Life stage investing: how should couples manage finances
27 Feb 2022 - Contact Sayan Sircar
21 mins read
Having a common understanding of the role of money is one of the pillars of a successful life as a couple.
In this article, a part of our Life-stage Investing series, we discuss how couples should manage finances. The series is here:
- Life stage investing: how to manage finances when you are joining your first job
- Life stage investing: how should couples manage finances « this article
More articles will come soon.
Table of Contents
- Be on the same page before being in the same house
- Separate or joint finances
- Budgeting in practice
- Funding the common expense account
- Non-earning partner
- Investing comes before everything
- Balancing the present vs future
- Tracking expenses vs tracking investments
- Common but avoidable mistakes
Be on the same page before being in the same house
Like everything else, talking about money and finances is an integral part of money and finances as a couple. This post covers a step-by-step process for new couples to set up their finances. Even existing couples can use this post as a resource to implement fixes that are causing friction. Some of the main reasons of money issues are having different ideas about:
- when to spend money: present vs future needs
- purposes of money: fulfil needs vs wants
- roles of managing money: one partner manages while the other has a less active role
We discuss these points and more in this post so that you and your partner can come to a middle ground with diverse opinions regarding money.
Note: All of the ideas in this post do not have to be done in a day. Instead, you should bookmark this post and come back to it regularly to revisit the items that are left to be implemented.Recent articles:
Separate or joint finances
This question baffles new and existing couples. There are four aspects which we need to consider:
One earning member and one stay-at-home member is the traditional way many of us have seen in our families. They would have managed money similarly, with one partner making most of the decisions with some inputs from the other. However, in today’s world, there are many choices and complexity. It will be detrimental to leave all decisions to one person. It is not about capability, but having a passive approach will foster doubts if things do not go well or when life situations suddenly change. You must know the following:
- what are the accounts, how to access them and what are the balances
- what are the loans, and how much are monthly expenses in various heads
- where are the property and other papers
- what investments are there, and why those investments are made
Importance of involvement and control
Enthusiasm is not a prerequisite for personal finance. As long as disdain or lack of interest does not preclude you to be an active participant in managing household finances and investments, you will be fine. In how many other situations in life would you be comfortable saying, “Oh, I don’t know, my fill-in-the-blank does all of this”? Then why would that be true for money?
Both partners must have a say and control over their incomes and utilisation. Keeping salary accounts and investments separate allows you to maintain control. If you are dying to merge accounts, merge the Facebook accounts and stop there.
Credit and its importance
The most significant loan you will ever take is a home loan. Having a good credit score is essential to get cheaper loans for cars, education and personal loans. You need to have separate accounts, credit cards and bill/EMI payment history for building credit.
If you have joint loans or investments, it has multiple tax benefits:
- you can claim separate tax exemptions for loans for jointly owned homes
- when selling investments, you can optimise the sale from those accounts where the tax hit will be the least
- you can harvest taxes separately and get the maximum possible benefits
Joint finances are easy to create but difficult to reverse. In contrast, separate finances do not require anything extra to be done and can be joined anytime. Based on these considerations, our recommendation will be to set up and budget like this:
- per partner separate salary and investment accounts
- one joint expense account for household expenses
We discuss this concept in more detail in the next section.
Budgeting in practice
Here is how income is to be handled:
Common expenses account
The common expense account is a joint saving bank account in the name of both partners, with anyone partner being the primary holder. Open this account in any bank with a good ATM network and have credit/debit card, UPI and Net-banking access enabled for both partners. Use this account for:
- all bill payments via auto/manual pay: mobile, electricity, Internet, OTT streaming services, gas connection, magazine subscriptions etc.
- all common/household expenses like groceries, entertainment, rent payment, children’s school fees and other educational expenses, daycare, books, maintenance expenses (plumber, electrician etc.), clothes for children, gifts for other family members, fuel for the family car, transportation, household help, medicines, etc
- funding a sinking fund for irregular (like travel, white goods replacement) or known regular expenses (like car insurance premium)
- funding an emergency fund via Recurring deposit/Fixed deposit or SIP in debt mutual fund
- paying the credit card bill if any of these expenses are done with the common account credit card
- keeping the family locker
We will discuss the manner of funding this account in the next section.
