Sunday, October 26, 2014

You learnt to make money-Learn enough to keep it

(This appeared in today's Deccan Chronicle)
Most people who earn and spend money do not take a high interest in what happens to the money they save. Often, it is a cursory discussion with someone before they write a cheque for some scheme or more often than not, investments are an impulse decision. They do not bother to take the effort to understand what they are doing with the money that they save or ought to save.
If you think that by simply dealing with a financial advisor you have done the best for your money, you need to get your head examined. He is out to make a living. And it does not necessarily come by doing the best for you. Similarly if you think that the bankers with who you and your grandfather dealt with have your interest at heart, you seriously need to get your head examined. To a bank, you are a customer, with a revenue target. Period.
If you go to a restaurant, do you think they will tell you which food has the lowest calories, lowest fat content? Will the seller of French fries tell you that it could be bad for you? So is the case with a banker. The person who you talk to, does not own the bank. His salary is dependent on the revenue he generates for the bank. And unfortunately, it is very unlikely that the product that is best for you will give the banker the highest revenue. Most likely, the converse would be true.
I am sure that to earn your money, you must have studied a lot and put in considerable efforts. Some professions give more and some less. But every rupee earned is a result of some effort that you have put in for a long time. If you spend so much time and effort in earning it, you owe it to yourself to understand how saving and investment works. Often I hear people say, ‘leave it to the experts’, “I do not have a head for it” etc.  Sure, investment is not a very easy topic but surely what you know on your trade or profession is not a cakewalk either. You could manage to become proficient in that.
Expertise in money matters is claimed by many but few really ever know everything. To compare, I can say that in medicine you have a lot of specialists, a few generalists but no one is complete.
On the way to getting yourself some knowledge in matters of money, there are some (like we can only save if we spend less than what we earn) which are obvious and some ( will a deep discount bond be better than a regular coupon bond) will flummox even most of the financial advisors. So do not lose heart. Since it is your money, it makes sense for you to spend time and effort learning about how money works.<>
You could actually break down your learning in to a few convenient heads. For instance :
Emergency Funds
Managing cash
Borrowing on credit cards
Housing Loans
Mutual funds
Fixed deposits, debentures etc
Insurance (life and health)
The power of compounding
Estate planning
Drawing up a will
Timing and markets
Do I need the money /
What is my neurotic state (Nervous, Anxious, Concerned, Active worrying or Relaxed?)
Once you decide to take the plunge, there is enough material available on the internet today. Why you should become financially literate is more to do with being at peace with your money rather than trying and squeezing the last bit out of an investment strategy. Most of us spend our lives with modest means and may not need experts to guide us. However, a fully DIY may elude even the savviest investor.
Once you start studying, a sure sign of your understanding a concept is when you can explain it to someone else lucidly.
Ideally, we should have at least one (preferably two or three) financial guides or teachers who we trust and make sure that we pay for advice. If we are willing to pay for advice, there is no reason why the advisor will bother about selling a product that gives him the best earnings. If possible, it is best to use one advisor to learn from and an intermediary merely for the transaction (buying / selling etc). Today, most transactions can be done online, but the irony is that offline is cheaper than online! Once you are paying for advice, then do not hesitate to squeeze pennies on the execution side. After all, it is our money.
Of course, you have a choice to be financially ignorant. Being so makes you very likeable to bankers, financial advisors and brokers. They are working for their money, using your money.


kumaoni said...

Thank you for this very informative and insightful article.
For people like me who are 'lazy' on the financial front and end up investing randomly at the so called 'advice' of bankers and their marketing agents this is an eye opener.
You have very correctly pointed out the 'conflict of interests' when a financial adviser 'suggests' an investment option and your article at-least makes us aware of this.

kumaoni said...

Also regarding your statement <'Once you decide to take the plunge, there is enough material available on the internet today.>

The problem is there is too much information in internet, almost like a jungle of information, confusing us further. I am sure a lot of this information is also posted by the same financial advisers with whom we have the conflict of interest

A structured way of learning is what is really required I feel.