Embarking on major life events can be both exciting and overwhelming. Whether you are getting married, starting a family, or becoming a homeowner, these milestones mark significant transitions in our lives. While they bring joy and new opportunities, they also come with financial implications that can often feel daunting.
In this article, we will explore the realm of navigating major life events from a financial perspective. We will provide you with valuable tips and insights to help you prepare for the financial challenges and opportunities that arise during these transformative moments. From managing your finances as newlyweds to planning for parenthood and homeownership, we aim to empower you with the knowledge needed to make informed decisions and secure a stable financial future.
Starting the Journey: Financial Preparation for Major Life Events
To ensure a smooth and fulfilling path ahead, it is essential to lay a strong foundation of financial preparedness. Adequate financial planning is the compass that will guide you through the choppy waters of these significant milestones.
Before diving headfirst into these life-changing events, take some time to evaluate your current financial situation. Assess your income, expenses, and existing debt; this will help you understand your financial standing and identify areas where adjustments may be needed. Create a realistic budget that considers all your upcoming commitments and allows room for unexpected expenses. By understanding your financial landscape and setting clear goals, you can embark on this journey with confidence.
Money Matters in Marriage: Financial Tips for Newlyweds
Entering into marriage is an exciting and joyous occasion, but it also brings with it a new set of financial responsibilities. As newlyweds embark on this journey together, effectively managing their finances becomes crucial for building a strong foundation. Open and honest communication about money is key to avoiding conflicts and establishing shared financial goals.
While discussing finances may not be the most romantic aspect of marriage, it lays the groundwork for a solid future together. By proactively addressing money matters, newlyweds are better prepared to navigate challenges as a team and focus on building a life filled with love and financial stability.
One of the first steps for newlyweds is to create a budget that encompasses their combined income and expenses. This will help them understand where their money is going and identify areas where they can potentially save. It's important to discuss individual spending habits and priorities, finding a balance that suits both partners' needs.
In addition to budgeting, setting up joint bank accounts or creating a system for managing shared expenses can simplify financial transactions and establish a mutual trust and transparency. Establishing an emergency fund can provide peace of mind during unexpected situations. Newlyweds should also consider reviewing their insurance policies to ensure adequate coverage for both partners.
Effective finance management and investment planning are crucial indicators of a successful marriage. In today's society, many marriages are witnessing the rise of power couples, where both partners possess significant financial independence. Often, each individual has their own financial goals, making it essential to align these goals and plan their financial future together.
The key to success lies in creating synergy. When married couples focus on strengthening their financial future, they not only achieve efficient financial planning and wealth management, but also pave the way for a peaceful and harmonious married life.
Openly and Respectfully Address Your Differences:
Financial aspirations are rarely identical. Your spouse's dreams may not align with your own goals. It is important to have open and honest conversations to understand each other's dreams and find common ground, considering factors such as:
- Vacations and travel plans
- Business or entrepreneurial aspirations
- Family planning and the financial costs of raising and educating children
- Significant purchases like a car or a house
- Retirement goals, among others
Acknowledging and managing daily household expenses and budgeting are also crucial.
Tip: Engage in candid discussions about your expectations from each other, as well as what you hope to achieve financially in your individual lives and collectively as a couple. Individual goals should not be sacrificed for family goals, and vice versa.
Allocate Financial Responsibilities:
If both partners are earning, it is important to divide and allocate responsibilities related to household expenses, investment commitments, loan payments, etc. Assess your combined income and develop a plan to manage various aspects, including:
- Bank accounts
- Credit cards
- Investments
- Insurance
- Loans, and more
Tip: Consider opening a joint account where both partners contribute funds and conduct transactions for shared expenses such as bills, rent, groceries, and family vacations. This approach is easier to manage, monitor, and review. Additionally, the transparency provides clarity on how to allocate funds for different expenses.
Establish an Emergency Fund:
Change is a constant in life, and unexpected surprises are bound to arise. This is especially true in the current uncertain times, characterized by economic instability and a global pandemic. Job uncertainties and health issues have become more prevalent. Therefore, it is crucial to prioritize the creation of an emergency fund. Newly formed relationships often face arguments about finances, which can be a major obstacle. It is more common than we realize for couples to fall out due to financial stress and their inability to handle it wisely. Remember, by prioritizing effective financial planning as a couple, you not only secure your financial future, but also strengthen the foundation of your marriage.
Emergency Tip:
Always keep your debit card PINs, net banking passwords, and other sensitive documents in a secure folder. Share the password with your spouse so that in case of an emergency, they will have access to the same information.
Also, create an emergency plan of action (POA). This includes deciding which credit card to use for unforeseen expenses, who needs to be informed in case of emergencies, preferred doctors and healthcare professionals, etc.
Take Care of Health and Life Risks:
Now that you are a family, it is important to take care of each other in every aspect, including financially. If both of you are financially independent, chances are you both contribute to your current lifestyle. If you want your partner to maintain that lifestyle even in case of unfortunate events, it is crucial to have adequate life insurance coverage.
Tip: Life insurance is necessary for both spouses, especially for those who are the primary earners in the family. This becomes even more important if you have made significant purchases through credit or loans and have ongoing monthly instalments. You certainly don't want your partner to be burdened with these responsibilities. With healthcare costs increasing at a rate of 15% per year compared to 6-7% for general expenses, it is essential to have sufficient health insurance coverage. This will ensure that any illness or medical emergency does not jeopardize your financial goals. Important factors to consider when choosing a health plan for newlyweds are maternity coverage, no limitations on room rent or co-pay, coverage for pre-existing conditions, etc.