Personal bank accounts
There are two personal accounts per partner: Salary and investment:
- Salary account is used for receiving salary/any other income, funding common expenses account, personal expenses and EMI (like personal loan and credit card loan), gifting for the partner (children and other gifts are from the common account) and funding the personal investment account
- Investment account to be used for all investments like stocks and mutual funds.
If your partner is earning, make them a nominee in the investment account. If they are not earning, make them an either-or-survivor operator of this account. You will keep the investments separate but also accessible in case of the demise of one partner.
Personal expense accounts are essential to provide a leeway for judgement and explanation-free spending. Also long as investments are on track, expenses out of the personal account are your own and have lower accountability than the common account.
Personal expenses will generally include:
- small daily expenses like office-related expenses that are too small to be tracked
- personal car fuel, maintenance and insurance expenses
- contribution to dependent parents and other dependents like sibling’s marriage/education
- any expense that does not get included in the monthly budget
- gifts for the other partner
Funding the common expense account
The common account should be funded on an equitable basis so that it is fair to both partners. This can become a point of constant friction, so open and continuous communication with your partner is the key to success. Once you start contributing to the common account, you can always change it later if you feel it is not later. Again communication is important here. You should know that whichever method you choose, the amount of money spent and invested at a family level remains the same. Only the investment amount in the name of each partner changes. At the end of the day, there is no perfect method except the one that works in your case.
Once you know the average expense for the next month, say ₹50,000, fund the account in one of the following three ways:
- Income ratio method, i.e. in the ratio of either CTC or in-hand salary of the partners
- Equal method or 50:50
- One partner pays for everything
Income ratio method
The first case also called the French method, is the most equitable one since both partners contribute as per their capability and includes the case where one partner does not have income. The only wrinkle here is if one partner earns too little relative to the other, contributing to the common account will not leave anything for personal expenses and other commitments like dependents and loan EMIs. So you need to work out a split that works for you in such a case. In neither case should you or your partner feel that one is subsidising the lifestyle, especially discretionary purchases, of the other since this account pays for truly common expenses.
You can choose either headline CTC or average of last twelve months of in-hand salary or previous drawn salary. It does not have to be accurate to the nearest rupee but something that you can work out in your head or a calculator in a moment’s effort.
When one partner is on a career break or sabbatical, this method gracefully degrades to one partner paying for all expenses simply because the other does not have any income.
Equal method or 50:50
This method is straightforward and works very well when the partners earn similar amounts. However, suppose one partner earns a lot more than the other. In that case, the other might chafe under the requirement of contributing a substantial proportion of their income for common expenses.
One pays the bills, and the other pays for…
With great power comes great responsibility - mostly SpiderMan
This method can work out for partners who are extremely clear on what the money-related roles are for both and should have the following requirements laid out and agreed upon:
- one partner (the Payer) pays for all common expenses
- the other partner (the Investor) invests and builds the majority of the assets
- the Payer does not compromise on personal expenses while paying for all common expenses
- the Investor agrees that significant common assets, like real estate, are purchased jointly, so that common asset ownership does not become lopsided
- Pay-yourself-first (see below) is applied to both partners rigorously: For Payer, it is for personal expenses, while for the Investor it is for goal-based investments.
The Investor should keep in mind that just because there are no bills to pay from their money, it is not for squandering in discretionary purchases. Instead, the Investor is responsible for investing this capital first as per common goals like home-ownership, children’s education and retirement by pay-yourself-first.
Buying a house is one of the biggest financial decisions you will make as a couple. Our Home Purchase series will show you the right way to get started.
In the context of this section, we will consider partners who either do not have income or earn negligibly less (Lower-Income-Partner or LIP) relative to the other who is the Higher-Income-Partner.
