Published Article Details

Its time people accepted the blame for not paying enough attention to their personal finances

Posted by: Uma Shashikant on Jul 03, 2017, 06.30 AM IST

If there is one persistent crib I have about people and their finances, it has to be the widespread lack of personal responsibility about financial decisions. There are any number of excuses one routinely hears when it comes to money matters: there is not enough to go around; jobs are not as easy as before; sellers lure buyers with their wares; banks focus on their profits and make big loans; advisers are tough to find; finance businesses are selling toxic products; regulators are not efficient.

The elephant in the room is the adult in diapers, unwilling to take charge of their personal finances. At every turn in our life we make choices. We make them, with our free will and mind. We have the right to stand up to oppression and take control. How our financial life pans out depends on these choices that we make. The lack of personal responsibility is very evident when we bemoan the consequences, blame everyone but ourselves, and believe that the resolution of our problems are beyond our control and action.

We then play victims, or find excuses, or revel in fantasising about a future where things will work out just fine. There is just isn't enough money to save, is a crib one hears too often. We just manage to meet our expenses, they say. Inflation is too high and cost of pretty much everything only keeps going up. The government is corrupt and does not care much for middle class families is the lament. But the culprit actually is the inadequacy of income. If a household is not able to meet its routine and mandatory expenses, only one of two is true: there isn't enough income or the expenses are too much.

The problem of inadequate income is serious and deserving of compassion when one looks at the low income wage earners. They are limited by their lack of education and skills to take on better paying jobs; their health and family circumstances constrain them from earning more; and they can end up with unexpectedly higher expenses having to live in urban settings to find a job in the first place. Except for such economically disadvantaged groups, there is no excuse for households that fail to save.

When the woman of the household chooses to not work, the family makes the conscious choice that her time and effort is better channelised in bringing up the children and caring for the family. But the flip side of that choice is that the household decides to use just 50% of its potential earning capability. This choice can be inhibiting in many ways, and not all households are prepared to accept the consequences. If there is no money left after paying the rent, the bills, the tuitions, and the groceries, the household is short on income. That is the problem to fix. Then there is the question of debt and dues.

It easy to blame the banks and the effortless availability of loans and credit cards. But the decision to buy the car, take the home loan, or swipe the credit card is purely that of the borrower. The lure of the marketplace or the dominance of the consumption culture are easy to blame. Malls have become the public places that people hang out in, and spending is the new social necessity. It is easy to live in denial of one's limited resources, when the credit card can be swiped without guilt.

The debt trap of the modern times is a glaring example of the lack of personal responsibility, and the loosening grip on personal finances. The limit to spending is imposed by income, either present or the future. To borrow is to use tomorrow's income today. Therefore, the decision to keep spending within the realm of personal affordability is a responsibility.

The choices that a household exercises with its investments, is another area where the lack of personal responsibility is very evident. Involved parents know the test schedules of their children; many indulge in reading physics and chemistry so they can help their children with studies; the prospectus of the college the child will go to is almost known by heart; and if the child is going to live in a new city, one can be sure that the parent has figured every detail of the neighborhood.

Sit the parent down and ask them to list the names, merely the names, of the financial products they own. The results can be alarming. Most people I have interacted with will tell me the name of the financial institution, as if they own equity shares in that entity. They are unable to tell if they have an insurance or a mutual fund product; they do not know if their investments include equity or not; they do not know if the company whose shares they own is in profit or loss; they cannot tell if dividends have been regular or not.

This inexplicable ignorance about financial products that they own is so widely prevalent that it is scary. It is almost as if these households are telling themselves that as long as the money is invested somewhere and doing something, we should be alright. The unwillingness to take charge of money and make decisions about how to deploy it, is too widely prevalent. Research on the personal finances of our members of Parliament and ministers shows that they have too small an exposure to the capital markets and its products. The savings bank balances of several well-earning professionals is too high to merit any justification.

Default choices for investing remain physical assets as data about household savings show year after year. Households are making sensible choices about what they eat, how they manage their health, and the lifestyles they pursue. But this responsibility has not percolated to their personal finances. When I see walkers and joggers who hit the trail with regularity and sip on water and vegetable juices with religious fervor, I am so tempted to ask them if they also care for their wealth in a similar manner.

Many people I speak to have abdicated this task to their bank RMs, advisers, chartered accountants or secretaries. In sudden spurts of enthusiasm and guilt, investment decisions get made. And then they tell me that they are disappointed that they did not get the timing of their investments right. They point out that they would have been enthusiastic investors if only they had not lost money on their last few investments, which did badly. Our wealth depends on the choices we make with our personal finances. Nothing else.

(The author is Chairperson, Centre for Investment Education and Learning) This article appeared in Economic Times dated Jul 03, 2017, 06.30 AM IST

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