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Money woes: do not blame it on nature

LiveMint logoLiveMint 16-07-2017 Lisa Pallavi Barbora

Trying to build their sense of value for money at an early age, a few months ago I gave a piggy bank to each of my 6-year-old twins. The initial excitement was palpable as they realised that money is important and that they had a responsibility to keep it safe. As days went by, I noticed that one of them would diligently pick up coins and notes lying around the house and ask if he could put them in his money box. The other never did. After a few days, I finally asked him why he never picked up the change like his brother to put in his money box. “I forget,” was the simple answer. To me it seemed more like the thought never occurred to him.

It is interesting to notice these behaviour patterns because both have access to the same home environment and are of the same age. Hence, I immediately put it down to nature.

Will nature continue to precede common sense when it comes to money matters? Behavioural research has shown that it’s not just children but adults too experience inborn behavioural biases when it comes to personal finances. My worry is, what if this behaviour extends to the wider understanding of money? Is one of my sons always going to be money ‘unwise’?

Recently, I overheard an elevator conversation between two neighbours. “After my bad experience with stock trading, I feel my luck lies firmly in real estate,” one said. “We are the opposite—terrible luck with real estate; it’s only long-term equity for us,” said the other.

When one says luck, often it alludes to a natural bent towards a particular approach rather than destiny. So then does our nature interfere with our ability to effectively utilise what we earn? The piggy bank experience suggests that nature impacts how we treat money, at least to begin with.

For an asset like equity or real estate, the risks and return forces at work are the same, no matter who transacts. But the experiences shared above indicate unique approaches, and that decides how much we earn from the assets.

Should we remain bound by our nature or can efficient money habits be nurtured? Before answering that, let’s understand why one should even bother with nurturing money habits.

Tarun Birani, a certified financial planner and the founder of TBNG Capital Advisors Pvt. Ltd, a Sebi-registered investment advisory firm, has been a financial adviser for more than a decade. He believes personal finance is largely about managing behaviour and biases—or your nature. All his new and prospective clients have to undergo what he calls the ‘Thinking Man’ programme, which is about understanding and overcoming behavioural biases. Birani said that unless biases are addressed, expectations will not match experience, ultimately defeating the purpose of undertaking financial planning. If you want your money to serve you well in the future, some amount of behaviour nurturing may be necessary.

However, acknowledging biases is not the same as resolving them, which can take time. Education and information are important, but in the end it is experience that will convert behaviour. Children pick up behaviour from what they see around them but they may repeat or rebel against these learnings or biases. If you want higher chances of your child repeating the learnings, showing the impact can help. Take my twins, for example. By breaking open their respective piggy banks and using the money to buy something of their choice, I could demonstrate the impact of saving. While one will have more to spend, the other may become aware of the value that money holds. Hopefully, it will lead to diligence in saving where it was lacking.

Experience works for adults as well. Financial advisers routinely come across people with a lifelong conservative investment biases—with experiences only in fixed deposits and pension funds, and swearing by the utility of equity mutual funds in the latter half of their lives (as wealth creation takes on critical importance). This happens with three things—knowledge and information, convenience of investing, and lastly, a positive experience when you take the plunge (done in the right manner). One can replace mutual funds with other securities or assets; I prefer the example thanks to familiarity and simplicity.

Start small when it comes to nurturing money behaviour. Let’s say you have a desire to make it to Maasai Mara in Kenya next year. The first thing you should do is to roughly estimate the expense. Then, every month keep aside about a tenth of what’s required. This way, when it’s time to book tickets and safaris, you will not have the daunting burden of arranging for a lump sum. A tenth could be one-twelfth or one-eighth—the idea is to break it up into smaller saving instalments. For habitual savers, this comes easily. But if it isn’t intuitive for you, then the physical act of putting aside money is important. Move it from one savings bank account to another or invest it in a low-volatility debt mutual fund. Procrastinating may lead to the money getting spent rather than saved.

But just saving will not increase your money’s worth. Putting it in a piggy bank or under your mattress isn’t an option. Think investing. You need not plan your entire life, but thinking ahead does lend to a positive outcome. Over time, this can be replicated for something bigger, like buying a car or a house.

‘I was born like this’ or ‘this doesn’t suit me’ are not enough to explain being money unwise.

Nurturing money habits is important if you want your money to deliver more than just your daily expenses in the future. This doesn’t translate to you becoming rich by changing habits, but you can be better off.

Forced saving is an outcome of nurture, the gains of which you realise over time. You may still prefer real estate investments over equity or vice versa but your ability to diversify the portfolio and reduce risk can certainly be nurtured to improve.

Confession: I haven’t yet been successful in nurturing a change in my son. I am hoping that starting early is the silver lining.

Lisa Pallavi Barbora is a consultant with Mint.

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