisition cost, holding period etc)
- Details of immovable property and location of property papers
- Location of legally enforceable will (if any)
- Contact details of the couple’s financial planner (if any)
- Any other details regarding the household’s finances per the couple’s discretion
The password of the file that is thus prepared must be known to both spouses. The file would then serve as a comprehensive ready reckoner on everything regarding the household’s finances.
Wills are the most commonly used tool for transmission of assets. Wills can be considered once a significant asset base has been built up. Wills are especially effective for the transmission of immovable property. But there are other methods available for transmission of assets. One of these is to appoint a second holder for each investment. Appointing second holders is useful in the case of newly initiated investments in financial assets. This includes stocks, mutual funds, demat accounts and so on. Appointing a second holder has multiple benefits as mentioned below :
- KYC of the second holder gets done
- The transmission process becomes more simple. When the first holder dies, the concerned investments (demat account, stocks, mutual funds etc) are automatically shifted to the second holder
- The paperwork involved in the transmission process gets minimised
Therefore whenever investments in new financial assets are initiated, it makes sense to add a second holder. The intended beneficiary of the asset can be added as the second holder. For instance let us say the wife initiates investments in a mutual fund that she would like to pass on to the husband. The husband should be added as a second holder before investments are initiated in the fund. When the wife passes away, the mutual fund holdings would automatically be transmitted to the husband.
But as per current regulations, second holders cannot be added for existing investments. This is where nominations are useful. Each spouse must make sure that the relevant beneficiaries are added as nominees to each of their existing investments. Also, nominations need to be updated based on changes in the couple’s circumstances. Examples of situations where nominations may need to be updated are given below :
- Divorce (Nominations for investments where the former spouse is the nominee need to be updated by removing the former spouse)
- Addition of one or more children to the household (Children may need to be added as nominees)
- Fallout with family members who were previously added as nominees (Such family members need to be removed as nominees)
All the estate planning tools discussed above come into effect on the death of the owner of the assets. But there may be some situations where either or both spouses wish to transmit assets to their beneficiaries during their lifetime. In such cases trusts may become the most effective option. The most common example of this is where a conditional transmission of assets is desired. Here assets to be transmitted are held in a trust. The assets are transmitted to beneficiaries when certain preset conditions are met. Examples of such conditions usually include :
- The attainment of a certain age by the beneficiary (For example when a minor beneficiary attains the age of majority)
- The occurrence of a specified event (For example the beneficiary completing their education or getting married)
The choice of estate planning tool therefore depends on two things :
- The nature of assets being transmitted
- The desired timing of the transmission
Both spouses must therefore have clarity on both these aspects. This would help them pick the appropriate tools to transmit their assets in light of their needs.
This covers all the aspects of the household’s finances that the couple needs to focus on. Initially both spouses can begin by picking any one of the aspects discussed above and discussing it over a month. This process can continue with a new aspect being picked and discussed each month. Over the course of half a year, both spouses would have a workable understanding of each major area of the household’s finances. Once this is achieved, both spouses spending an hour a month discussing money management would be sufficient. It may be a challenge for the spouse who is less interested in discussing money matters to commit to such an exercise. But it must be remembered that the exercise is aimed at educating the less involved spouse about the household’s finances.
The less involved spouse may, therefore, be put in charge of overseeing the operations of the spouse handling finances. This would foster a sense of ownership and responsibility in the less involved spouse. They are then more likely to commit to participating in the exercise. That way both spouses would be fully aware of the essentials of the household’s finances. Either spouse would then be able to step in and manage finances whenever required. That is the ideal point to try to reach for any couple who is managing their money.
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