Are you pruning your garden but not rebalancing your investments? Both money and plants need similar care to grow Is there a tendency to spend impulsively? Do you shop compulsively under stress? Are you tempted to overspend on clothes? You may not achieve a complete makeover with respect to your habits and behaviour, but you can choose to act on significant habits that impact your wealth
Uma Shashikant
Chairperson, Centre for Investment Education and Learning
Setting up food gardens for people is a task that I joyfully engage in. Over the years, I have learnt well about managing light, shade, water, wind and life in the garden. Each time, I’m also reminded how much I don’t know about coexistence with other life forms. That keeps me curious, observant and eager. However, there are limits to eagerly deploying these learnings in others’ gardens. As is the case with personal finance.
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Personal finance is a private affair. We can speak about broad principles. People like to hear about how and where to invest. Whether they actually do what is recommended remains private. They may fear the risks associated with the decision, or be suspicious about it working for them, or just procrastinate. Many investors act quickly on an investment tip, almost as if they won’t do it if they do not act immediately.
Other aspects of personal finance remain even more secretive and private. Incomes are seldom discussed or disclosed. Many disclosures commonly overstate or understate income. Even strategies for protecting income, in the case of retirees for example, are not shared and discussed. Between an extreme case of consuming only the interest from government schemes and fixed deposits, to day trading with the retirement corpus, people prefer to do what they like, and in private.
It’s the same with spending. Everyone has an opinion about how others must spend and allocate their money. Small indulgences of the not so well-to-do are criticised as reckless spending. With respect to the super rich, everyone has an opinion about how their money should be used for charity, public purposes and giveaways. Any spending, even if it is their own money, is criticised by others as wasteful and opulent. How willing are people to talk about their own spending habits? Everyone is aware of the broad principle of spending within means. This doesn’t mean that behavioural problems of emotional spending, borrowing to spend, overspending on credit cards, spending guilt and regret do not exist as serious behavioural problems in many households. It’s not possible even for an insider to question spending decisions or control them closely, even if household members have agreed to the overall general rules.
We have discussed in earlier columns about the low levels of accountability and disclosure that exist for personal finance decisions with respect to investments and their performance. While people speak about their investing successes and evaluate one another by social markers of prosperity and wealth, there is no objective evaluation of how well personal portfolios have actually performed. Poor documentation is a bane with respect to the investment portfolio of many households.
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My gardening friends will continue to sow and transplant as they wish, complaining from time to time about pests and poor harvests. But it is their garden and they can do what they wish. I can give them a plan, but can’t actively monitor its implementation. Their garden reflects how much they are willing to work and how much time and resources they allocate to having a beautiful space. Personal finance is no different. Except that the results of the work or neglect are not visible to the public eye.
In this context, asking a household to take charge of their personal finances is a case of good advice that runs the risk of being poorly, or partially, implemented. We may suffer from the inability to cede control to anyone else while being in poor control of our own finances. We may not like our limitations to be exposed, and suffer guilt and regret that accompanies actions we fail to take. How do we protect our wealth, and strategies we implement to manage it, from our own desire for privacy and secrecy?
First, find another person who will get to know your personal finances intimately, over a period of time. It could be your financial adviser, friend, sibling, or spouse. Make the decision that you will not travel this path alone making all decisions unilaterally. Speaking about your decisions and thoughts, and hearing your own voice can be very useful. Choose someone who will travel with you in your money life. Most of the issues discussed above can be addressed if there is another person who acts as a sounding board and can be trusted to keep things confidential.
Second, document, tabulate and formalise your finances. We live in times of electronic transactions. It is easier than ever before to electronically own our plots and properties, insurance and investments, deposits and bonds. Consolidate and enable a holistic view of your wealth so you can review it easily. It is now possible to analyse your bank statements, credit and debit cards to consolidate and track your spending under various heads. Make it a habit to review these periodically so you can begin to exercise control.
Third, identify behaviours that impact your personal finances the most. Is there a tendency to spend impulsively with friends? Do you shop compulsively under stress? Are you tempted to overspend on clothes and accessories? Do you front-end your expenses when salary arrives and face shortage mid-month? Do you impulsively buy stocks and fail to act when prices fall? You may not be able to achieve a complete makeover with respect to your habits and behaviour, but you can choose to act on significant habits that impact your wealth.
There is no alternative to being in charge. This means being present, engaged, in control, and deliberating about financial decisions so that your money works in alignment with what you want. Some of my gardening friends show me pictures from the Internet about the ideal garden they would like to have. Their poorly kept, unruly yard is usually in the background. ‘What ought to be’ is the dream; ‘what is’ is the reality. Without effort, these gaps will remain unbridged.
THE AUTHOR IS CHAIRPERSON, CENTRE FOR INVESTMENT EDUCATION AND LEARNING
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This story originally appeared on: India Times - Author:Faqs of Insurances
