Spend, Save and Invest Smartly

Financial Planning for a Young Couple Just before Planning a Family



Life is all about moments. The greatest moment for one and his spouse is the birth of their new born child. A baby will make love stronger, home happier, the past forgotten and the future worth living for. The bundle of joy brings with it a sense of responsibility. The baby also makes the bank balance smaller and money is in short supply. In order to meet bulging expenses financial planning is a must. One needs to have a financial plan in place much before the birth of one’s new born. Financial planning involves getting ones act together. One has to eliminate all debt from one’s life. This may be the overdue credit card debt or any personal loans taken for extravagant spending.

Financial planning before the birth of one’s child

Avoid excessive personal spending: When one is newly married about 10-15% of the budget is spent on entertainment. Money is spent on fine dining and eating out at expensive restaurants. Now what is personal expense will soon be household expenses. One has to cut down on excessive spending and budget for household expenses which are very different from preparing the budget for a couple. The focus in a household budget is cutting down expenses which are spent for personal entertainment and focus these amounts on saving for the needs of one’s new born child.

Credit card debt: One of the main culprits which lead to debt is the use of a credit card. These cards encourage one to spend money one currently doesn’t have on things one might not need. One starts using these credit cards by spending small amounts The spending gradually increases until the borrowed amount is huge. These huge borrowed amounts mean that one has to pay a high interest. At this point of time one mainly pays back only the minimum amounts needed to avoid a severe penalty. The borrowed amounts which have to be repaid with high interest can be too high a burden to bear. One lags behind on his payments and falls into the debt trap. One needs to retire all credit card debt before the birth of one’s new born child.

What are the effects of being addicted to spending using a credit card?

  • Spending using a credit card causes one to lose control over how much is spent. This is a sure shot way of exceeding ones budget. Before one realizes he is in debt.
  • Being in a credit card debt trap leads to a bad credit score. A poor credit score makes availing of very important loans such as a home loan very difficult. If one is in dire need of cash he would not be able to avail a personal loan.
  • Excessive debt leads to permanent damage of one’s image and reputation in society and may have an adverse effect on one’s career. It might also affect family relationships.

How can one avoid the pitfalls of credit card debt?

  • One needs to create a buffer for emergency expenses in the household budget .One can use these amounts in an emergency thereby removing the need for the dependency on a credit card.
  • One can opt for a balance transfer where he can get a new credit card from another bank. The debts one has can be transferred to this new credit card. A lower rate of interest is charged on this new card. However all debt needs to be repaid within a fixed time period of around a year. If one were to miss his payments he would have to repay the amounts due at higher rates just as before the balance transfer.
  • One can convert all the outstanding dues on the credit card into equated monthly installments to pay back the debt in parts. The interest rates for the repayment of the outstanding amounts on the credit card is lower than the rates charged under standard conditions.
  • If one falls back on his credit card payments very high interest rates are charged. One can avail of a personal loan to retire all credit card debt since these loans charge a lower interest rate. A personal loan can be availed at an interest rate of around 14-22% which is cheaper than the interest rate charged on a credit card.

The inclusion of insurance planning in the financial plan

At this point of time in life one doesn’t know how much time he has to make the financial plan. One doesn’t know when the child would be born. In addition one’s spouse might have to give up her job in order to take care of the child for maybe a couple of years. These leads to a loss in income as only a single salary is available to manage all the expenses. The financial plan has to factor in the additional costs with a single income. These uncertain conditions make financial planning very difficult.If one has a term life insurance plan renewal of this policy is very essential as he is the sole breadwinner of the family. As uncertainty in one’s life is very high at this point rider benefits are very necessary in the term plan. Rider benefits are obtained on paying a slightly higher premium. One can opt for a critical illness rider which covers diseases such as a heart attack , kidney failure or a stroke which entail high costs. An accidental death rider makes payments when one is temporarily disabled and cannot work due to an accident leading to a loss in pay. These rider benefits gives one peace of mind. One has to plan for maternity costs in the financial plan. This could be a huge expense in the range of INR 20000-INR 25000 for a normal delivery which could extend up to INR 30000 for a caesarean. A family floater policy helps one to bear these high costs by providing maternity coverage. Family floater policies may provide maternity benefits for a single or a couple of deliveries. Post delivery complications are also covered by these policies. In addition the newborn child is also covered by this policy without paying an additional premium. One needs to note the waiting period in these policies as the maternity benefits take 2-4 years to kick in on continuous claim free renewals. One must select a policy which has a low waiting period as one would opt for such a plan only once he is married. The premium in such policies tend to be higher by about INR 2000-4000 than an ordinary family floater for a couple of age 27-30 years. This higher premium justifies the maternity benefits. Tax benefits are available under Section 80 D. There is a famous saying “Good plans shape good decisions. That’s why good planning helps to make elusive dreams come true. Ones priorities shift at this stage in life and the focus is on making a financial plan to provide one’s child a sound and secure future.

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