Saturday, October 25, 2008

Financial Illiteracy – An Unaffordable Luxury

MONEY is the eternal elixir of life. It is power. It is energy. It is a passport to conveniences of life. It is the most powerful antidote to the crippling constraints imposed by poverty. Money is empowering and yes an obsession with money also brings in its wake misery – but that is besides the point here.

It is a fact that people spend the maximum time, first training themselves to earn and then earning money. The amount of effort put in getting good education and then getting a good paying job is almost Himalayan in dimension.

This is not the end of it. Once having entered in that never ending spiral, the person is completely pre-occupied in efforts to increase his/her income. This is normally done by working harder, working longer hours, opting for higher and specialized education and so on. The spiral continues and we are sucked deeper into it trying to earn more money.

The question that now arises is - How should one manage this money?

Isn’t is funny that so much effort is put in, time and resources invested to develop a high earning capacity but people are totally ignorant about how this money should be managed.

I call this “Financial Illiteracy”.

Life was simpler in the past. The choice was limited and one would place money in nationalized bank fixed deposits or small savings schemes managed by the Post Office or the popular Public Provident Fund. Of course, there was the mandatory insurance with Life Insurance Corporation (LIC) and units of UTI where you had almost assured dividends every year.

Stock markets were considered as “gambling dens” and avoided by a large section of the population.

Times have since changed. Many changes have taken place and India is slowly moving away from a tightly controlled and Government owned structure to a more market related structure.

This has meant

- Exposure to market fluctuations
- High fixed returns now becoming a thing of past
- Safety has become relative and capital is exposed to possibility of loss
- Element of risk is now an important factor to be taken into consideration
- Entry of private players in the financial markets
- There are now multiple choices and of varying complexity
- Smart marketing and product positioning has come to stay
- “Financial Advisors” is a new breed that will be part of the scene henceforth.
- Introduction of dematerialization has added a new concept of ownership.

It has now become imperative to understand how to navigate through this maze. It has become increasingly important that basic concepts are understood such that one is not taken for a ride. It has also become necessary to understand financial and other types of risk and accept it as a part of our life.

It shall be my endeavour to expand on this theme and attempt to de-mystify some of the so-called complexities.


Krishnan said...

Excellent post Mavin. I am very much looking forward for your future posts on how to manage money. Like you mentioned, we are perplexed where to invest - mutual funds or fixed deposits ? With the current financial tsunami, I guess conservatism rules now.

Happy Deepavali to you and your family.

Vinod_Sharma said...

Very timely post Mavin. The stock market nose dive has seen the hard earning money of many people disappear before they could react. The present crises has, in fact made the biggest and the best of the lot look like foolish financial illiterates.

The good old days are looking much better these days. Apart from simple and safe financial choices, you had to simply choose between a Bajaj and Lambretta scooter, a Bullet and Jawa bike, and Ambassador and a Fiat, and so on.

Now that so many choices are available all round, it is even more important that your money is not just safe but grows faster than you are growing old.

Looking forward to some illuminating insights from you Mavin

manju said...

Certainly it is difficult for the average person to navigate through this money maze. The options have changed so radically in the past few years.
Looking forward to further posts by you on this theme.:)

prerna said...

I loved the post Mavin.You have simplified the intricacies of money maze for the ordinary person.

Gopinath said...

Looking forward to demystifying the complexities of the hard-earned money. Always wished you write about investment options and your opinion in the context of the financial turmoil we are witnessing today.

Indian Home Maker said...

A very useful post, look forward to reading more. Financial illiteracy is indeed a luxury!

Mavin said...

Hi Krish, Vinod, Manju, Prerna, Gopi and IHM,

Thanks for your comments.

Markets have dropped at a speed that has surprised almost every one.

This will have wide ranging impact in our economy.

However, there is a silver lining to this and Indians can now look forward to increasing their ownership of Indian equities.

This is a very rough patch but I am confident that we shall come out of this much stronger.

Anrosh said...

they better give the fundamentals and live scenarios in high school. rather than just asking us to do plain math.

Mavin said...

Hi Anrosh,

You are right there.

I now see my daughter having the basics of mutual funds in her college course.

It may be useful to try and make it a more in-depth study. It will surely help.

L. Venkata Subramaniam said...

these days banks assign financial advisors to their high networth clients. Do you think it is a good idea to depend on them?

You are right there are too many options today and keeping track of them all is very difficult.

Amit said...

Any comments about the mining baron giving 42 crores to Tirupathi temple?

I read about it & was totally appalled!