V-Day special: Checking financial compatibility

With Valentine’s Day just around the corner, many of you would be thinking of embarking on a relationship. Also, with the marriage season just over, many of you might have already started on a wonderful journey. But if I have to ask just one question, ‘How many of you have discussed your finances openly with your spouse/partner?’ I am sure the answer would be ‘not many’.

While it is okay to overlook this aspect during your initial period of companionship, things change when you get married.

In India many women are still housewives where most of the times, they have no clue as to how much their husbands earn or how much debt they have or where they have invested money or how much is the family or their husbands are insured for. Many of you would be able to relate to this. But is it good? Definitely not.

In fact, recently, I came across a couple with severe financial trouble where the husband had lost a fortune while trading in the stock market. Before he could realise, he was neck deep in debt. To clear off his debts, he took loans. But he could not cope with repaying that too and soon moneylenders started knocking on his door. That was the time his wife realised that there was some trouble.

When things got really out of the hand, her husband finally confessed. The wife said if she had known about the problem earlier she would have somehow forced her husband to take professional help or at least put an end to his trading habit or even taken up some job to help with the finances.

We often hear this. It is an unfortunate scenario wherein husbands do not involve their wives in financial matters.

But why is it important to discuss finance and be financially compatible? Here’s why:

Financial personality: One partner can be a spender whereas the other can be a saver; or both the spouses can be spending heavily or both can be savers. If a couple knows each other’s financial personality well, it helps in charting a financial plan to save them from a lot of trouble in the future.

Goals: Every individual has goals in life. When a couple embarks on a journey where they spend their entire lives together, it is very important to set their financial goals well in advance. Every individual is different from another and so are her/his goals. Therefore it is very important that they discuss them and then set the goals, and chart a route to achieve them. Always remember to divide the goals into three parts: Needs, responsibilities and dreams and work towards achieving them.

Budget: This is the base of any financial decision or plan. “Our day-to-day expenses are common and hence I discuss them with my wife and plan for them accordingly,” says Kunal Shah, 34, a businessman who, is into the 5th year of a happy marriage.

While preparing a budget it’s necessary that both spouses sit down and discuss their expenses. Very important since they will not miss out on budgeting for any expenses but also stick to it if they have prepared it together.

Communication: It’s the key to any successful relationship. Communication between spouses also includes discussing financial matters. As seen from the above example due to lack of communication from the husband’s side, both the partners faced problems from which they will take a long time to come out of.

“Communication is probably one of the most important aspect for a successful marriage. Because these days women have an important role to share in financial responsibilities, and it is obvious that when they do it they want to participate in financial planning,” says Paolomee Adani, a 30-year-old IT Professional.

Financial structure: One of the other important reasons to discuss finances before marriage or at the start of a courtship is that you know how you are going to utilise your hard earned money. Say if the husband’s income is utilised for meeting daily expenses then the wife’s income should go into saving for their goals or future.

Many a times, husbands do not feel comfortable asking for financial help from their wives (ego problem?), which should not be the case. This understanding helps avoid any financial harm later.

Money management: Generally financial literacy of both the spouses/partners is not the same, hence the need to decide who will manage the money. In India, generally, the male in the family handles money even if he does not have the time, from his busy working life, or the knowledge to do it. This can lead to mismanagement of your money and in turn financial problems. If the couple feels it is difficult for both of them to manage their own money they should seek financial advice.

Whether you agree or not, the truth cannot be denied that money does form a very important part of everyone’s life. When you start a new life with someone you expect to understand all there is about him or her. So why should monetary aspect be any different?

The building blocks of financial planning

Arise, Awake and stop not until your goals are achieved: so aptly put forth by Swami Vivekananda. And that is what financial planning is all about!

It is about planning your money to achieve your goals within a given timeframe. Why do people toil away from morning till evening? So that they can achieve their goals! Goals can be different for different people at different times. For some it can be striving to provide for the basic necessities of life. For others it can be buying a luxury car or going for a world tour. And you can’t achieve these goals without financial planning.

