WHAT WE SHOULD DO AND WHAT WE ACTUALLY DO -THE BEHAVIOR GAP

It was easy when over last forty odd years I experimented and practiced my personal financial matters like financial planning and equity investments. I carried out my own reviews and did the course corrections and thus achieved my Financial Freedom. After retirement and migrating to US I decided to teach and benefit suitable students who enroll on my web site. The web site was specially designed and launched for this purpose and unique proposition of the efforts was that students will get to decide what they want to pay as “Guru Dakshna” and surplus was to be given in charity as I believe that anything offered free is not valued.

Response was good but experiences forced me back to some research and reading trying to understand why these people after deciding to enroll and filling the KYC and in some cases even after taking an introductory audio video session procrastinated. I was learning and also trying to understand this behavior which was puzzling me.

I did some research and revision reading to help me in understanding this behavior and find a solution to it.

For recommending to read to learn right basics in matters of personal finance I thought of  my old favorite book “Richest man in Babylon” I got hold of the book and read it again just to confirm that it was the ideal one to read and still relevant.

Behavioral aspects still continued to puzzle me and what were these particular aspects which puzzled me :

1. Some not understanding their need for insurance and paying for endowment policies at the cost of not covering risk and opportunity to save.

2. Paying for high interest rates for credit card dues, as much as 39% besides some other charges and putting money in mutual funds or SIPs .

3.  Buying shares of companies businesses of which they don’t understand and just because some one recommended it or they read it some where and not knowing if it fits in their life goals and purpose.

4. Keeping large savings in bank Fixed Deposits at low interest rates but not learning to invest in equity.

5. Not keeping the spouse and grown up children informed about family finances

6. Confused about buying a house or to continue in rented one.

7. Not thinking of retirement or death or losing the job or some other emergency in life.

8. Thinking that even a small saving will affect their quality of life and need for disciplined regular saving and in some cases spending beyond their incomes.

9. Ignorance of Tax considerations and benefits of compounding.

10. Reluctance and inability to talk about money matters and not knowing with whom to talk about it.

11. Confusion due to thinking that money matters are too complex. This is due to media over dose of marketing of insurance and equity investments by  mutual funds, ETFs, brokers, advisers and planners and their voluminous unrealistic complex financial plans.

12. Avoiding investing in equity because it was considered by them as too risky and akin to gambling but not thinking of learning ways to benefit from it and reducing the risk.

Broadly one reason was neither parents nor education had given them the practical knowledge. Second was taking generic advice from random people who don’t know their life position and financial position well. Correct advice, education  or support was not available or was too costly and most advisers had vested interests which clashed with what was best in the client’s interest. too.

Third  aspect was behavioral for which I was looking to find a book to recommend as essential reading , the contents of which will be well aligned  with my thinking and experience of over 40 years experimenting with financial planning and equity investments.

My efforts bore fruit when I found a book “The Behavioral Gap” by Carl Richards. Reading of this book will help people to :

1. Avoid tendency to buy high and sale low.

2. Avoid pitfalls of generic financial advice.

3. Invest their time and energy the real assets wisely.

4. Quit spending time and money on things that don’t matter.

5. Identify real financial goals.

6. How to meaningfully talk about money specially to the children.

7. Simple but not easy financial planning for life.

8. How to stop losing money saved from hard work.

9. Its never too late to make a fresh financial start and age is not a bar, even after

 retirement many will live for long and face hardships when funds dry up.

I plan to cover all of the above and some other aspects in my future blogs.

Here is a quote from the author: CARL RICHARDS

“We have all made mistakes, but now its time to give yourself permission to review those mistakes, identify your personal behavior gaps , and make a plan to avoid them in future.The goal isn’t to make a “perfect” decision about money every time , but to do the best we can and move forward.  Most of the time, that’s enough”

We restart with our earlier planned series now after this brief but essential digression from the next blog.

REVIEW OF PAST BLOGS

I have been thinking and reviewing my efforts with the  web site and blog last few days and sharing the thoughts in brief in this week’s blog as it takes two to tango. Without the right type and needy students my teaching efforts and time allocation for this purpose is meaningless. This is particularly important before I start with my next phase of teaching , benefiting and being happy with equity investments.

Initial response of about 35 in first few months when I had planned to take on 50 in year one is very encouraging . What puzzles me is the later part. Of these only half have taken it forward to have the first introductory audio video session. And only about 10 of these have followed up and pursued it progressing with actions required to start learning investments. I wonder why this procrastination and reasons for it as they are unfolding .

