Building Wealth & Happiness Together: 9 Steps of Financial Planning for Newlyweds

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Start with documenting your current financial reality

a. Assets and Liabilities: Upon beginning your financial journey together, start by taking stock of your current financial health. List your assets, including savings, investments, and any property you own. Simultaneously, identify and document your liabilities, such as outstanding loans or credit card balances.

b. Monthly Budget: Create a detailed monthly budget that outlines your income and expenditure. This will serve as a roadmap for your financial journey, helping you understand your spending habits and identify areas where you can save.

Forecasting Your Financial Future: Your future regular income & expenses are very important aspects of your financial future. Estimate and document it.

a. Complications in Estimating Future Expenditure: As you project your future monthly budget, consider the various phases of life. From married couple, to parenthood, high school, college education, post-child dependence stage, and finally retirement, each stage brings unique financial demands. Be mindful of these phases to make more accurate estimations.

b. Prioritize Based on Values, Not Perception: Your savings should reflect your values, not societal expectations. Remember, “your saving is the difference between your income and your ego”. Identify what truly matters to you and allocate your resources accordingly. Avoid the temptation to spend based on how you think others will perceive you.

Navigating One-Time Financial Milestones: One-time financial instances or goals are major life events and planning for them is extremely important. While these vary for every individual, typical one-time financial instances are below:

a. Planning for Your Home: Purchasing a home is a significant one-time financial event. Consider this carefully in your future projections and planning. Understand the potential impact on your budget and allocate resources accordingly.

b. Preparing for Your Children’s College Fund: Planning for your children’s college education is another major financial consideration. Anticipate the costs associated with higher education and incorporate them into your long-term financial planning.

c. Strategizing Your Retirement Corpus: use online tools / expert guidance to estimate retirement fund. A thumb-rule is: your retirement corpus should be 25 times your expected expense at the time of retirement

d. Future Asset Additions: Consider potential future asset additions, such as expected inheritances or other windfalls. While it’s essential not to rely solely on potential future assets, acknowledging them in your projections adds a layer of flexibility to your financial planning.

Embracing Imperfection in Financial Planning: Recognize that estimation can never be perfect. Rather than obsessing over achieving pinpoint accuracy, focus on having rough estimates. Trust that these estimates can provide a solid foundation for financial planning and future financial health. Understand that the impact of refining estimates is not as monumental as one might imagine. Keep updating your estimates as needed in the future, adapting them to the evolving dynamics of your life. This flexibility ensures that your financial plan remains robust and aligned with your goals.

Before asset allocation decision, shield your financial castle: Protection steps prevent extreme unforeseen conditions. These should not be calculated in asset allocation. These are essential must-have steps.

a. Rainy Day Fund: Building Your Emergency Safety Net: roughly 6-months of essential expenditure

b. Health is Wealth: Ensuring Adequate Health Coverage

c. Life Coverage: Estimating and Securing Your Financial Backstop

Crafting Appropriate Asset Mix for your risk Profile: Your risk appetite is dynamic. It depends on your age, disposable income, liabilities, surplus balance sheet.

a. For average risk-appetite, the asset allocation should be as below:

a.i. Upto 35 years of age: 75% equity, 20% fixed income, 5% alternative assets; asset allocation should change over next 10 years.

a.ii. From 45-60 years of age: 60% equity, 30% fixed income, 10% alternative assets.

b. Estimate annual return with the above-mentioned asset allocation. For Indian markets, this can be approximated to 10-11%.

c. Home Is Not an Asset: Clarifying Your Property’s Role: Don’t count primary residential property in this asset allocation.

Mastering Equity Allocation Strategies: Your equity allocation will be the biggest determinant of your finances. Equity allocation should be as below:

a. Steady Gains: Long-Term Strategies for Stable Finances: 60% of equity allocation should be in long-term buy and hold strategies with low portfolio turnover. Spend time identifying good fund managers and stick with one.

b. Taking Risks: Navigating Small-Cap Investments: 20% in small cap with higher risk & return potential

c. Passive Income: The Power of a Balanced Portfolio: 20% in passive

8. Assess Goal Attainability and Prioritize: Assess whether all goals are likely to be met, or there is deficit or surplus. Prioritise goals accordingly. If there are also absolute necessary goals that can’t be met, it means there is a disconnect between your current & future earnings and your financial goals. Discuss with an expert.
9. Accepting Your Financial Reality & Regular Revisions: You can stick with your financial plans only if you have accepted your expected reality.

a. Emotional Acceptance of Financial Situation: Emotional acceptance involves acknowledging and embracing both the present and anticipated realistic future financial circumstances. It requires recognizing the realities of your financial situation, building resilience, and understanding that adaptability is key in achieving long-term financial well-being and stability.

b. Understand the importance of adaptability for long-term stability: Keep revising asset, liabilities and income / expenditure budget yearly to ensure there isn’t too drastic a deviation from your plan. Revisit asset allocation & investment decision every 5 years to assess the same. Most importantly, don’t over obsess, remember that you are doing all this for a happy stable life.

This article was originally published in Financial Express.

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