Incorporate Your Long Term Goals:
Often, couples start investing without considering long-term goals such as buying a home or retirement. These aspirations may be in the back of your mind but may only become relevant over time. It is best to bring these goals into the picture and start planning for them well in advance. The earlier you start, the better. Getting a head start on your long-term goals is crucial. The power of compound returns is revealed in the later years, and the longer your investment tenure, the greater the final amount. It also makes it easier to achieve your goals without any obstacles. Remember: Update each other's nominee details in bank accounts, investments, loans, etc. to avoid any surprises in the future. Keep your marriage certificate readily accessible.
Tip: Opt for adequate medical and life insurance coverage to ensure that your savings and other financial goals are not affected by unexpected medical expenses.
Joint Ownership and Co-borrowers For Your Home Loan:
When purchasing your new home, if both of you are earning members, you can maximize tax benefits by jointly applying for a home loan.
What if it Doesn’t Work ?
While it is definitely not expected at the beginning of a romantic journey, but things do happen and sometime reached to a point of permanent damage where both the individuals choose to get separated longing for a better life.
If this unfortunate event happens in a couple’s life, then they should be avoiding these mistakes to navigate the financial implications of divorce.
Divide Existing Assets Wisely:
In most divorce cases, the financial settlement becomes a major point of contention between spouses. Each party aims to secure the maximum financial advantage, often resulting in both parties losing out in the end. While every case is unique and different, it is important to remember that existing assets can be divided and distributed without excessive conflict.
To simplify the process, consider the following guidelines:
(a) Assets obtained or created before marriage should be retained by the respective party.
(b) When one spouse is a non-working housewife, fairness dictates that each family member, including the children, be entitled to an equal share.
For example, if a couple has two children, the existing assets should be divided into four equal parts.
(c) If both spouses are working, the existing assets can be divided equally into three parts: one for the husband, one for the wife, and one for their child/children. An important misconception many husbands have is that if a property is solely in their name, they are the sole owner.
However, according to the law, even if the husband is the sole owner, any property acquired after marriage is equally owned by the wife. Instead of wasting time and energy on ownership disputes, both parties should consult the relevant laws and divide the existing assets accordingly. Rather than relying solely on a lawyer's promises, it is crucial for each party to understand their rights regarding existing assets in a divorce. With this knowledge, assets can be divided amicably without the need for unnecessary involvement of third parties.
Consider Timing for Financial Settlement:
The timing of a financial settlement is of utmost importance, especially when the divorce could affect the valuation of assets. Let's consider an example of, Ms. Nishi, and her husband who decided to sell their property. Their inability to agree on the valuation and occupancy of the property after the divorce led to a decrease in its market value. Unfortunately, the divorce proceedings eventually became a public knowledge, making it difficult to find buyers willing to pay the full price. As a result, Ms. Nishi had to settle for 90% of the property's actual worth, losing out on a significant financial gain. To avoid such situations, it is advisable to initiate financial settlement discussions before divorce proceedings begin. By doing so, assets, including properties, can be sold or transferred at their true value, ensuring fair compensation for both parties involved.
Loan and Debt:
One of the unresolved matters between spouses is deciding who will take responsibility for clearing their loans and debts. Even in cases of inheritance, loans and debts can be burdensome. A fair approach would be for husbands and wives to share their loan and debt obligations according to the agreed-upon proportion of their assets. The most effective way to manage these financial obligations is by using common savings or assets to prepay or settle them. Let's consider an example: if a husband and wife have three properties, each valued at 1 crore, and there is a outstanding loan of 60 lakhs on Property C, they can agree to retain one property each during the financial settlement.
The third property can be sold to clear the 60 lakh loan, and the remaining 40 lakhs can be divided equally between them. It is important to note that stopping loan repayments, especially EMIs, is a grave mistake. Doing so can lead to the attachment and auctioning of the asset by the bank. Additionally, it can negatively impact the borrower's CIBIL Score.
Legal Expenses:
The legal process in India can be arduous, lengthy, and costly. A couple can save on legal expenses if they come to a mutual agreement on their financial settlement. Seeking guidance from neutral friends and family members can also be beneficial. In some cases, the legal process can drag on for years, adding to the stress of divorce which is already one of the most challenging life events. Therefore, it is crucial to find ways to minimize the never-ending, tedious, and exhausting nature of legal proceedings.
Change Nominations and WILL:
In an interesting case, an ex-wife claimed her ex-husband's assets based on a Will executed 15 years prior to their divorce. The ex-husband's second wife contested this claim, but the court ruled in favour of the ex-wife. This highlights the importance of updating nominations and Will documents in the event of a divorce.
Insurance and Investment Products:
Often overlooked in financial settlements are insurance policies and investment products. In one instance, a husband claimed his share in a recently matured investment made by his wife three years after their divorce. He argued that he was unaware of this investment at the time of divorce, but his wife had utilized joint savings to make the investment during their marriage. Therefore, he believed he should receive his rightful portion based on the financial settlement at the time of their divorce.
Conclusion
By prioritizing financial preparation, embracing budgeting and saving habits, and seeking professional guidance when needed, you can build a solid foundation for a prosperous future. Remember that these major life events are not only opportunities for growth and change but also moments to celebrate your achievements and the milestones reached along the way. Embrace the journey with optimism, knowing that your commitment to financial stability will bring forth a brighter future for you and your loved ones.