Financial freefall: Mistakes newly-weds should avoid

As many a cynic would have you believe, marriage is a zero sum game. You gain some, you lose some. If, however, you’ve been pinned by the crafty glare of Cupid, scuppering your logic, marriage would seem a profitable equation, promising zestful returns. Now take a moment and expunge the extremities; chart the middle course, where realism rules. Marriage is what you make of it. Get your math right and it doubles your dividends, fudge it and you halve them. So with the finances in a marriage.

One of the most critical changes you encounter after tying the unwieldy knot is the financial reality. Single income can convert to double, but so can the debts; buying assets may become easier, but insurance liability could increase; your spending or saving habits could be a disastrous mismatch, but your long-term goals may be the same. In fact, numerous studies have claimed money to be the primary reason for all marital discords. While it’s not easy to find a snug financial match, it’s not impossible to home in on feasible solutions either. These can work for or against you depending on how you deal with them. You not only need to harmonise the different financial ideologies and habits that you bring into a new relationship, but also streamline your individual finances in a way that you can work towards the combined goals.

To help you find a firm foothold in the new financial paradigm, we present a primer that will not only help avert any faux pas but also provide ready resolutions to fiscal irritants that can unravel a stable marriage.

Reveal your cards

Talk. Discuss. Debate. Confer. Communicate. There aren’t enough synonyms in the thesaurus to emphasise the importance of talking about your finances. Preferably even before you get married. So be it your income or expenses, savings or debts, liabilities or assets, proclivities or aversions, habits or cravings, lay them all on the table. List out your outstanding debts like car loans or credit card bills and assets like jewellery, real estate or stock investments. “Talk about your attitude towards money, your values, what you plan to do with it after marriage,” says Kartik Verma, co-founder of iTrust Financial Services.

These inputs will act as building blocks for your new financial equation and make it easier to formulate goals and stick to a plan to achieve these. Mumabi-based Raj and Rahmat Tapal, both 32, know about the importance of talking. They’ve been married for only a month, but have known each other for several years and have discussed their finances in detail. “We talked about our savings and spending and knew that we wanted a house. So we started saving Rs 50,000 each every month to be able to buy it. After marriage, we have increased the inputs to around Rs 1 lakh per month,” says Raj.

Talking not only helps meet your goals, but also irons out misunderstandings and differences. Besides, it keeps both the partners in the loop and in the absence of one spouse, the other is not left in the lurch.

Frame a budget, fix the goals

If, after the revelations and discussions, you have not already set your goals, it would be the next logical step. Frame your short- and long-term goals in accordance with your priorities and earning capacities. So whether you plan to buy furniture, car or a house, establish a time frame. You should also discuss the financial implications of having a child, savings required for his/her education and marriage, vacations and, of course, your retirement. It’s never too early to start planning and saving for such goals because the compounding effect of investments works in your favour.

To ensure the fulfilment of these objectives, it is critical that you make a budget. Start with bigger expenses like loan EMIs, house rent or insurance premiums and go on to smaller ones such as utility, grocery or credit card bills. Then move to discretionary expenses like those on clothes, cosmetics or outings. “A budget, which includes tracking your spending, is the only way to really know where your money is going,” says Kshitij Gupta, a Mumbai-based financial planner. So you could resort to remedial measures like cutting down on dinners or vacations. “We were both spendthrifts,” admits Bangalore-based Amandeep Singh Chawla, 29, who has been married to Divya, 27, for nearly a year. “But once we framed our goals and budget, we realised than an ‘x’ amount of money had to go towards savings. So we cut down our spending,” he adds.

Work out the plan dynamics

This is perhaps the most critical aspect of financial management for newly-weds. The plan is ready. The execution should be easy, right? Wrong. This is a pitfall that brings on most of marital confrontations. Should you merge your finances? Should the debts of both spouses be settled jointly? Who will ensure the budget is on track? “There is no blueprint for the way a couple should handle finances,” says Gupta. “Merging finances is one of the first big decision married couples make—and often the most difficult. For some, it feels natural to merge all assets. They feel that they are taking the marriage seriously. For others, giving up their financial identity makes them nervous,” he adds.