While my focus and purpose as planned was to help those desiring to achieve financial freedom I had not visualized getting some cases who were in financial distress of sorts. helping them to recover from this negative state was very satisfying but was a different experience. It was very educative in learning and understanding how they got into this mess and what can be done to prevent and caution others to avoid getting into such mess. I will be covering these aspects in my future blogs. It has a lot to do with our behavior which is not logical many a times in taking decisions on personal financial matters and hence a recent book which I recommend all to read is “The Behavior Gap “another book about  which I plan to discuss in my next blog.

What are the prerequisites, as per my thinking, before you start learning investing in equity. Actually experiencing with your own investments of your savings  will lead you in long term  to your cherished goals of becoming rich, retiring early,achieving Financial Freedom or just growing your savings at rates better than inflation.I have tried to cover these prerequisites in my first ten blogs and delineating them here:

l Ensuring financial security of your family by having correct term insurance and getting rid of  endowment policies.

l Starting focused regular savings and making it a disciplined habit

l Making a monthly budget and keeping record of expenses to review and do course correction to arrive at an accurate budget

l Realizing that savings don’t affect even your short term happiness and in fact help achieve long term sustainable continued happiness.

l Making financial planning a joint family exercise by involving your spouse and children depending if above 10 years of age.

l Thinking long term to include retirement from the time you start earning.

l Understanding how to use banking

l Separating personal and business finance if it applies to you  

l Developing your goals and correct mind set and attitude which will help you achieve them while leading a happy life is something I have not touched upon so far but more about it in my next blog. Human Behavioral weaknesses and how these can be controlled .

I am looking forward to your comments and feedback to realign my efforts if required .

For those who can not get hold of the Babylon book , a lot of literature and reviews etc are available if you Google it and can serve some purpose but its not the same as reading the book.  

Here is a some food for thought as an appendix to my blog on banking.I do not  subscribe entirely to the contents beyond finding it interesting and don’t know the author too.

APPENDIX TO BANKING BLOG

“A bank is a broker between the middle class and the rich. The only place where the two meet is in a bank. The middle class brings the money, through saving, and the rich takes it, through borrowing. A middle class person saves the money because they have more money than their thinking capacity. So they keep the money in the bank so they can go and think what to do with the money they saved.”

*On the other side, the rich people come to pick that money, through borrowing, because they have more ideas than the money they have. On a practical side, please show me one billionaire who got rich through saving and I will show you a million Indians who have money saved in the banks and are still renting the houses that the Millionaires and billionaires build through the middle class people savings which the rich borrowed from a bank.*

BACK TO BASICS OF PERSONAL MONEY MANAGEMENT AND WHY?

I am surprised at what I see in a few cases that I have come across and hence this digression from the logical chain of blogs,where I was to look at other options to deploy savings besides the banks. That will now continue after this blog or may be after a few blogs. Matters important though not urgent must be attended to and this seems very important making it very urgent.

My focus and purpose of my web site and blog is  to teach and help those suitable students to help themselves and become rich, remain rich and be happy in life. At a later stage I expect them to help others and thus in my mission to spread financial education and happiness as well as help achieve financial freedom to those seeking help. Charity begins at home and learning is never complete without teaching.

Even God helps those who help themselves but these few cases made me think that my whole efforts may get diverted to treating the disease of financial distress self inflicted and of their own volition and lose the intended positive focus and purpose.

Height of professionalism is to eliminate your need to exist. If doctors  work to eliminate disease and if people remain  healthy and disease free thus building society to a Utopian state where doctors are not required. Similarly I will like to see all people sufficiently rich and happy so that there is no need for my teachings or help, Utopia again.

Dealing with a few cases of financial distress leading to frustration caused by high interest personal and credit card loans , inadequate and incorrect insurance . All this after getting good education, coming from good families and getting jobs and having responsibility of family with children of their own. This is what got me thinking and my analysis came to two inferences:

1. Like Singapore past Prime Minister says about India that it does/did  not develop because its a democracy without discipline , personal financial management and pursuit of becoming rich, helping others and retiring early too needs much discipline as well as knowledge of basics.

2. Basic subject knowledge and being faithful to it is lacking and I was reminded of a book which I read many years back and decided to read it again and local library got it for me.

Every problem has a solution and teachings from this book helped me reach my financial goals and achieve Financial Freedom and so here is an absolutely compulsory reading for all those who follow or want to learn from me . This book was written in 1920s , its timeless and as relevant today. Its small and in a story form , despite selling millions of copies and being available is still not read and practised by many. Old style English does not prevent getting the message across.Its written by an American but not many here seem to follow his teachings, that is sad but true.

So here is the book which you must get, read and practice its teachings in your life

The Richest Man in Babylon.

