11 February, 2014

What couples need to know about managing finances

Marriages are made in heaven, they say. It is certainly one of life’s most intimate relationships. Hence, it is natural to trust the partner implicitly and be a bit relaxed and laid back on many fronts, including finance. Trust is important in a marriage. And for that very reason, spouses don’t raise too many questions when one spouse takes financial decisions concerning money of the other.

All these should not pose problems normally. But, there are situations when it can. It is important to understand certain basics in marriage as regards money to protect the interests of both spouses. Also, money can become the rock on which the tender institution of marriage could break.

The risk tolerance of the spouses can differ :  This is an area which is overlooked, if there is a dominant spouse taking all financial decisions. Let us say the husband is someone looking for high returns & is willing to assume high risks in the process. Let us suppose that the wife is a very risk averse person. In this situation, if the husband takes all financial decisions according to his risk appetite, it will make the wife quite queasy, due to the high risks involved. This can cause friction between the couple, which could have been avoided if their individual risk appetites have been factored and then the investments were done.

The best way to handle this kind of situation is to invest one portion of the money as per the risk tolerance of the husband & the other as per the risk tolerance of the wife. For the plan to work, the asset allocation cannot afford to compromise on the correct allocation in growth, debt and other assets. The overall allocation should be such that the majority of the risk assets are with the husband and the predominant portion of the wife’s investments are in safe assets. Such an allocation would meet the overall requirements of the family as well as the aspirations/ fears of the parties concerned.

Spouses should bear expenses proportionately :  Many times we find that one of the spouses takes care of all expenses and the other does all investments. Sometimes, one of them pays all EMI and the other takes care of other expenses and investments. In these situations, the spouses are laying the ground for future discord as one person may feel he/she has only been spending and the other spouse has been able to make the investments.

This problem can get compounded in case of a discord in marital relationship. In fact, this can be a fertile ground for marital discord. What can be done?

In the interest of fairness, the family expenses should be borne in the same proportion as income they are earning. For instance, if the husband is earning Rs.1 Lakhs pm and the wife brings in Rs.50,000 pm, then two-thirds of the expenses should be borne by the husband and one-third by the wife as this is the same proportion in which they earn. After this, they should make investments from the surpluses left.

Joint accounts : Joint bank accounts are fine when it comes to expenses. Each spouse can transfer a predetermined amount into that account for expenses. But from an income tax point of view, it is better to maintain separate accounts from where the investments are made. This account can either be one’s salary account or an account into which the amounts to be invested is transferred.  This will ensure that investments and their sources are clearly demarcated.

It is better to show clean transfers to this account which will ensure that there are no problems with Income Tax department, if one were to explain the source of various investments. Also, it is a good practice to have the investments separate. Each spouse will have some investment and in the event of a dispute, this would prove to be really useful. Like they say in armed forces – Trust in God, but keep the power dry.

Investments : It is not that the investments cannot be made jointly… but the primary investor should be the first applicant and the spouse should be the second applicant. And like it has been mentioned before, it should be invested from an account which can clearly be mapped to the first applicant. All investments should be done in both the names; wherever that is not done, atleast the spouse should be the nominee.

Insurance :  Insurance would be required to protect the family, incase the income earner is no more. But many times the husband has insurance but the lady of the house does not have insurance or has insignificant sums. This will create problems, if at all there is a separation. In such an event, suppose the children are with the mother and the mother were to pass away without sufficient assets to back them up, it will be a problem. The insurance should ideally be a sufficient amount that could cover the expenses of children till they reach adulthood & can also take care of their goals like education.  Term insurance is inexpensive today and should be considered by spouses with dependents, especially if the marriage is going through a rocky patch.

Knowledge :  It is important to know where the money is being invested. Ladies do not show much interest in financial matters. Their spouses do investments on their behalf which means they are completely ceding control to their husbands, which could be dangerous especially if the relationship is turbulent and separation is a possibility. Women have to show more interest in their finances and need to understand where the investments are being done, whether they are being done in their names, if they are in the proper assets and instruments etc. For lot of women who have not paid attention to their finances, a separation comes as a rude financial shock as they are completely at sea regarding their investments.

Prudence should be the watchword for couples. Marriage is a relationship of trust. Trust your spouse; but be aware of what they are doing with your money. Involve a trusted advisor, where required. Have enough knowledge of the financial domain to be able to manage on your own, if you may need to do that. Review or get your portfolio reviewed, from time to time. That way providence will not find you wanting even when the going gets really rough!  

Athor : Suresh Sadagopan  ; published in Money control.com  ;  www.ladder7.co.in

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