Working Couple’s guide to money

Working couples need to evaluate their finances keeping ‘opportunity cost’ in mind.

Working couples seem to be the order of the day, thanks to the galloping cost of living. The way things are progressing, most young urban families cannot entertain a stay-at-home spouse, if they want to maintain a ‘decent’ standard of living and attain their financial goals. It’s an entirely different matter that these days many women “choose” to work after marriage, purely due to psychological reasons or (in the case of my missus) as a means to escape from household chores.

For couples that work hard everyday for achieving their long-term financial goals, here is a word of advice – evaluate the ‘opportunity cost’. If you don’t – it is highly likely that you would be stuck in the rat race without ever achieving financial freedom. Opportunity cost is the value of the next best choice that one gives up when making a decision. For a working couple, opportunity cost is the cost of qualitative pleasures foregone as a result of choosing to work – e.g. time with each other, time with kids etc. It is also the money saved if both partners weren’t working – e.g. not having to eat out often, no need for day care, no expensive outings for the sake of spending quality time etc. A good evaluation of the quantitative portion of opportunity cost begins with the question - what would be your monthly or annual spend if one of you had chosen to stay at home?

A truthful analysis of opportunity cost for working couples could be shocking. It could even point out that it doesn’t make sense for both partners to work. Many of you may think you are working to save more, but in effect you may be saving less. This is usually because your lifestyle has expanded so much. The biggest problem that working couples need to address is the ever increasing desire to splurge just because there are two incomes. It starts with small indulgences and before you realize you have rented a 3-bedroom apartment when you could have very well done with a studio. You may have heard of the saying – ‘Work expands to fill time available’, but here’s another one for you – ‘Stuff expands to eat the money available’.

Believe it or not, both partners working does cause a strain on the personal side, which only gets aggravated with kids to take care of. Every working couple needs to mutually define what is the objective of both of you choosing to work and make sure you don’t forget it. If the objectives are financial, it serves well to set periodic milestones to take stock of the situation – Have you met the objectives that you set out to achieve? Are you on track? Is there a course correction required? Do both of you want to continue to work given the state of affairs? There is no point in enduring the bitterness of personal sacrifice if the prime purpose is not met.


Here’s a five-step approach for working couples to attain their financial goals:

1. Set Long term targets
2. Break-down long term targets into short term milestones and define how you plan to achieve them
3. Take baby steps and reward yourself on achieving the short term milestones
4. Remind yourself about the opportunity cost of both of you choosing to work
5. Review your personal and financial situation, course correct, plan for next milestone, revise target as necessary

Additional money management tips for working couples:

1. Build trust by opening up your financial situation to your partner
2. Make your marriage a financial partnership by planning together
3. Decide which of you will pay specific bills
4. Make sure each of you keep some money separate for personal indulgences
5. Set joint savings target, pool your savings and then think about how to invest
6. Don’t take on debt without mutual consent
7. Ensure that the monthly family bills, including EMIs, are well within the capacity to pay using a single income, incase one of you decides to take time off work or in the event of an emergency.
8. If you’re a young couple planning to have children, budget part of your savings towards future expense when the family has to sustain on single income

Understand compounding and make it work for you

According to the legendary investor Charlie Munger – Understanding the power of compound interest and the difficulty of getting it is the heart and soul of understanding finance. There’s an urban legend that Albert Einstein once said compounding is the most powerful force in the universe. What else can help you turn a few thousands into millions? The great thing about compounding is that it helps you to achieve your long-term financial commitments, retire comfortably, and maybe even become rich beyond your wildest dreams.

At its most basic level, compounding is all about gains producing more gains. A rupee invested at a 10% return will be worth Rs 1.1 in a year. Invest this to get 10% again, and you'll end up with Rs 1.21 two years from your original investment. The first year earned you only Rs 0.1, but the second year generated Rs 0.11. Increase the amounts and the time involved, and you can multiply your wealth by just sitting idle.

For those who have forgotten their junior school mathematics, compound interest can be calculated using the following formula: FV = PV (1 + r)^n

FV = Future Value (the amount you will have in the future)

PV = Present Value (the amount you have today)

r = Rate per year (your rate of return or interest rate earned)
^ = Raised to the power of

n = Number of Years (the length of time you invest)

For interest rates less than 50%, a simple way to know the approximate time it takes for money to double is to use the rule of 72. For example, if you wanted to know how many years it would take for an investment earning 12% to double, simply divide 72 by 12, and the answer would be approximately six years. The reverse is also true. If you wanted to know what interest rate you would have to earn to double your money in five years, then divide 72 by five, and the answer is about 15%.

Key concepts of compounding

Let's consider the case of two investors, Chetan and Abhishek, who'd like to become crorepatis. Say Chetan put Rs 20,000 per year into the market between the ages of 24 and 30, that he earned a 12% after-tax return, and that he continued to earn 12% per year until he retired at age 65. Abhishek also put in Rs 20,000 per year, earned the same return, but waited until he was 30 to start and continued to invest Rs 20,000 per year until he retired at age 65. In the end, both would end up with about Rs 1 crore. However, Chetan had to invest only Rs1,20,000 (i.e. Rs 20,000 for six years), while Abhishek had to invest Rs 7,20,000 (Rs 20,000 for 36 years) or six times the amount that Chetan invested, just for waiting only six years to start investing. Clearly, to reach your long-term financial goals, investing early is as important as the actual amount invested.

In addition to the amount you invest and an early start, the rate of return you earn from investing is also crucial. The higher the rate, the more money you'll have later. Let's assume Chetan from our previous example, had another friend –Nirav, who also started investing at age 24, saving Rs 20,000 a year for six years. But unlike Chetan, who earned 12%, Nirav earned only 8%, due to unwise investment decisions. When they all retired at age 65, Chetan would have nearly Rs 1 crore but Nirav would have only approx. Rs 25 Lks!! Even though Chetan earned only 4 percentage points more per year on his investments, or Rs 800 per year more on the initial Rs 20,000 investment, he would end up with about 4 times more money than Nirav. That’s how a few percentage points in investment returns or interest rates over the long term can mean a huge difference in your future wealth. What you need to keep in mind, while seeking higher returns, is – compounding provides better rewards for consistent long-term returns, even if the returns per-se are just “average”, compared to the alternative of stellar short-term returns, but poor long-term returns.

Wise investing, aided by the power of compounding, can help you attain your financial goals in life. In order to use it most effectively, you should start investing early, invest as much as possible, and attempt to earn a reasonable average rate of return over the long term.

Compounding and Stock investing

Overcome by the lure to earn high returns, a lot of investors take to “trading” with great fascination. What they fail to understand is that although trading has the potential to generate high short-term returns, it is rarely sustainable over the long term and hence offers poor compounding effect. This is why over the long-term, most trading strategies lose out to the simple alternative of buying and holding sound stocks, mutual funds or index funds purchased at fair prices. Investors with a medium to long-term perspective save money in broker’s fees and taxes every year that compounds over time to provide an unfair advantage in the form of higher total returns.
For more on the transformative effect of compounding, readers can check out the aptly titled book ‘The Snowball’ - by Alice Schroeder.