The only problem is that many individuals tend to confuse financial planning with investment planning. Once they know which fund or script or investment avenue to deposit their money into, they are relieved and consider their financial planning as over. This indeed is a very big blunder.

What about insurance? Are you adequately covered or is your health insurance enough or what about retirement or emergency funds?

How we wish financial planning was that simple by doing a few simple investments your goals would be met. But the path towards our goal is never that easy.  There are steps to follow and blocks to build before achieving your goals.

Investment planning is just one part of the entire financial planning exercise. Just like a building where a strong foundation is led first and then the next levels financial planning too has to have a strong foundation.

Let us have a look at the building blocks of financial planning wherein we will learn to build each block one by one. We will start with the foundation and then gradually move upward from the foundation to the next level to build a strong financial plan. So you are financially prepared for all events in life; be it any medical emergency or your child’s education or marriage or your own retirement or health problems.

The building blocks of financial planning

Just like a building where you start with the foundation and then move upwards towards the first floor, second floor and so on, the financial planning building has five blocks to scale. The first two blocks are the foundations and then the next three levels where you actually experience the benefits of a strong foundation.

Let us have a look at these blocks, what they are and how to go about their planning:

5. Estate planning (Will planning)
4. Retirement planning
3. Investment planning
2. Insurance planning
1. Contingency planning

You might be wondering why the reverse order? Just as I mentioned we have to build the foundation and then move upwards. The foundation starts with contingency planning and then you gradually move up.

The first two blocks: contingency planning and insurance planning is known as risk management. Also in a layman’s term, it is the foundation of a good financial planning. Once this is in place, you are not worried as it takes care of all your emergency situations (contingency planning) as well as your insurance requirements (that is your health insurance, life insurance and other insurance).

Once your risk is managed, you can then safely move on to the higher levels to plan for your goals. The next two levels are investment planning and retirement planning collectively known as goal planning.  The last but not the least is estate planning or will planning.

Let us start with the foundation and the first of the two levels in risk management.

Contingency planning

Also known as emergency planning. It has been emphasised time and again that a contingency plan or an emergency plan has to be in place before starting to plan for other goals. Why? Emergencies can come anytime or anyplace especially when we least expect it. We cannot predict it or even prevent it but what we can do is buffer ourselves against it so that our life does not go for a toss due to the emergency. It is basically saving for a rainy day. So once that you have planned for any untoward or unpredicted eventualities, you can safely move ahead to the next level of the financial plan.

How to calculate?

All your mandatory monthly expenses which you have to meet by hook or by crook have to be taken into account. A list of all mandatory expenses have been given below:

Fixed mandatory expenses (which are fixed every month) include:

  • Mortgage installment
  • Car loan installment
  • Other loan installments
  • Life insurance premium
  • Health insurance premium

And variable mandatory expenses (which are mandatory but vary every month) include:

  • Food
  • Utilities
  • Grocery
  • Transportation
  • Miscellaneous (unavoidable) expenses

The above expenses have to be calculated on a yearly basis and then divided by 12 months so as to arrive at an average monthly figure.

How much to set aside?

At least three months of your average monthly expenses have to be kept aside in the form of emergency funds since it is generally observed that three months worth of funds are enough to meet most emergencies and come back on track. People nearing retirement should try and keep aside at least five to six months of mandatory monthly expenses as contingency fund.

Let us take an example: Say your yearly mandatory expense is Rs 350,000.00. Hence your monthly average expenses will come to Rs 29,167 (3,50,000/12) (rounded off). You need to keep aside Rs 87,500 (29,167*3) that is your three months’ average monthly expenses as contingency funds to meet any eventualities.

It is not necessary to keep the entire amount in cash. You can keep aside Rs 20,000 in cash and the balance you can split between savings account, fixed deposit, or liquid funds. Why? Because all of the above mentioned products have liquidity, their biggest advantage, which is a very important feature in case of any emergencies. Also, remember that in case of usage of these funds always remember to replenish it.

