Common Pitfalls of Double Income

Ignoring cost of earning second income

A common misconception is equating income with wealth. People assume double income translates into wealth ignoring the fact that wealth requires regular savings deployed to investments that grow well over time.

People also typically overlook the cost of earning two incomes ignoring costs like those for domestic help, commute to work and office attire, besides personal expenses on business trips and childcare costs

Imprudent spending and borrowing

Many double income families also overvalue their income. This often triggers impulsive and imprudent spending, be it for entertainment or gadget acquisition. When such expenses are financed by high interest consumption loans like personal loans, it substantially adds to expenses and reduces ability to invest.

Lulled into underinsurance

Income overestimation also tends to bring about a false sense of security and makes households ignore insurance needs. This often causes huge financial setbacks due to large emergency expenses.

Excessive liquidity

Double income families often end up keeping unjustifiably large bank savings account balances and cash for current needs and emergencies. Since savings accounts typically earn paltry interest, they effectively end up losing money.

Stuck with lower risk, low return investments

For major long term goals like retirement which require large savings, double income families end up investing in lower risk, lower return investments like bank fixed deposits (FDs). Since such investments typically cannot grow faster than inflation, the two incomes do not end up making a difference.

Making the Most of Double Income

Establish individual and joint goals

Individual goals can be a mid-career course or accumulating seed capital for own start-up. Holiday trips, buying a home, children’s higher education and retirement can be joint goals.

Develop an expense management system

Establish a system of meeting current expenses like groceries, utility bills and work commute. This system also needs to include expenses of financially dependent parents and siblings. Different expenses can either be met from incomes of spouses or from the income of one spouse, ideally the higher income. The latter approach helps save a great portion of the lower income and provide a true picture of its significance. It can help plan for life situations like career transitions involving low or no pay.

You also need a home budget that earmarks portions of pay to current and imminent expenses besides major future goals. Budget also helps track expenses and take corrective action on detection of any anomaly. You can do budgeting conveniently by using one of the many available mobile applications for budgeting.

Establish a system of regular savings

Experts suggest the 50-20-30 rule which involves first directing 50% of the take home pay to investments, then 20% for loan repayment and 30% for expenses. In early married life, this may be tough to enact. The next best option is to ensure maximum portion of pay for investments and increase it with pay hikes.

Rein in loans

Avoid expensive consumption loans like personal loans and credit card and restrict repayments to 10-15% of take home pay. Those following the Old Tax System can consider joint home loans for annual tax deduction on principal repayment of up to Rs 1.5 lakh under Section 80C. There is additional tax deduction of Rs 2 lakh for interest repayment for self-occupied or vacant house under Section 24(b). Overall, EMIs should not exceed 45% of take home pay.

Provide for adequate protection

To prevent investments being used for emergencies, ensure adequate insurance cover for life, health, income, and assets like car and home. This can be supplemented with an emergency fund for uninsurable emergency expenses such as during hospitalisation or job loss.

Money equivalent to 3-6 months of expenses can be kept in liquid funds and short term debt mutual funds like ultra short term debt funds.

With the above steps, a double income couple would have laid the foundation for create substantial wealth from two incomes.

Begin with tax saving investments

In the initial years of marriage, with limited regular savings, for couples following the Old Tax Regime, tax investments are a good first step in investing.

Each spouse could open a Public Provident Fund (PPF) account or invest in ELSS mutual funds (Equity Linked Savings Schemes). Investments in ELSS are tax exempt with both the investments eligible for annual tax deduction of up to Rs 1.5 lakh under Section 80C. PPF provides tax exemption at the time of contribution and for interest and maturity proceeds. Thus, its returns are equivalent to higher returns from investments without tax benefits.

Get the ELSS advantage: ELSS funds invest in equities and have the potential for high returns in the long term . ELSS provides convenience of investing pre-decided amounts, as small as Rs 1,000, in an automated way through a Systematic Investment Plan (SIP). Each spouse can make SIP investments in the same one or two ELSS funds, earmarking them to individual or joint goals.

SIPs reduce the average long term cost of buying units as the regular investments buy fewer units when the market is up and more when the market is low. Double income couple can enhance this advantage with different dates for their SIPs.

Use mutual funds for different goals

For individual or joint goals like a vacation in 1-2 years, SIP investments in short term debt funds like ultra short term debt funds can be considered. Medium duration debt fund can be considered for home down payment in 3-4 years.

To counter significant long term impact of inflation in the medium term, equity-oriented, growth investments with limited volatility are required. Hybrid mutual funds like equity savings scheme and balanced advantage fund can be considered for medium term financial goals. For instance, saving for seed capital to establish your own start up in 5-8 years. For major goals in distant future like children’s higher education and retirement, mostly sticking to equity mutual funds like large cap index funds and large cap funds helps.

With regular pay hikes, consider Top Up SIP. Here, regular investment is periodically increased by a pre-defined amount, says 10% annually. Small investments in higher risk equity mutual funds like mid cap mutual funds and small cap mutual funds can be considered along with gold mutual funds.

Periodic lump sums like bonus and commissions can supplement existing investments with Systematic Transfer Plan (STP). Here, the lump sum is parked in a low risk fund like a liquid fund followed by regular investments in equity mutual funds.