When it comes to psychology and financial behaviour, India does not
have too much of research papers. Hence we are forced to turn to the US
or UK for such research work.
US studies have summarised financial problems and have found the following to be the most common of financial problems:
~ Not planning: The
single biggest problem for most people is that they just do not plan
their finances. It just keeps coming and going. Even if they are not
happy about the results of what they have done so far, they do not
change the way things are done.
~ Overspending:
Many people with not very high incomes have very high ambitions. This
is likely to get them to grief. Most of this problem is because the
salesmen in most shops do not tell you the price of a product, they
only tell you the EMI -- so anything from a plasma TV to a luxury home
on the outskirts of the city are made to look cheap! After all at Rs
2,899 a month does a plasma TV not look cheap?
~ Not talking finance at home:
Children are kept away from the finance topics at the dining table.
Finance is perhaps the second most taboo topic at home! So many
children grow up without knowing how much of sacrifice their parents
have gone through to educate them.
~ Parents spending on education and marriage:
There are just too many kids out there who believe that they need to
worry about savings, investment and life insurance only at the age of
32 plus. This means your father, father in-law or a loan has funded your education and marriage. Kids should take on
financial responsibility at a much younger age than what is happening
currently.
~ Marriage between financially incompatible people: Most
marriages under stress are actually under financial stress. Either the
husband or the wife is from a rich background and the other partner
cannot understand or cope with the spending pattern. It is necessary to
match people financially before marriage.
~ Delaying saving for retirement:
"I am only 27 years old why should I think of retirement" seems to be a
very valid refrain for many 32 year olds! Every year that you delay in
investing the greater the amount that you will have to save later in
your life. Till the age of
32 it might be feasible for you to catch up, but after some time the
amount that you need to save for retirement just flies away.
~ Not prepared for medical emergencies:
Normally big emergencies -- financially speaking -- are medical
emergencies. Being unprepared for them -- by not having an emergency
fund is quite common. Emergency fund has now come to mean the credit
card -- which is good news for the bank, not for the borrower.
~ Lack of asset allocation:
Risk is not a new concept. However, it is a difficult concept to
understand. For example when the Sensex was 3k there was much less risk
in the equity markets than there is today. However at 3k index people
were afraid of the market. Now everybody and his aunt wants to be in
the equity market -- and there are enough advisors who keep saying,
"Equity returns are superior to debt returns." This is true with a
rider -- in the long run. It is convenient for the relationship manager
to forget the rider. So there could be a much larger allocation to
equity at higher prices -- to make for the time missed out earlier.
~ Falling prey to financial pitches:
The quality of pitches has improved! Aggressive young kids are
recruited by brokerage houses, banks, mutual funds, life insurance
companies, etc. and all these kids are selling mutual funds, life
insurance, portfolio management schemes, structured products, et al.
Selling to their kith and kin helps these kids keep their jobs, and
there is happiness all around! These kids, themselves prey to financial
pitches, have now made it an art when they are selling to their own
natural 'circle of friends' and relatives.
~ Buying financial products from 'obligated persons':
This is perhaps one of the worst things you can do in your financial
life. A friend, relative, neighbor, colleague who has been doing
something else suddenly becomes a financial guru because they have
become an agent! They, in great enthusiasm, sell you a financial
product and promptly in 2 years time give up this 'business' because it
is too difficult. You are saddled with a dud product for life! What a
pity. Charity begins at home, not financial planning.
~ Financial illiteracy: Most
people do not wish to know or learn about financial products. They
simply ask, "Where do I have to sign" -- so buying a mutual fund is
easier than buying life insurance! Selecting products based on the ease
and simplicity of buying is a shocking but true real life experience in
the financial behaviour of the rational human being!
~ Ignoring small numbers for too long:
What difference will it make if I save Rs 1,000 a month? Well over a
long period it could make you a millionaire! So start early and invest
wisely. It will make you rich. That is the power of compounding.
~ Urgent vs important:
Most expenses, which look urgent, are perhaps not so important -- the
shirt or shoe at a sale. That luxury item which was being offered at 30
per cent discount is such an example. These small leakages are all
reducing the amount of money you will have for the bigger things like
education or retirement.
~ Focusing too much on money: Money is no longer a commodity to buy things. It is a scorecard of one's life. That
will cause stress, and yoga might help. However if you will seek a
branded yoga teacher -- so that your friends think you have arrived,
yoga it self could cause financial stress! (Sounds wierd but very
true.)
