Who says you only have to learn from your own mistakes? Why can’t you learn from other people’s mistakes?
My friends were telling me about the property [read house] they just bought or, are in the process of buying. I liked their approach on how they arrived at their decision and kept nodding my head, my sign of approval, with a huge smile. When it was my turn to speak I just had one question –
“How will you pay for this?
My friends had a perplexed look on their faces, as if I had asked a “no-brainer”. They must have been thinking “he must be really thick”. Then they realized I’m serious and they set out to explain how they would make the payments, and how the housing loan be a huge component of it, which led me to my next question –
“How the hell will you make such huge periodic [read chronic] payments in the future?”
Basically, they said that as they grow older their earnings would increase drastically; therefore they will be able to make much larger payments, so they can afford to take a larger loan based on greater future income. Hmmmmmmmmmm.
Ok I’m not a sucker nor am I a pessimist but somehow what my friends said didn’t sound right. In fact I find it stupid; blame it on my middle class upbringing where the only values that were spoken of or handed down to me were the ones with no financial value attached to them! Or blame it on my love for logic. I understand the difference between spotting a potential opportunity and taking risk to reap greater return, which makes complete sense and is great, but here the individual is getting in to something and knows of and the respective risk associated with his actions. What my friends are doing is being oblivious to risk all together. That is scary.
I digress , back to the point.
I’ll never forget 2 things Warren Buffet wrote in his annual letter to Hathway shareholders –
1, while, budgeting and planning for future, a person should always plan future expenditure based on current income
2, you should always have 2 sources of income
Now, point number 2 is what I call real insurance and point number 1 is about being grounded. I like that, it’s logical and reasonably ok to practice, well I hope it is! Then why do my friends think otherwise?
When the economic crisis was threatening to spoil the party for us in India, suddenly everyone went on an austerity drive, but as soon as the clouds drifted away, they’re back to their old ways. Have they forgotten horrible stories of real people losing jobs and their “lifestyle”? I pointed this out to my friends, but it didn’t make a difference. That’s when I realized their financial optimism but still failed to see what it was based on.
I understand positive sentiment, emotions and attitudes arising out of confidence, optimism, and being secure. What scares me is the absence of a real solid tangible reason for being financially optimistic, especially amongst the young. When I ask them this very question, the only response I get is “it’ll happen, somehow”. But they have no idea how! Isn’t this reminiscent of a “fatalistic life” which they themselves ridicule! Ironical wouldn’t you say?
So why are they so optimistic?
Media creates a rosy picture and buzz gets amplified by increasing opportunities of employment which fuels optimism, which in turn lets individual take it easy and feel comfortable. This sense of comfort and entitlement entices them to consume, every product available on easy credit, screaming “buy me “. This is the beginning and the end. I say this because people need to know why they want to consume, when they forget that, it’s scary.
Another Big reason For Financial Optimism : A young person’s starting salary today may be equal or even greater than his father’s last salary. So suddenly people have started to think they have high paying jobs because their current reference point is that of the PAST!!! Reality is that it’s not that simple ; the value of their current, self perceived high salary isn’t that high. Here is why -
They live immersed in this financial optimism and forget the big picture; REALITY
So here is what people forget to factor in -
Just because you’re getting paid well doesn’t mean you’ll continue to get paid well. It’s fair to say that. So what happens when you can’t work? Remember, we no longer have pensionable jobs, as our parents use to. Yes MNCs pay well, but more and more people are being made redundant far before the official retirement age, if you’re wondering why – it’s cheaper for employers.
No financial planner can calculate time value of money and tell you how much money you’ll need to survive 20 years from now. Healthcare will eventually shift in the private sector’s domain, education almost has, and social anchorage is disappearing.
What my friends are oblivious to is the fact that when we were growing up our lifestyles were so bloody simple, and our parents income was sufficient for the time, because there were limited avenues for expenditure. I paid less that Rs 5000 for a undergrad college degree because it was subsidized by the state, but that won’t be the case going in to the future with the advent of private universities.
Today we create consumption occasions and drive every rupee out of the wallet. Yes that helps the economy grow, and as long as our economy continues to grow in wake of the global economic context, inflation will grow too, and it’s because of this inflation that our economy is still growing and we’re less affected. But it is eroding “value”.
So what do you do? Well – Asset creation by curbing current expenditure not borrowing more! Asset creation in context of current income so it can appreciate proportionately without seeming inflated.
I work with brands and my job is to make brands more profitable by bringing them closer to people. So as you expected I am going to link this back to brands & marketing – evil me , Aeh?
Financial service brands go on and on and propel us to invest through them so we get greater return and get more money and live a better life – How bloody shallow ! Everyone is doing that , al most in the same manner !
So if was advising a financial services brand, say a Life Insurance Company, Bank or MF brand I would urge them to use this insight of people having a misplaced sense of financial optimism in India, and perhaps Asia. I would advise these brands to use this insight and construct a brand that would inculcate a behavior of responsible financial handling NOT planning amongst the young and remind us of our value system, and not just do lip service like the Tobacco or alcohol industry, that says “ consume responsibly”. I would urge the financial brand to go much further, and make sure they don’t begin to instill fear while educating people. The brand should try and help people find the tangible reason for being financially optimistic. I like happy endings and brands that work in that direction.
