Finance and Family – Is Coordination Important?

In the early part of 1900’s and later too there was not much of an emphasis on personal finance from an individual point of view. But today individual money management as well as financial planning within a family is becoming crucial.In the olden days family responsibilities were shared between different members in a joint family set-up.

Household chores were handled by women, property and assets were mostly handled by men, on few occasions women had access to gold or cash, other occupation/trade activities were mostly handled by brothers in the family.

The eldest member generally was consulted in case of any dispute or to take advice on major decision. Today this set up still exists in some homes, but is getting more challenged as people like to live independently as nuclear families.

Why Coordination? Everyone has their own plans

Let me clarify that ‘family’ here does not refer to the Indian definition of you, your wife and children. I have heard people using the word ‘family’ to colloquially refer to a person’s wife/kids, which is quite common in Indian English.

To make it simple my definition of family means your near and dear ones or people who are part of your household and are very closely attached to you. This could include parents, siblings, children, partners, etc.

So whether you live alone or with family members at home, you still need to discuss, share and implement your plans in coordination with other members to achieve individual as well as common goals.

Coordination will help you to benefit mutually by sharing expenses, dividing responsibilities, budgeting for future needs, etc. The benefits can be multi-fold which we will discuss as we move ahead.

‘Things to Do’ for better coordination

While there are many ways to achieve coordination I will discuss a few generic ways as well as specific financial instruments/assets that will help achieve growth in family wealth.

Open Discussion, Planning & Scope

Before we get in to specifics, the first step is an extension of discussing and sharing plans – both individual and common ones. Here you may also want to define the scope of responsibilities – whether it is your spouse and children only or if it also includes your elder parents, siblings, etc. In some cases where you have a younger brother who is still in school or college (for whom you are responsible) that needs to be factored in. Even kids and those not earning income should be consulted so that their needs are not compromised. Non-earning members can also pitch in with ideas for saving expenses.

Budgeting & sharing expenses

This is mostly ignored although crucial. In some cases you may have a mutual understanding on expenses assuming you are a close knit family (nuclear types).

But where you have a situation like an elder parent, brother, additional earning members, etc you have to draw a clear understanding of sharing common expenses such as rent, electricity, gas, groceries, etc.

It goes without saying that you need to maintain 3-6 months’ worth of expenses as emergency savings for unforeseen needs or incremental expenses. This is highly critical in cases where you live in a shared household but manage your personal finances independently. However, independent you may be, if you live under the same roof some common items are enjoyed by all, which needs to be discussed and shared.

For example, lets say A, B & C – Father, mother and daughter live along with Dad & Mom (A’s parents). Lets say A and Dad share all expenses. In this case A and Dad will share common expenses in the ratio of 3:2. If A spent Rs.40,000 in a month on common expenses for entire household, then A’s and Dad’s share will be Rs.24,000 and Rs.16,000, respectively. Here Dad will pay Rs.16,000 to A at the end of the month to reimburse A.

If all this sounds too complex or formal then you should believe and go by conventional trust, belief and common understanding. Everyone should look at common welfare or benefit rather than individual gains.

Life Insurance

This is inevitable today because your family member’s situation can come to an absolute stand still if some unforeseen incident takes away your life. It can provide a huge financial relief in case you are not around. Buy only a term insurance plan with a longer tenure as early as you can. In case of term insurance you get a good amount of risk cover at affordable rates.

For instance for a 35 year old male (non-smoker) a 20 year term policy with Rs.50 lakh cover costs about Rs.7,445 based on the plan of a leading insurer. (Source: ET Wealth Feb 14, 2011) All key members in the family should be covered by term insurance, except for kids and elderly people who don’t have dependants. Key members include all income earners, homemakers, etc.

Health & Accident Insurance

Most people get health insurance provided by employers which generally covers only the employee and his spouse. Nowadays most employers don’t provide this facility for parents because of high cost which insurance companies charge on aged policy holders.

Nevertheless health insurance for your family members can be taken separately by you to meet any unforeseen health emergencies such as sudden illness, disease, surgery, etc. Accident insurance is important for people who commute to work or even travel.

Accident includes accident that happens to pedestrians, accident on public transport, etc, so anyone who travels even by public transport will need this. However, make sure you know the features of the policy/plan before purchasing it.

Property Investment, Housing Loans..

Property investment is a high ticket item so this requires a lot of thought and consultation because its for the benefit of the family as a whole. A few tips that can help you financially by sharing expenses, saving taxes, etc are below:-

HRA (Housing Rent Allowance)

If you live in a house owned by your parents or other family members you can pay them a rent and claim HRA deduction. But remember that this is possible only for those who don’t own a house or a property. If you own a property elsewhere in the same city then you will not be eligible

For example, if you have a HRA of Rs.1,00,000 in your annual salary, if you pay rent of Rs.7,000 p.m then you get a deduction of Rs.84,000. So your HRA of Rs.16,000 (Rs.1 lac – Rs.84,000) only is taxable. (Disclaimer: Please consult a tax advisor or expert for latest rules and also ensure you have necessary documents to provide to your office or tax authorities)

Housing Loan Payments & Deduction

If two people in the family borrow then both can be eligible for principal deduction (Sec 80 C) and interest deduction of up to Rs.1.5 lakhs. Joint ownership and borrowing will ensure burden is shared and also provide deduction to both co-borrowers.

Housing EMI & Rents

In cases where only one can contribute to house payments, due to income/budget constraints, then the other member can pay rents (and get HRA deduction).

Generating Income out of Second Property

Smart families know how living together can pay off in the long run.

The Gupta family consisted of a husband wife and two kids – one son staying with them and working, and a daughter who works abroad. In 2008 their daughter working abroad bought a property where they could live in and save on rents. In another 6 months their son who was in higher tax bracket bought a second property, which was rented out.

After marriage the son still stayed in the same household instead of moving to the new property. Had they moved to the second property they would have lost on the passive monthly income which almost covers 40% of their EMI (the rent is Rs.10000, while EMI is about Rs.25000). The son has to just pitch in with Rs.15,000 while he earns over Rs.45,000 per month. Remember that families should try to have one property for personal use and have other assets to generate income.

Additional Property Investment

The Gupta example clearly shows how living within your means can generate good cash flows. Does this mean you live in the same cramped house? Not at all.

You can move to a new house if the family size becomes larger. A few years later Mr.Gupta Junior got married moved to his own house and bought another apartment, which is on rent, which is again paying about 30% of his EMI. Although EMIs move up and down with interest rate cycles, the EMI and property value will go up overtime.

Its not easy, quick money but more gradual and long term, but certainly reliable and sustainable. In fact a second property can be a kind of passive income if you already living in your home.

However, don’t try to focus only on property because it is high-ticket and difficult to liquidate – consider equity, gold and other options, and when you have paid off a major portion of your first mortgage, a second home can be thought of. If you want to know more about this feel free to ask specific questions.

I would recommend you to read How Property Investment can make you a Millionaire 

Tis not a Get Rich Quick formula. But if you put in the right efforts you will see a meaningful difference in your personal wealth in 2-3 years.

Conclusion – Finance and Family

Remember that the basic idea is to balance between what you enjoy today and what you want to keep for the future. Any surplus savings have to be invested in assets that put money in your pocket. ‘Money in your pocket’ can be regular income or an asset for future use – both personally and for family.

The most important trait for successful investing is discipline and patience – so that why the good old lesson from the story of “The Hare and the Turtle” holds true for achieving financial freedom.