By

George S Clason

That its teachings and mine have a lot of goal congruence and a lot in common is not a coincidence but that the author like me was also a veteran army man surely is.

I appeal to all to read, learn and benefit from this book.

BANKING

Before we were introduced to banks it was a barter system which changed to currency as a measure and then to private money lending or depositing to the evolution of banks .

Do banks have relevance in our lives today? How to make the best use of them till we come to some thing better with new technology, may be digital.

In India we have the nationalized banks, private banks , cooperative banks and also some NBFCs. Then we have the regulator in RBI.

For a common man knowing and using these banks is what I am discussing here.

1. Use banking and be included in the financial system of the nation so do have an account and do all or most transactions using this account.

2. Nationalized banks are better for normal personal banking purposes, as risk of banks getting into trouble and putting your money in the bank at greater risk is more in cooperative banks,

3. Nationalized banks don’t get after you with dubious means for recovery of loans which is likely in case of cooperative banks and NBFCs.

4. Being nationalized deposits in nationalized banks are safer than otherwise and also insured and assured till 1 Lakh.

5. Fixed deposits earn a rate of interest related to inflation and thus are not a good investment of your savings, but can be used to keep your Emergency fund as getting loans against these FDs is very easy and quick in case of any emergency or you can even keep the facility of loan against FD ready to use when required.

6. I will recommend using separate banks for business and personal/ family finance too.

7. Fixed deposits be they in banks or companies are not the ideal place to park your savings, even though company fixed deposits give higher rate of interest they also have higher risk of losing your savings capital too. Some amounts of bank and company FDs may suit some particular people for reasons of age,tax considerations etc.

8. Last but not the least don’t forget to help all poor and uneducated people like maids, servants etc you know to open their bank accounts and take insurance which has been made available by this Government of 4 Lakhs at just rupee a day premium. Please also educate them to ensure that they keep adequate balance in their accounts for banks to deduct yearly premiums.Poor people mostly get into trouble and financial debt crisis because of not having insurance when their bread earner falls sick or dies

9. As regards the use of banks for opening your investment accounts for investments in mutual funds, ETF and equity I will deal with it in the future blogs when discussing these investments.

A very simplified crude example of what happens when you put Rs. 100 in FD at 6% with the bank after one year when inflation is 8%

l Your money becomes 106 and its purchasing power is reduced as what you could buy in 100 is costing 108 now.

l Bank lends it at 11% so makes a profit of at least 2-3 percent after the costs

l Person who borrows it utilizes it to make at least 15 % and repays the loan and makes 2-3 % and also gets experience and knowledge of how to make money at 15% so will continue to earn at that rate even after repaying loan and generating his own capital and becomes rich

That is why it serves only for rich to become richer and those keeping money in the Banks poorer in real terms. Decide what you want to be a depositor, lender ( not directly but investing in equity) or a beneficiary by taking loan and becoming self employed.

WHAT TO DO WITH THE SAVINGS

Now I assume that you have taken the term insurance,made your monthly budgets well, keeping the dos and don'ts in mind and started focusing on savings and are happy doing all this and now have some savings. If not please refer to my earlier blogs and get down to it. Earlier the better. Assuming you have some savings , the next logical question which comes to mind is what to do with the savings and with what purpose. The purpose is very important because if these savings don’t earn at a rate better than the inflation then your net worth in real terms is getting eroded and it will not help towards becoming wealthy, achieving financial freedom or retiring early. We all know that there is a time value to money and thus to our savings. You cannot purchase tomorrow or at a later time what you can purchase today with a similar amount of money. So if you have to buy it later your money must grow to that level when you want to buy it. So that gives us the purpose “ Savings must grow at a rate faster and better than inflation” Without getting into how bank rate are fixed etc it is enough to know that banks will have to give you interest at rates lower than inflation if they have to further lend , take risk and make some profits. Does that mean we don’t consider the bank deposits at all--- No, banks fulfill a need and serve a purpose in the overall plan , we shall come to it a little later. Now let us consider the avenues available to deploy these savings are: 1. Bank fixed deposits – Nationalized, Private sector and Cooperative banks 2. Company fixed deposits 3. Mutual funds and ETFs 4. Public Provident Fund 5. Equity investments 6. Buying gold or silver 7. Taking Insurance as investment 8. Buying a house/real estate/plot/agricultural land 9. Lending it further to a person or business I plan to discuss all these avenues to deploy your savings in details in my future blogs so watch out for them and refer them to your near and dear ones who may find them useful. Theory and knowledge is available on the net but for implementation you may need support from me , visit www.moneymonk.me.