Saturday, January 24, 2009

A Closer Look at Some Factors Influencing Our Financial Position

The previous post examined how Income was a result of choices made and how a person shaped up in life. It is amazing to see how our family background and our upbringing impact our attitudes and approach in later life and how this eventually links up with capacity to earn.

Let me share some of my observations here. These are not judgments or a discussion on what is right? Or what is wrong? This is an attempt to highlight some of the influencing factors.

Let me discuss one case (names, places and time not considered relevant for our discussion) in our neighbourhood that I had a ring side view for over two decades and made me ponder on what shapes financial position in later life.

This is an instance of two families with similar financial and educational background, working in very similar jobs with single earning members and staying in typical one bedroom (1BHK) apartments. A typical middle class family that one sees all over.

Children of both families attend the same school with reasonable above average intelligence. Nothing out of the ordinary here and logically the future should largely be parallel.

What happens is something like this….The child from one family goes to qualify as a brilliant doctor with top rankings and the younger child goes to be a brilliant industrial designer. Opportunities abound and monetary position is on a distinctly higher level.

In the second family, one child completes graduation and gets a job in a bank. whilst the younger becomes an engineer and gets a job in a medium sized engineering firm. Incomes are on a slightly lower level.

Let me clarify here – I am not getting into a discussion on luck, destiny or any such matter. This close observation of over two decades helped me trace many differences between these two families and I believe they have played a major role in shaping up attitudes of these children, their approach to problems, their enthusiasm, passion for anything in life, their tenacity …..infact their intellectual and emotional quotient was different.

Some of the factors have been - emphasis on education, family discipline, bonding, reading habits, outlook and attitude of parents, responses to difficult times, social networking, manners and social etiquette….etc.

I was amazed at why all these play a role in shaping our financial position, amongst others, in later life. I almost dismissed this as a one-of co-relation but then as I got deeper in the financial markets, I got an opportunity to interact with innumerable people and found that my earlier observations were not random. This kept coming back quite regularly till I was convinced that my observation were indeed not a flight of fancy.

This does not suggest in any way that we are powerless to better our lot. In fact, hard work, smart work, enthusiasm and passion are a must that need be inculcated in every child and it is our birth right to aspire for betterment in our lives and we have seen numerous instances when this has happened. Some of us will probably vouch that this has been their personal experience.

I urge readers of this post not to start an analysis of their own lives and imagine shortcomings where none existed in the first place. There is nothing right or wrong about this just as there is no agreement on How much money is enough?

In my next post, I will look at Expenses – the second aspect of the financial literacy puzzle.

Monday, January 19, 2009

Moving Ahead – Income, The First Step in our Journey

In my last post on Financial Literacy, I had talked about the whole game having three sides to it.

Let us, in this post, examine the first i.e., the income side.

All our efforts in life are to earn adequate income and more. Many of us opt for a job and work out a career plan thereon. Others with a family business would probably take this opportunity that already exists. There are many others who have been bitten by entrepreneurial bug and want to strike out on their own – the first generation entrepreneur.

It is also possible that later in life some would cross over from the comforts of a job to the wild thrills of striking out on their own and at the same time many will want to switch to a job after a few years of doing their own thing.

Whatever the choice made, it is the result of various influences in a person’s life, the past and current circumstances existing in that person’s life, upbringing, family background and such other intangibles.

Depending on the choice made and, how the person shapes up later in life will determine the level and flow of income. It logically follows that this will vary from person to person and keeps changing at different points of time in a person’s life.

At this stage it will be useful to examine “Income” in the light of the following factors:

  • Age of the income earner,
  • Quantum of total income in a period – say a year,
  • Quantum of income at shorter intervals – say every month – whether fixed or fluctuating amounts,
  • Regularity of income – Whether at regular intervals or are they random inflows,
  • Possibility of increase in Income in future or decrease (in bad times) or what happens if it stops (due to death, disablement or retirement) or whether it remains flattish,
  • Vulnerability of income to changing circumstances – These may be economic or from obsolescence of one’s skills or it could be for any personal reasons - health. E.g., Due to growth of supermarkets, smaller grocery shops could face squeeze in profit margins and incomes of that businessman may be threatened by competition. (There will be many similar or different live examples).