A simple solution is to have both. While you can retain your individual accounts for paying your credit card bills and other personal expenses, you can have a joint account for household payments, including utility or grocery bills. The latter allows flexibility to operate it in each other’s absence. “You could also decide contributions towards different household baskets, depending on the income ratio, and make allocations from separate accounts. This will give room to both for indulging in discrenationary spending and maintaining independence,” says Surya Bhatia, a Delhi-based financial Planner.

Another fragile decision that needs to be made at the start is how to build assets and settle debts. If you build assets jointly, keep in mind that there can be legal problems in case of a split. As for debts, you could do it by pooling in resources and trying to pay off the one with the highest interest, or continue to do it as you were before marriage. “I am paying my EMIs on the car loan, while Divya pays the house rent from her salary as the house has been leased by her company,” says Amandeep. What’s important is that the decision is made by both so that they are comfortable about managing their finances.

Buy more insurance

Before marriage and without dependants, you can make do with small insurance. After being hitched and if you are the sole earning member, you will need to upgrade it; more so when you have kids. “Now you have to cover the risk of dying young and leaving a dependant(s). So a term life insurance is critical,” says Ajay Bagga, GM of wealth management at Duestche Bank. Your cover should be enough to pay your outstanding loans so your spouse isn’t burdened with it. Then there should be enough left for the spouse to live off it. Ideally, you should have at least 10 times your annual income as life cover. Another important cover to consider for upgrading is health and disability insurance. Chances are you are insured by your employer, but it’s advisable to buy a separate policy. “On an average, a combined cover of Rs 5 lakh for a couple should be adequate, especially in a big city,” says Jayant Pai, vice-president of Parag Parikh Financial Advisory Services.

Know about taxation benefits

You can’t be blamed for a mild aversion to the taxman, but after tying the knot, you’ll find a few reasons to toast him. As a married couple, you will be eligible for a higher home loan and both can claim tax deduction on repayment. A joint home loan offers a benefit of Rs 1 lakh each under Section 80C of the Income Tax Act (for repaying the principal) and an additional Rs 1.5 lakh each on the interest repayment under Section 26. This takes your total deduction as a couple up to Rs 5 lakh a year. If you are planning to get married soon, remember that a wedding is one of the few occasions when cash gifts are not taxed, but the recipient will have to prove it was a gift. So be more amenable to cheque or demand draft gifts. You should, however, beware of two words: clubbing provision. The money that a woman receives from her husband and parents-in-law is not taxed, but any income earned from investing this money is clubbed with the income of the giver. Similarly, the income from the money received from the wife will be clubbed with her income.

Take care of documentation

To snuff out irritants if you go in for a name change after marriage, ensure you indulge in the necessary paperwork. One of the most crucial alterations involving name and address would be in your PAN card, besides the passport, KYC, bank account, etc. “It’s also the man’s duty to bring in his wife by appointing her as a nominee in his investments and policies. He should include her as a secondary holder for ease of administration in his absence,” says Kartik Jhaveri, a Mumbai-based financial planner. Adds Gupta: “Go through all your investments, savings accounts, insurance policies and other accounts and review the designations if you want your spouse to own these assets, should something happen to you.”

Till divorce do us part

It might be criminal to think of a split when you are just married, but it’s a possibility one should not negate. “While marriage works on trust, one needs to be prudent while making joint investments to avoid financial implications later,” says Pavan Duggal, a Delhi-based lawyer. You could face problems in claiming your contribution towards joint assets like a house. If the property or asset is mortgaged with the bank, both parties can continue to be co-borrowers and co-applicants and service the EMIs. There would be no change in the borrowers’ liability despite the change in their marriage status.

There could be problems even if it is mutually decided that the property will go to one of the spouses. They will have to first foreclose the loan account. “Even if there is a joint property with a clear title, the situation is tricky because real estate is not as liquid as stocks and cannot be easily sold,” points out Jhaveri.

Besides, what happens if the property is registered in one person’s name but the other has also contributed to it purchase. “In such a situation, the contributor will have to provide evidence of the contribution in the asset. Most of the time people don’t maintain records of such intra-family transactions because they never think about such a situation,” says Osama Suhail, associate partner in law firm Anzlawz.

To bypass legal and tax hassles, it is necessary to open accounts and investments in your own name and make the spouse a nominee or secondary holder. However, if you do make joint investments make sure you collect all receipts for any payment towards these in your name.

Courtesy: ET Wealth.