The family budget should have a line-item for the personal expenses of the Lower-Income-Partner, including contributions to their dependents. It should be indexed to the income growth of the Higher-Income-Partner. A simple standing instruction from the Higher-Income-Partner’s salary account to the Lower-Income-Partner’s personal account should be set up for this purpose and reviewed regularly.
Decision making on finances
Regardless of their incomes, both partners need to have an equal say in critical money-related decisions like vacations, car, house, and target retirement lifestyle.
Access to accounts in emergencies
All bank accounts should be operated in a joint mode so that in case of need or emergency, both partners have equal access to funds. This rule is more critical if the earning partner is hospitalised or otherwise incapacitated.
Similarly, when creating bank fixed deposits to be held by both, you need to explain to the bank that withdrawal must be allowed by only one partner if the other cannot sign or provide explicit consent. This particular consideration is only for access to funds in an emergency and not for passing assets to legal heirs.
You can use the HLV expense method to calculate the insurance coverage needed: typically use expenditures like home and childcare (if applicable). Some insurers may offer limited or single premium plans in such cases. This is often missed during financial planning for the family. There are nowadays joint term plans and “Saral Jeevan” plans that cover a non-working partner.
Our new Goal-based investing tool will help you to create and manage all of your goals in one place. Click the image below to get access:
Arthgyaan creates a system for reaching your financial goals by sharing simple, actionable advice backed by research and analysis.
Investing comes before everything
We have mentioned this concept before in the section on contribution to the common account, but we define it more formally here. Pay-yourself-first (PYF) is one of the golden rules of personal finance that builds up a habit of saving and investing. The main benefit of paying-yourself-first is that the money is moved out of reach before discretionary expenses start. With PYF
Expenses = Income - Investments, i.e. money is spent only after money is saved and invested
The concept is defined in more detail in this post: How to budget, save and invest in a stress-free manner?
To make PYF possible, you need to know how much you need to invest. This requirement brings us to the next topic of goal-based investments.
Securing your future
But before going to goals, we need to secure the foundation of the financial house we are building. Three things need to be done:
Term insurance: Each partner should have adequate term insurance. Why term insurance, how much to purchase and where to purchase from is described in detail in this post: Term life insurance: what, why, how much to get and from where?
Health insurance: Insurance costs are relatively cheap at the beginning of the career, so this is an excellent time to take a family floater coverage (separate from the company provided one if any) for 10-15 lakhs base policy with a 50-100 lakhs super-top up. Elderly parents must be covered in a separate policy since, due to co-morbidities, their premiums will increase drastically a few years later. Since health insurance can be expensive, the premium can be saved via a sinking fund. You can add children to the family floater later.
Pay off high-interest loans: Any loan like a credit card or personal loan comes under this bracket. If any extra money is there, it is always best to pay off the highest interest rate loan first. This plan will save a lot of money for future investments. If there is a lot of credit card debt, try to consolidate them via a personal loan at a cheaper rate. Typically, home and education loans are cheaper and can be considered separately. The topic of paying off loans is covered here: Which debt to pay off when you have more than one loan?
Setting goals as a family
Goal setting helps you understand the priorities of your life, set the future of you and your family, understand the various money-related challenges that come and be best prepared for the future financially. Goals give direction and momentum to your financial life:
- direction: if you know why you need it, you know what to invest for. Creating wealth is not a goal, while investing to send your child to Harvard in 15 years is one.
- momentum: this allows you to build investing discipline and track progress along the compounding journey. The money will likely be spent on frivolous things without a goal just because “money is available in the account”.
If goals are not set, you will hurt your chances of creating wealth via compounding. Since you are now in a new life stage as a couple, to set goals, you need to:
- sit and think about your plan for the future and write them down
- Where do you see yourself in life: 5, 10, 15, 20 years from now
- What do you want to do in your career: salaried job, own business, freelancing
- How long do you want to work? Are you excited by the Financial Independence, Retirement Early (FIRE) movement?
- What are your plans for retirement?
Read more on this topic here: Set a goal before looking for what to invest in
Once your goals are set, follow this extensive guide to understand how much you need to invest for your future: I am now ready to do goal-based investing, how do I get started?.
