Sunday, November 2, 2008

The First Step towards Financial Literacy

My attempt is not to study “managing one’s finances” in isolation as a very narrow topic. I believe our financial health card, so to say is a by product of how we live our life itself. Once we understand the basics, the build-up is very logical and simple – completely de-mystified.

Our times are changing fast and bringing in its wake unheard of opportunities. This has meant widening employment and entrepreneurial opportunities and higher incomes. Often, high incomes come at a young age when responsibilities are not many.

As I had mentioned in an earlier post that having money is empowering, it presumes that flow of income is constant and abundant enough to leave a surplus after needs are taken care of. Further, our attitudes, our background and our upbringing plays a major role in shaping our approach to handling money.

Whilst every body would like to be a “crorepati” (a “lakhpati” has no value today) today or at some date in future, it is possible that many may not reach their target, while a few may achieve it many times over. It is also entirely possible that with inflation, a sum of Rs. one crore then may be very ordinary and bar has moved higher.

Let me try and put things in a simpler perspective.

This whole game has three sides to it

- Incomes earned or capacity to earn,

- Expenses – both living and discretionary,

- Resultant Surpluses and its subsequent investment and management.

Under each of these heads lie all the complex variables that interplay with each other and make each person’s financial situation as unique as it can be. This is a very important basic principle that we must keep in mind but do not.

Each one of us is unique and this impacts our financial condition. It follows logically that each requirement is unique and therefore has a separate solution. What works for one, need not (Please note my emphasis) work for the other. We will see at a later stage, especially, in the context of stock market investments, how this has played havoc with people.

I would like to examine all variables that fall under these three heads mentioned above and the impact it has on one’s financial health card. This will help us understand the basics better and, hopefully, stop being awed by a lot of jargon and smart marketing.


Vinod_Sharma said...

Mavin, this is a very informative post and shows promise of what is coming. The 'three sides model' of personal financial planning powerfully drives home the essence of the endless and individually unique possibilities that each one of us should choose early on in life to achieve stable and lasting financial freedom.

Looking forward to further expositions on the subject that should interest all.

manju said...

It is true that young people nowadays may earn a substantial salary at a very young age. And when it comes to investing, they tend to do as their friends do.

I agree with you that each person's requirements are different, so their solutions too, should be different.

I am looking forward to further posts by you on this subject.

Avani said...

Besides these three sides of the whole game, I would like to point out the fourth aspect of the game it is the side which essentially poses maximum risk to the financial health. The probability of the game getting ruined is higher when it is played in a vice-versa way. i.e Instead of investing the surpluses, a person makes investments (especially in stock markets) in the absence of surpluses with a view of using the returns from these invesments to provide for creating surplus and subsequently higher expenses.

Indian Home Maker said...

A very useful series of posts. Look forward to reading more of these.

Mavin said...

Thanks - Vinod, Manju, IHM and Avani.

It is fascinating subject. There is an offshoot of this known as Behavioural Finance.

The whole gamut of human emotions that are seen at play while dealing with money is amazing.

Having been in Capital Markets for over 16 years, I have sort of become an insider but I am still detached enough to be an outsider.

The posts are as yet unplanned. Hope they unfold in a manner to benefit atleast some.

Krishnan said...

Mavin, at last an article on finance shorn of jargon and jaw breaking acronyms and mumbo jumbo. I am keenly looking forward to future posts in this regard.

Mavin said...

Thanks Krish...

Hope the thought cloud in my mind gives me enough clarity to roll this out.

Indian Home Maker said...

You have been tagged :)

Chirag said...

Will definiteley return to read the series, Pl. don't use jargon's :).

Today's time financial freedom is a must for everyone, "Paisa nahi to kuch nahi"

Mavin said...

Hi Chirag,

Welcome to "My Voice"

I will try and keep it as simple as possible and avoid jargon to the extent possible.