Many of us rue about how we learnt things at school that we never use and were never introduced to important and useful things like filing taxes and managing money. Since most of us never get a formal introduction to the latter, we end up learning our own lessons, sometimes from experience and sometimes from the successes and mistakes of others. But this way of teaching yourself might lead you to make more mistakes than you can afford.
This Teacher’s Day, learn to be your own money guru and find out how to teach yourself the right money lessons.
Out with the old
According to Amit Kukreja, founder, Amitkukreja.com, a financial planning website, your beliefs about money are formed during your childhood as you see your parents managing money. “At the first stage of your career, you are influenced by your colleagues financial behaviour, some past traumatic experiences and, of course, some financial successes that you have had in your life,” he said.
Inherited wisdom and following the herd are two primary reasons people end up making money mistakes. Deepali Sen, founder, Srujan Financial Advisors, a financial planning firm, recounts the case of a client who shied away from equity investments because his parents had stuck to real estate and gold, believing them to be “safe” assets. Such behaviour can hold you back and keep you from achieving your financial goals, said Kukreja. “Over time, they can become self harming patterns, until you recognize and rectify them,” he added.
According to Kukreja, there are several “money disorders” prevalent in Indian society, including hoarding, or the habitual accumulation of assets, which stems from financial insecurity.
Another habit Kukreja mentioned is financial caregiving, which involves providing continuing financial support without the necessity to do so, which keeps the receiver from having to take responsibility or become independent. Due to social and familial structures, Indian parents often continue to provide financial support to their adult children. This also extends to managing their money for them or giving advice. “They may do this out of love. They use money in an attempt to feel close to others and to continue feeling important and useful,” said Kukreja.
While there is nothing wrong with listening to your parents or well wishers, keep in mind that the financial landscape has witnessed a sea change since your parents were your age. So, what worked for them is unlikely to work for you. It’s wise to examine inherited wisdom and financial habits instead of following them blindly.
Some of the money lessons you have picked up along the way are not learnt. They are inherent biases and behaviours that are wired into human nature. One example of such a bias that affects your money life is the present bias, which refers to the tendency to favour immediate rewards.
“The present bias comes from a model of temptation and self control. A person has two selves, one self is a long-term planner which has no trouble making prudent decisions. But the second self gets tempted by short-term prospects,” said Brishti Guha, associate professor of economics, Jawaharlal Nehru University, New Delhi.
The way to beat this bias is to limit the access and control the latter has. “If I know I will be tempted to spend a big chunk of my salary right after payday, I might sign up for a ‘forced saving’ plan such as a mutual fund SIP which automatically deducts a part of my salary and puts it into a pension account. In this way, my long-term self ensures that my short-term self does not have access to this money,” said Guha.
Other biases that might be holding you back include status quo bias, which refers to people know that they should start saving and investing, but don’t because of inertia; optimism bias, which leads people to believe that nothing bad can happen to their investments; loss aversion bias, which makes people attach more weight to losses than gains; and disposition effect bias, which leads people to label investments as good or bad. In each of these cases, the first step to tackling the bias is to recognize it.
“The most unconscious money habits are based on associations between money and strong emotions that are stored in the limbic or more primitive part of the human brain,” said Kukreja. So, once you have identified your bias, you will have to start taking conscious measures to overcome the instincts that drive it.
Back to basics
Identifying bad money habits is only part of the process. The other challenge is to unlearn them and teach yourself prudent practices. According to Shilpi Johri, certified financial planner and founder of Arthashastra Consulting, waiting too long to correct bad financial habits can cost you. “Unlearning can happen only when one realizes that his current knowledge is no longer useful. In case of investments, such realization usually happens after a monetary loss. To avoid such costly mistakes, it is wise to keep relearning regularly either through self study or by taking professional help,” she said.
Goal-based investing, streamlined by the right instruments, can make your money life simple. But if it seems like too much of an effort to make on your own, you can always enlist the help of an expert. “Engaging an expert always helps. They would guide you with respect to markets, understanding your money scripts, differentiating wisdom that makes sense for you from generic wisdom, objectively tracking your progress and finally ensuring your financial success emerges from the plan the two of you created together. The times have changed. Technology is more handy,” said Kukreja.
Technology has made it even easier to find information to teach yourself. But Kukreja added that it’s important to separate the self-proclaimed experts from those who offer valuable information and insights. So be careful about the knowledge you gather.
According to Sen, the best way to unlearn any bad money habits like risk aversion is to try and understand why and how some people make money and some lose it. “People come in expecting to double their money in a short period, and if they experience volatility in a four-to-five-year period, which is not uncommon, they panic and exit, thinking that equities are not for them,” she said. Sen recommends introspecting about the real cause of making or losing money to figure out that one needs to take a certain amount of risk to build a corpus, and then investing with better understanding.
Becoming your own financial teacher can sound like an arduous task, but it doesn’t have to be. Start by taking a holistic view of your financial life and habits, then identify and eliminate the ones that are holding you back. With a clean slate, do your research and seek help if need to start inculcating positive money habits that can help you gain control of your finances and achieve your goals.