If that is too daunting to follow immediately, then follow these simple two steps to get started with investing:
- make sure your prerequisites (emergency fund and insurance) are in place, which will take a few months: see this detailed post
- start a SIP in two index funds, one for each partner, from here for long term goals. The SIP amount will be left in each partner’s salary account the day before the salary gets credited. You can log in to the MF investment app/website you are using and purchase with 2-3 minutes of effort every month.
Balancing the present vs future
We use the twin super-powers of Pay-yourself-first and Conscious Spending to get over the YOLO barrier.
Housing costs and vehicles are the most significant line items in any household budget. However, over-spending on home loans and car EMIs can significantly divert money from other goals. This is where prioritisation comes in. You and your family need to decide on your primary lifestyle:
- Case 1: a small rented apartment in a high-cost location, short commutes, premium schooling, small car or public transport, regular long-weekend vacations
- Case 2: a large house in a low-cost suburb with more peaceful surroundings, a big family car, one extensive foreign tour every couple of years
The options above will not only require spending different amounts of money every month but will create different types of memories and experiences. It is up to you to choose which one you prefer.
These items are more frequent but tend to add up over time. This is called the Latte Factor.
The Latte Factor was popularised by author David Bach. The concept is simple. Small amounts of money spent on a regular basis cost us far more than we can imagine - [Source: Forbes.com: ‘https://www.forbes.com/sites/robertberger/2017/05/27/the-latte-factor-7-key-lessons-we-can-learn-from-a-cup-of-coffee/’]
It would help if you prioritise your spending on discretionary items like this:
- do you care about gadgets vs eating out
- do you want to spend more on shopping for clothes vs movies
- or any other combination that you want
This way, you can spend more money on what you care about and cut down on those items you do not. This concept is discussed in more detail here: How Goal-based investing lets you do guilt-free spending.
It is quite natural that both partners will not have the same priorities for conscious spending. However, as long as you respect the fact that a different list exists for the other partner and they understand why conscious spending is essential, then you are good to go.
Tracking expenses vs tracking investments
Simplest possible budgeting
You need to classify and figure out approximately the major monthly expense heads under the three main buckets below:
- mandatory: rent/EMI, food, school fees, electricity/mobile bills etc.
- variable: entertainment, transport, clothes, anything discretionary
- save to spend: these are used for the sinking fund
We will apply the 80/20 approach or Pareto principle here. Instead of tracking every rupee spent, we will track the large ones diligently: rent, EMI, food, utilities, fuel/transportation, among others. Travel and other frequent/recurring expenses should be tracked via sinking fund contributions. To make budgeting even more straightforward, use a modern version of your parents’ envelop method:
- wallets and gift cards for online spending. If you order groceries or food delivery from the same app, fund that app’s wallet or use gift cards with the amount you will be reasonably using until the next refill
- create labelled recurring deposits or goal-wise SIP folios: travel, gadgets, new car etc
Tracking expenses and investments
There are multiple apps and solutions out there that track investments and expenses. A simple shared Google Sheet will suffice to maintain the household budget and track investments.
Common but avoidable mistakes
Your money management skills or role need not be perfect, but as long as you do not make these common mistakes, you will be better off vs those who make these mistakes:
- relying on one partner for managing money: It is unlikely that your partner is a professional investment advisor. But you do not need to be one to manage household finances as long as both partners have an active interest, defined roles and dialogue on the topic. You should also understand the limits of your capability and seek professional help when needed
- trying hard to trade in stocks or FnO or invest in unsuitable investments to make more returns: both you and your partner should focus on increasing your income instead of trying fancy things to make money: Your human capital, not investment returns, is your biggest wealth creator
- investing less due to lack of knowledge or planning: there is a quantifiable cost to delaying investments either due to lack of knowledge or time. If you wish to DIY your investments, start today or visit a professional.
- not securing your present and future: it is irresponsible not to have term and health insurance since they provide a benefit many times their cost
- not making a will: death is an inevitability, and when that happens, you will be thankful to have a document that clearly spells out who gets what. Nominees are not legal heirs.
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