Everyday, we see differences between people. Incomes vary, levels of wealth vary, capabilities of earning are different, attitudes are different and a host of other things.

Let me now go back to my earlier post and highlight a point made then, which is very relevant here.

“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.”

I have attempted to list just a few variables that impact a person’s life in general and its effect on the monetary situation. In the next post, I will attempt to study “Income” from another perspective.

Sunday, January 18, 2009

Financial Literacy - A Quick Recap

I had raised this issue of Financial Illiteracy in my post “Financial Illiteracy – An unaffordable Luxury” on 25th October 2008 and then followed in up with “The First Step towards Financial Literacy” on 2nd November 2008.

This was till we got seriously derailed by dramatic events of 26/11 and thereafter.

I think it is time we get back on track and bridge this wide gap of over two months.

Let me recap on what I have covered so far.

In the first post “Financial Illiteracy – An Unaffordable Luxury”

Money is empowering and liberating and we put such immense effort to acquire more money in our lives. This process begins right from childhood and we spend time training ourselves to earn an then earning money. We then reach a sort of dead end as we are utterly incapable of managing this money. Much of this is due to our “Financial Illiteracy”

With passage of time those yesteryears seem so simple and golden. There were few choices and Financial Planning seemed an unnecessary luxury.

However, with changing times, there has been a trade-off and we now have choice, sophistication, advice, facilities, information, ease of transaction at the cost of risk, volatility, uncertainty and complexity.

It is, therefore very critical, that we are equipped to navigate through this maze and understand the basic concepts.

In the second post “The First Step towards Financial Literacy”, I looked at

Our financial position is not to viewed in isolation but is a byproduct of how we live our lives and our attitudes, values and upbringing. Once basics are understood, further build-up are

The whole game has three dimensions

Incomes and capacity to earn

Expenses, and

Resultant surpluses which becomes our retained wealth and available for investments and management.

These three dimensions cover the complex variables that inter-twine to influence our lives. It is important to also remember that each person / family is unique and has a different requirement. There is no standardized “One size fits all” solution here.

This recap brings us back into focus. The next post talks about the first dimension – Incomes.

Sunday, January 11, 2009

Welcome 2009………What a way to start

“Greed, for lack of a better word, is Good” said Gordon Gekko in a 1987 film “Wall Street”. B Ramalinga Raju took it to heart and acted on it.

The Satyam drama has hit us square in the face and it has been a KO punch to the employees, clients, non-promoter shareholders, regulators, State and Central Government, the IT industry and many other stakeholders.

Much has been said and written on this and in the coming days tomes shall be generated. Officers shall investigate through mountains of information and give their verdict. Raju and his band of “corporate pindaris” may yet be found guilty and may be spending the rest of their lives in the slammer.

This is corporate-politician nexus, crony capitalism, manipulation, deceit, treachery all rolled into one and at its worst.

Is that it? – Just a Corporate fraud………or something more

What is more serious and unpardonable, Satyam has inflicted a grievous wound to

- Our faith in ourselves,

- Our belief and capability to build world class businesses

- Our capacity to rise above the murkiness and create something in an atmosphere of transparency and fairness,

- Our capability to rise without a powerful surname, and

- Our trust.

Our faith and trust has been trampled upon with impunity whilst presenting a straight face to the world. This is a letdown of Himalayan proportions. We now have to be apologetic for this skeleton in our cupboard.

We shall view every entrepreneur and his success story with a jaundiced eye half expecting a cooked up story. We shall view every big company with suspicion. There will always be a thought lurking whether we are being taken for a ride.

Who or what can we trust hereafter?

Does this whole episode have a good part to it?

I think the financial markets will be ruthless and any Company / Entrpreneur who cannot stand to exacting standards and high levels of scrutiny will be dumped to the trash bin and sumptuously reward the honest.

Am I being utopian? Is this too much to ask? …… a system that has institutionalized corruption and entrenched interests first enrich their small closed clubs to the complete exclusion of everybody else.