Financial Literacy Begins at Home

A financial professional is rarely able to conceal his line of work. They talk about money every chance they get. In this regard, I am guilty, as charged. Having spent more than two decades in the financial services industry, primarily as a life insurance professional, I have become somewhat of a financial evangelist. I discuss money management with everyone, every chance I get. Even the last person who had the misfortune of sitting next to me on a plane, will attest to the fact that I pried a bit too much into their income and investments.

My tryst with money management started quite early. I think you will agree that a person with middle class roots rarely forfeits the habit of savings. Most of us have grown up watching our mothers saving up money in ‘gulakhs’ and kitchen utensils for a rainy day. For me as well, it was my mother who gave me the most  important lesson in financial management–save first, spend second. This rule set me apart from my peers, even as a young person, freshly entering the workforce. While I earned a monthly salary of about Rs.16,000, my mother always reminded me to save at least Rs. 5,000 from that income. This exercise slowly turned into a habit and has now become the foundation of how I take decisions related to money. 

The money management rules that I have learnt and follow, have allowed me to build a robust quality of life. We often lose sight of the fact that we want to manage our money for the ultimate goal of deriving happiness and contentment. Making money, in itself, is never the actual goal for most people. So, when you believe yourself to be in possession of the most critical rules of financial management,you can’t help but pass them on to the people you meet every day. So, here I am yet again, to give you a personal account of some money management lessons that I have learnt over the past three decades: 

1. Education Starts at Home:

Most families shy away from openly discussing money. But,most of us learn our money management habits at home. Think back and try to remind yourself of a time when you learnt financial management in your school or college. You didn’t! You looked at how your father or mother budgeted their money and picked it from there. 

So, I always ensure that we make financial decisions as a family. My family, including my young kids, know how much income is generated in our household, how that income is invested and spent on critical expenses, what purpose each investment serves and how much liquid money is available at our disposal for discretionary spends. 

2. Life Stage=Risk Appetite: 

My investment habits have undergone a huge change as I have progressed through various life stages. My asset allocation has gone from ‘high risk, high return’ investments in my early working years, to largely ‘low risk, steady returns’ as a parent of two kids now.

While opting for ‘high risk, high return’ investments might be tempting at any life stage, it is always important to put a structure to how you are investing money. For instance, I look at my investment with regard to the goal they will fulfil. A critical goal like marriage, childbirth or child’s education has to be provided for at certain intervals. If these goals are derailed, they can cause a significant impact on your family’s aspirations. So, such goals can be fulfilled via assets that offer low risk, and steady returns. On the other hand, a discretionary goal like a second house or a second car offers a wider leeway in terms of risk appetite.  

3. Diversification:

A close family friend, who was a businessman dealing in textiles, went through a very big financial upset in the 90’s. As an entrepreneur, you tend to divert your investments back to your own business because you see that as your most important and ever-appreciating asset. But I realised that keeping all your money parked in one asset can be like walking a tightrope because in good times, it is your cash cow and in bad times, it can threaten your future aspirations.  

This episode taught me the importance of diversification, a cardinal rule I follow to this day. I ensure that a certain portion of my income stays liquid to tide through our monthly expenses, both critical and discretionary, and a part of it goes to a contingency pool to provide for any emergency expenses. Rest of my money is parked in multiple goal-oriented assets and is earning more than the true inflation rate. This strategy has worked well for me by ensuring that I have enough liquidity when needed, and my longer-term investments can continue uninterrupted. 

4. Goal-Orientation: 

Earning money is always a prerequisite for fulfilling a particular goal. Earlier, I made several missteps on this count. I consumed a lot of financial products, but most of them always led to dissatisfaction and I would discard them from my portfolio soon. Upon close examination, I discovered the reason behind my disillusionment, my financial purchases were not linked to my goals. 

The first step towards goal orientation began with educating myself on how each product functioned and how it can be employed towards my life aspirations. Since 2002, I have more or less stayed persistent with the financial products that I have bought, including life insurance policies. 

To this day, I continue to relook at my portfolio at regular intervals and educate myself on newer financial trends to keep my portfolio in line with market realities. While an independent advisor can always steer you in the right direction, nobody knows you better than yourself. So, a bit of self-education goes a long way in accurate financial management. 

5. Power of Compounding:  

I started my professional life as an entrepreneur. Back then, I helped co-found a company called Inmatch Internet Ventures which was funded by Rakesh Jhunjhunwala’s Rare Enterprises. One of the most important lessons I learnt during this period, partly from the market guru himself, is that it is about betting on the fundamentals and not the intra-day trading or transactional betting. Staying invested for the longer term gives you the benefit of power of compounding and I have been a true propagator of this rule since then. 

While all these rules may seem overwhelming at first, here’s how you can start. Spend one day each week to identify personal and family goals, further segregating them into essential and discretionary ones. Once you are crystal clear on the destination, the journey to get there will become much simpler. 

The author is Chief Distribution Officer, Edelweiss Tokio Life Insurance

 DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.