Now that we have covered the first level of a financial plan, we can boldly move towards the second level that is insurance planning which will be dealt with in the next article… Till then think how best you can build your first block — a strong foundation — on your journey towards a strong financial plan.

Terror insurance: Are you covered?

The best insurance against terror is love. True but not very practical, is it?

And the recent Mumbai terror attacks proved it even as they left everyone in the country in a state of extreme shock. What has become very apparent, though, after these attacks was the fact that disasters can strike anybody, anywhere and in any form. And we have to be prepared to face such eventualities mentally, physically and even financially.

While life and death can be best left to the mercies of fate it is nevertheless wise to secure your dependants’ future for such eventualities. And the main purpose of this feature is to focus on the financial aspect of terror-related deaths. How can you secure your family’s financial future in the face of such unforeseen, unnatural calamities? There is only one simple answer: insurance.

I vividly remember those times in the early 1990s when people used to check whether life insurance would cover death by natural causes or illnesses? Today insurance takers are checking frantically whether death resulting out of a terror attack like the one witnessed in Mumbai is covered or not.

For such people there is hope. Death due to terror attacks is covered both under life insurance and general insurance.

Life insurance

This forms the most important part of risk management. It is prudent to make sure that death by terror is covered in the insurance plan you choose. In India most insurance companies cover death by terror barring a few private companies. The standard phrase that has always been emphasised is this: Please read the offer document carefully before selecting any kind of financial product. And it holds true in terror-related insurance cover cases more than ever before.

If you have selected a personal accidental rider (which covers bodily injuries, death and disability) along with your insurance cover then you can claim the insurance amount as assured under this rider as well.

Illustration: Suppose you have a term policy of Rs 25 lakh along with which you have added a personal accident rider of Rs 5 lakh. God forbid if you were to die due to terror acts then your family stands to receive a total of Rs 30 lakh as insurance amount: Rs 25 lakh as life insurance plus Rs 5 lakh of personal accident rider.

However, in case the insured person is just disabled or injured then s/he will get only Rs 5 lakh as part of her/his personal accident rider agreement.

Personal accident insurance

This is completely different from personal accident rider and should not be confused with the personal accident insurance which is a standalone policy.

Personal accident insurance covers any kind of damage inflicted like bodily injuries, death, temporary disability and permanent disability due to accident (which also includes terror acts). All of the above-mentioned damages are covered in this policy offered by general insurance companies.

To be on a safer side it is advisable to have a standalone personal accident cover rather than taking a rider along with your life insurance cover as the premium turns out to be cheaper. Also, the standalone cover does not end with life insurance claim unlike the personal accident rider claim.

Moreover standalone personal accident insurance policies allow coverage for older people which is not the case with personal accident riders.

Property insurance

This is a very important part of risk management. Check whether your property or home insurance covers damage to property caused by terrorism acts. If not, ask for a terror cover. Generally, you can get a cover for damage to property due to terrorist act after paying an extra premium amount.

The sudden importance of insurance for terror has had many investors scrambling to get terror insurance cover. Terror cover is the most unwelcome insurance one can have but in recent times it has become the most unavoidable one. Let’s just pray for the day when there will be no need for a terror cover in our society. Amen!

Are you a victim of lifestyle inflation? Here’s help

Sam Ewing, a former baseball player, best described inflation thus: Inflation is when you pay 15 dollars for a 10-dollar haircut you used to get for five dollars when you had hair!

How many of us can relate to this? Most of us!

Believe it or not but reports last year suggested that salaries in India would increase by 10 per cent in 2019. Salary hikes are followed by better lifestyles, by buying the latest and most expensive mobile phones, electronic gadgets, designer clothes… the list goes on.

Many Indians now have more than one car per household in comparison to hardly one car just 10 years ago. Restaurants which saw crowds only over the weekends are now seeing 70 to 80 per cent occupancy even on weekdays.

Moviegoers flocking to multiplexes after buying tickets as high as Rs 500 or more without batting an eyelid, have also increased.

