Dinks, this financial plan is for you...

Last month, Firstpost started a series on financial planning. We began with a plan for Twenty Somethings and then covered a Nuclear Family last week. But, if you belong to the luckier category called Dink - Double Income No Kids - it doesn’t mean you have no worries. What worked for the family of Fantastic Four simply won’t work for a Dink couple. And you still need a plan.

Your Life: Investopedia defines a Dink as well-educated and typically high-earning professional couples who have no children. You have two incomes, most expenses and bills get split, and you also get tax breaks on certain joint holdings of investments. All this leaves you with more disposable income. With no diaper-change responsibilities to attend to and no tricycle-pedal-pushers to take to the park, you have more time to live your dream life as well.

However, having more income and time at hand, and living a lavish lifestyle can make you vulnerable to overspending, credit card debt, and living beyond your means. To avoid this trap and make the most of your Dink status before the cradle rocks, we suggest a few financial steps.

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Unexpected times: First make a monthly budget, and find out your monthly expenses. Then start building an emergency fund. Yashwant Aangne, Mumbai-based Certified Financial Planner (CFP), says, “Dinks should have four months’ expenses as emergency funds.”

Risk protection: While living the good life takes top-most priority, most Dinks ignore protecting themselves against risk in the belief there is always the partner to fall back on. But this is not always true.

Life insurance: Many Dinks think that since both partners are financially independent, life insurance is not needed, but that’s incorrect. Surya Bhatia, Delhi based CFP, says, “Due to double income, Dinks go for a bigger and better homes (home loans). Taking a life insurance cover, and covering various loans as well, is a good idea.” If something happens to you, repaying the EMI would be tough with a single income. Usually CFPs will advice you to take a life insurance policy which has a cover equal to 12-15 times your annual expenses or 8-10 times your annual income plus debt obligations. The life insurance policy to buy is a term policy.

Strategy: Says Aangne, “Let’s say, you need a cover of Rs 1 crore. Instead of buying a single term plan for Rs 1crore, buy four term-policies of Rs 25 lakh each. As time goes by and you accumulate wealth, you could start discontinuing one policy at time.” So, when you meet the target to accumulate wealth of Rs 25 lakh (in this example), you could discontinue one policy. But if you are not comfortable with this strategy, ensure you have at least one term life insurance policy for each partner.

Medical Insurance: Kartik Jhaveri, Mumbai based CFP, says “Getting medical insurance is an absolute must. Not only for young Dinks, but even for older couples.” Get at least Rs 3- 5 lakh as medical cover over and above the medical insurance your employer offers. Next, look into buying a serious disease disability policy, and an accidental death-cum-disability insurance.

Investments: One of the best investments you can make as a Dink is a house. Says Neeraj Chauhan, Delhi-based CFP: “House is an appreciating asset. Buying a home should be a priority for Dinks. Ensure that the EMI does not exceed 30-35 percent of your total monthly income.” Getting a home loan on a joint basis will also give both partners tax breaks. Ideally, one should prepay the home loan as much as possible. But with Dinks this may not be the rule.

Chauhan says, “Since both partners’ incomes only increases with time, the EMI remains static. So, they could look into continuing with the EMI as per schedule, make the most of tax breaks and invest the surplus funds (which you don’t pay as prepayment) into other wealth creation investments.” But if you are someone who prefers prepaying the home loan, take your call. Other wealth creation investment avenues will really depend upon your risk profile as a family.

Aangne says, “Dinks have the best opportunity for wealth creation. Before the kids arrive, you should try and build a large enough corpus. The goal for Dinks should be to convert one’s active income to passive income, so, the dependency for income on jobs decreases.” Passive income means income from interest and dividends, or rental income from house leased out among other things.

What if you plan to have kids in the years to come? Chauhan says, “Cross the bridge once it comes. There is no need to start a separate kitty for kids’ expenses now. If you just stick to wealth creation as Dink, when the kid comes, you would have an ample amount gathered.”

Wealth creation: Depending on your risk profile you could look into a good mix of debt and equity instruments. It’s best to buy a deprecating asset like a car or an iPad with your own funds. This would ensure that your borrowings are minimum.

Retirement: Jhaveri says “Building a retirement fund is one of the most important needs for Dinks, even if they plan for kids in years to come or cannot have kids due to medical reasons.” The Employees’ Provident Fund, the Public Provident Fund, and the National Pension Scheme are good retirement tools and would be enough if you have been disciplined with wealth creation during the Dink phase of your life.

Dinks get double the opportunity to create wealth. On the other hand, you face twice the temptations to live a lavish life. A little restraint and disciplined approach can help you get both.

Disclaimer: The story aims to help readers with their money related decisions and choices. Each individual has his or her own financial situation and circumstance. We recommend that you consult a Certified Financial Planner before you buy a financial product or service.