Here are few tough questions directly or indirectly to personal finance, that I have encountered. I do not propose answers but only wish to point out certain neglected aspects that must be considered before a decision is made.
Let us start with a familiar question:
Should I rent or buy?
The answer is simple only if,
rent+ tax benefits = emi+tax benefits.
Which is seldom the case.
Children who have lived in rent since birth would long for a house they can call their own. You cannot factor that as an Excel input.
If the spouse bugs you about a bigger house, you cannot talk about financial logic at the cost of breaking the relationship.
In a buy-vs-rent calculator, there are multiple inputs but only one that calls the shots: the rate at which property prices increase.
If you buy a home as early as possible, the emi will eat into into your retirement planning, if your income does not increase higher than the home loan rate and/or inflation.
If pre-paying a home loan is your number priority, irrespective of the size of your emi, your retirement planning will again take a hit.
Most people do not factor in retirement planning while buying and/or attempting to pre-pay a home loan. For the simple reason that it too far into the future.
What is the solution? If emotions rule the roost, logic will have to take a back-seat.
This is what I would do: start investing for investing retirement first and ensure it is not affected by your home loan. Let the home loan run its course, pre-pay in chunks.
When should we have a child?
One might dismiss such a question as ‘personal’ and not related to ‘personal finance’. I am not too sure of that.
Having a child immediately after marriage when the couple is not earning enough is not a good idea. A newborn brings with it expenses both good and bad.
Waiting for income to stabilize before having a baby can be terribly expensive too. Which is what transpired in our case. Pregnancy, especially the first time is time-sensitive. When the man and woman age, their ability to produce a child goes down. Especially for those with sedentary lifestyles.
Which is why fertility clinics are doing booming business. We spent quite a bit of money before my wife became pregnant. In fact, I almost lost her due to a complication. Assisted pregnancy techniques are not cheap. It could cost a few lakhs to just get a baby. The risk of multiple pregnancies is higher (we insisted that only two embryos be used instead of three!).
All these will have a significant impact on finances both immediately and in future.
From my experience, I would suggest having a kid as soon as you are mature enough to understand the basis of what it takes to be a parent (it is said that the woman becomes a parent, the day she conceives and the man becomes a parent only when the child is delivered!). Easier said than done though (see next question).
This is way more tougher than the rent vs. buy question although in our setup the in-laws trivialize the matter and suggest having a family asap. Even if not financially ready, the couple must be mentally ready to understand and adapt to parenting.
Which bring us to the next question:
Should a parent quit working after the birth of a child?
Parenting is a full-time job and most parents do not understand what it takes. Both my parents worked. So my vote is yes. One parent should not work full-time for at least a few years after the child is born.
When I wrote about this recently, I was criticized for my primitive views. I was told that society interprets such a stand in only one way: the women should quit her job.
This is a dangerously dark area. There is no free lunch. If the couple keep working, it will have an impact on the child’s psyche (trust me on this).
Some couples get a joint home loan and find out that it not possible to service the loan on single income after they become parents.
Some parents claim that it is important to balance parenting with a career and leave the child in the care of the in-laws (completely unmindful of the toll it could take in the evening of their lives).
Day-care is a terribly mixed blessing.
This is no easy decision. If one parent does not work, it could impact finances. Perhaps the couple could never afford a home or perhaps the child may be forced to get an education loan for college.
If both parents work, it would influence the child’s mental makeup (in a positive or negative way). Parents will have lesser control over the kind of resources that the child is exposed to.
Finally, the award for the darkest question goes to:
Should we have a second child?
If the couple decides to have a second child,
they would need to provide for its education and perhaps marriage. This implies one will need to invest more.
Will this impact retirement planning is a question that they will have to ask.
Will they be able to provide equally for both children? If there is a second child in the picture, will it affect the educational aspirations of the first child (or the second child)?
Meaning, will the couple be able to provide the necessary investment amount? Would this mean both of them will have to work? (back to the previous question!)
they better write a will!
If the couple decide to not have a second child,
they will need to be sensitive about the emotional framework of a single child. Single children more often than not tend to be loners, but are often fiercely individualistic (trust me on this: am a single child and have a single child!)
the couple need to be financial independent and must provide for means by which they do not depend on their child (emotionally and physically) in the evening of their lives.
even if the couple do not wish to impose on their child, the child could choose to bear the burden of taking care of them in old age. That is one burden without respite.
the child may grow up with no support system. Blood is thicker than water. When the going gets tough, support from siblings is invaluable.
One last question which I recently encountered
What if my partner is not financially compatible?
The primary reason my financial life is in reasonable order is because of my spouse. She is as frugal as I am. We think 10 times before we make big ticket purchases. Financial compatibility makes a lot of difference. However, one cannot plan for it, whether we marry out of love or by arrangement.
It is down to sheer dumb luck. There is more to a spouse than financial compatibility!
An understanding couple will adjust and meet half-way … hopefully!