There are two types of popular behavioural patterns pertaining to financial management that we exhibit. Acquired behaviour and drive based behaviour. These behavioural patterns tend to affect our innate need to first own money and then create more money and then create even more money,thus putting us in a never ending cycle.
Covert or internal behaviour stems from what we are,what we have learnt,what we have seen and what we have been advised and taught. It is controlled by our skills,knowledge and resources,which we have built over the years. The most important influencer of this behaviour is the environment in which we have lived. The point where things start falling apart is when the environment itself changes.
Need for newer skills,resources,knowledge becomes acute while we continue to hold on to the principles of the past. There is a huge element of personal bias as well which largely stems from the lack of knowledge.
1. Equity investments are like gambling,therefore risky and hence can eliminate our money is one of the most common notions.
2. Endowment policies are a great idea whether it is 1980 or 2012.
3. Online transactions are an invitation to fraud and thus best avoided.
4. The CA knows everything and whatever he says is right.
5. Investment in gold is never a bad idea. Thus most of our actions are based on our understanding,which at times may be rather shallow.
The fact is that most people do not understand equity investments; endowments were a good idea in 80s and early 90s and they are wealth destroyers now; online activity is highly efficient mode of working plus audit trails become extremely easy; CA is an expert at tax related matters and debt management or mutual fund advisory is just not his forte; gold can be stagnant for many years; thats possible.
It is strange however,that for everything important in life we want to consult the experts but when it comes to financial management we want to do it ourselves. May be we think financial management is not so important. This type of behaviour is financially ruinous.
DRIVE BASED BEHAVIOUR
This type of behaviour is driven by greed,competition,social standing and again the primary influencer is our environment. If we see others doing something profitable even we want to do it irrespective of whether we understand it or not. Another important influencer here is emotion. I also want it a very powerful emotion. Here are some more examples,even I own stocks or even I have a 1,600cc mid-size car these days or even I went abroad this Diwali holiday. All this becomes a matter of social acceptance.
I too have to be a part of the action. Lets talk about stocks – if everyone around me these days is playing into stocks I should do it too and make some quick money. We forget that there is no short cut to making money if we have to do it the legal way of course. Lets talk about lifestyle cost The me too is a killer once again. We spend and over spend for our children and ourselves. Our lifestyle cost keeps increasing and with cheaper loans we think we can afford our new lifestyle on installments. Such behaviour is also financially ruinous.
All along the way,the behaviour is dictating what we are and what we will be in terms of wealth and affluence. Neither type is appropriate on its own. However,a delicate mix of the two can become a powerful potion to live by. Adaptability with ambition (bit tempered) can work wonders for you. Change with the times but keep your ambition in reference frame all the time. Another perspective would be to keep your ambition at the centre and adjust everything around it. Basically be driven rationally and not emotionally. Building wealth requires behaviour where the benchmark is what we were a year ago,five years ago and where we are today and where we expect to be in a years time and in five years’ time. This exercise continues year after year. An important component of prudent financial behaviour is to have the attitude to consult strategy experts (not analysts or agents or product advisors),do thorough research,plan your financial goals and invest time to learn continuously.
To build wealth and bask in the glory of affluence requires a mindset; a mindset to create and harness the power of money. Question is how much are we willing to comply with our standard behavioural norms and embrace new ones?
Author is Director,Transcend Consulting