So what is lifestyle inflation?

Lifestyle inflation means the increase in one’s spending in proportion to an increase in income. In short, salaries have gone up, spendings have gone up and savings have gone down.

Isn’t this what everyone has been doing?

In the current economic gloom, maintaining the existing lifestyle is becoming more and more of a challenge.

Just recently, a friend of mine was quoting her husband, owner of a small business, ‘There is severe liquidity crunch. I am not getting payments on time. We better cut down on our expenses. Think twice before you spend.’

My friend was like, ‘Where do I cut down?’

The only thing she could think of was to stop going out for dinners and coffees as often as they used to.

We are so used to this exorbitant lifestyle that cutting down or lowering one’s lifestyle just doesn’t seem possible.

There is no harm in buying materialistic things but that has to be within limits. Recently, quite a few big names have filed for bankruptcy or have been facing a financial crunch. Besides demonetisation, the other big reason is over-borrowing. The same is happening with individuals who get caught up in a debt trap to maintain their lifestyle.

So how can we avoid lifestyle inflation?

I am not asking you to be frugal but here are some pointers to bear in mind to avoid falling prey to this inflation cycle. First and foremost, remember:

It can affect anyone: India’s gross savings rate was at 37.8 per cent in 2008. Since then there has been a steady decline, with gross savings rate reaching 30.5 per cent in March 2018. So where is the money going?

In coping with lifestyle inflation, taking exotic vacations, eating out, etc. In the current economic scenario everyone is feeling the pinch, and hence first prepare for rainy day then spend.

Luxury has become a necessity: Over the years, with an increase in earnings, luxury items like smartphones, designer clothes have become necessities. There is no harm in indulging yourself but all these should be after you have had your insurance policies, emergency funds and savings in place.

Don’t give in to the charm of every new product that catches your eye. All material things lose their appeal after a point. Learn to differentiate between what you fancy and what you need.

Indians have started travelling abroad, which is fantastic as it broadens one’s perspective towards life. But many young couples do it on borrowed money which is where the problems start. Learn to keep your borrowings under check lest it come back to haunt you.

Beware of offers: Of late, you are bombarded with a plethora of messages from big clothes brands, electronic brands and the automobile sector trying to lure you with lucrative deals. Human mentality leads us to buy these things thinking that they are actually making us save money. Remember, ‘SALE’ means the company wants to make a sale; it’s for them, not for you.

In fact, sometimes you end up spending more than your initial budget and after coming home you realise there are many items which ideally you do not require and now lie unused.

Spending to maintain the state of happiness: Hedonic treadmill, or Hedonic adaptation, according to Wikipedia, is the observed tendency of humans to quickly return to a relatively stable level of happiness despite major positive or negative events or life changes.

Just like humans binge on food when they are depressed, they also tend to shop for instant gratification. which is just temporary. In the present economic turmoil, please do not fall into this trap.

Maintaining a particular lifestyle for the benefit of others: One of the richest men in the world, Warren Buffet, still lives in the same house he has been living from the time he started investing. Although I am not saying you have to deprive yourself of new belongings, the point is, just to show off your wealth or to compete with your friend who has the latest car or has just been back from an exotic vacation you don’t need to spend or, much worse, borrow to spend.

Social media has made sure everyone can peep into other people’s lives. Please avoid spending your money based on other people’s expenditures.

Last and the best way to avoid falling into lifestyle inflation trap:

Cash flow statement: Always maintain an expense sheet. Once you start maintaining an expense sheet on a daily basis, you will automatically tend to be more cautious while spending. You need to maintain the following fields:

  • Your earnings from all sources
  • All your mandatory expenses
  • Your outgoings for any savings/investments you are doing
  • All your voluntary expenses (this is where you have scope for controlling expenses)

Even if these fields are not maintained on a daily basis, at least a monthly expense sheet is a must. Not only will it help you in controlling your expenses but also to chart out a sound financial plan.

Be a mindful spender. Save wisely and spend wisely!