Let there be no financial secrets in your marriage

Both should be involved in all aspects of financial planning. Each other?s understanding of investments must be respected as well

Just as almost every medium to big corporate has a Chief Finance Officer (CFO) to drive the financial decisions in a company, every household, too, has a Family Financial Officer (FFO). The FFO is the one who carries the main responsibility of managing the family finances in terms of bill payments, keeping track of expenditure and, of course, utilising the savings in the best manner.

In most households, either the husband or the wife would don the role of the FFO. Only in a few cases, do both the partners shoulder this responsibility jointly. Past research has shown that in households where the husband is more knowledgeable about financial matters and / or has higher earnings than his wife, he is more likely to be the decision maker. This is the case for more than 60 per cent married couples.

However, this trend is changing on the back of rising levels of education and earnings. Increasingly, the modern Indian household is moving towards sharing the responsibilities of the FFO position. This could be a problem as each spouse will have different expectations and attitudes towards savings, investments and goals. In view of this fact, it is important for every couple to know and recognise certain important factors with regard to their financial planning.
 

THE DOS AND DON’TS OF PLANNING INVESTMENTS TOGETHER: 

• Identify the Family Financial Officer in the family, approximately 65% of the times, the husband is the FFO;
• FFO would be responsible for factoring the risk appetite of the other spouse;
• The non-earning spouse being actively involved in the financial planning process will help in increasing her confidence in financial matters;
• High level of education and incomes of both the spouses is a major bonus and can help reduce the financial risks required to be taken;
• Adequate information to be shared about choices for retirement planning among spouses for a better decision;
• If the difference factors are irreconcilable, then it is advisable to draw separate plans for the working spouses

Risk tolerance of the couple
Understanding risk tolerance of an individual is a challenging task as it changes with situations for the better or worse. At the same time, it is important that the couple assume an appropriate level of financial risk because of the relationship between one’s risk taking abilities and growth in wealth. Too low a level of risk could result in less money to meet retirement and other financial goals and too high risk can play a spoilsport for the same.

It is observed that generally women are more risk averse than men, even though the former’s life expectancy is higher of the two. This observation contradicts the rationale that risk appetite should rise with higher time horizon available.

It is extremely important for the couple to consider their respective risk tolerance levels and factor the same into their plan. This is important for the success of the plan. In case the other spouse is not inclined to take higher risks, the best way to tackle the situation is to educate her/ him about the risk and investing principles.

Involvement of both spouses
A financial plan for a family is supposed to be the guiding force for both the spouses in all things financial. Hence, both the partners must be involved in all stages of the planning process. For instance, it should start at the data sharing stage itself where a wife’s inputs on the expenditure patterns of the household matter and would consequently define the family’s objectives, such as vacations, house purchase or renovation.

She should also be involved in the implementation of the plan’s recommendations. For example, she must know about the investment instruments chosen, nominations being made in her favour and so on. Special attention must be paid to life insurance policies, helping her understand the different type of covers that might be taken. Last but not the least, keep her in the loop regarding all paperwork related to investments.

Different levels of income and education
With an increasing number of women working and earning incomes at par with their partners, the likelihood of them participating and assuming a greater role in financial decision making is also increasing. A better understanding of finances may also help in terms of a higher risk tolerance for women.

In such cases, the couple should capitalise on this opportunity. A higher income helps boost the total risk appetite of the family and can accordingly help one take above average financial risks to earn above average returns. An interesting take away for high-earning couples here is the fact that a higher level of household income and disposable income may also help reduce the level of financial risk that they may be required to take in order to accomplish their goals.

Retirement planning
Retirement planning, being a long-term goal for couples in their mid-30s or early 40s, has to be carefully crafted. Both spouses have to think and act upon the same since each of their thoughts would have an impact on the decision of the investment choices for their retirement plan. It is generally observed that in cases where the husband is employed and the wife is not, he is less influenced by her opinion and thereby willing to take more risks. This pattern should be avoided as retirement is one of those longer term goals, which affect both spouses equally. Adequate sharing of information between spouses in relation to the different investment choices available for retirement will help in making more informed decisions.

Every couple should keep these factors in mind while devising their financial plans. Care should be taken to ensure that the planner is sufficiently informed about the differing attitudes of both the spouses so that the plan may be drafted accordingly.

The writer is a certified financial planner