Understanding the language of money

Obsession with money is a global phenomenon and is intrinsically wired to the human mind. But the fundamental problem in this part of the world and the reason why Indians fail to scale up to the benchmark of financial independence is that as a society, we are not taught the language of money. Indians don’t easily understand the basics of finance, investing, compounding and inflation-adjusted returns.

In a country known for wealth inequality, the quest for wealth among Indians is understandable. The irony nevertheless is that the vast majority of Indians don’t understand the language of money. The language of money refers to the ability to understand money and wealth, various asset classes, personal finance, return on investment and money management. The inability of Indians to understand social and financial structures of the money system more often than not leads them to take poor financial decisions in life.

It is ironical that the subject for which there is such obsession is the least taught and understood in our education system. Many of us just wonder how someone with the same income, or even less, gets financially free with more assets earlier in life. It is hence imperative to understand the basics of money language at an early stage of life.

Some of the most common money myths among Indians are...

Saving and investing

With a predominant demography that grew up without money, the very subject of money is interlinked to the deep-rooted anxiety and insecurity of Indians. This is why a vast majority of us more often than not fail to differentiate between saving and investing. For us, saving money is equal to investment, and the safety and cushion of money is at the top of the mind. The fact of the matter is that saving gives the returns at a base rate that is lower than the inflation rate. This erodes the purchase power of money.

A bank fixed deposit (FD) of Rs 1 lakh might look fancy the next year, but the appreciated amount cannot purchase today what you could have purchased with that amount last year.

Myth of returns

Indians calculate Return on Investment (ROI) with Absolute Gains and not Compounded Annual Growth Rate (CAGR) returns. For example, I come across many happy home-buyers who proudly claim that their house price has doubled in the last 10 years. The reality, on the other hand, is that Rule 72 of accounting reflects a CAGR return of just 7.2 per cent, which is as good as the bank fixed deposits.

Insurance versus investment

Insurance and investments are two very different products and should never be clubbed together. But middle-class Indians continue to buy insurance as an investment product and end up getting returns way lower than even bank deposit returns. Insurance is not investment by any stretch of imagination and one should limit it to just Term Insurance for families in the wake of any eventuality. Investment products are meant for growing your money and must beat the inflation by at least 500 basis points with compounding effect.

Decoding inflation

Inflation is a double-edged sword as it erodes the purchasing power of your money and at the same time, doesn’t always get in sync with your wage growth. Most of the Indians take this as a number given by the RBI at face value, without understanding that the consolidated inflation number is not what is necessarily affecting your expenses. For an average urban Indian middle-class citizen, real inflation hurts with three consumption items of food, healthcare and education and these are all in double digit year on year.

Property as social security

Flaunting wealth is culturally discouraged in Indian society. But we take exception when it comes to a house. It is hence no surprise that we stretch our financial limits to buy a house and flaunt it. Why is property as much a subject of discussion among Indians as religion and politics? Do we publicly discuss bank statements and other investments in our portfolio? Is a house really a status symbol worth sacrificing other forms of social security? Property as a symbol of having arrived is a lousy financial decision.

Lifestyle and affluence

Affluence is not lifestyle, but today’s youngsters buy high-end iPhones and branded clothes on EMIs. ‘Buy Now Pay Later’ is the biggest money trap; and lifestyle is never a true reflection of affluence. Matching lifestyle with peer pressure is the biggest financial illiteracy, as someone living in a bigger mansion or spending crores on weddings might be spending not even 1 per cent of their net worth, while you try to match that with all your net worth, plus debt.

Reality of salary growth

A vast majority of urban Indians don’t understand the crude reality of wage growth being lower than inflation, since their outlook of money is limited to absolute numbers. When inflation is adjusted, the wage growth in most of the sectors in India in the last five years has been in the negative. It is hence no surprise that despite earning way higher than their previous generations, most of the Gen Z are actually earning lesser when it is adjusted against inflation.

It is time to delve deeper into the psychograph of Indians to understand their language of money; money management skills; investment outlook; obsession for property; and understanding of ROI. Financial literacy in this part of the world can only then be structured. In a society where more than one credible study has shown that 98 per cent Indians are living pay cheque to pay cheque even after earning decently, it is time to differentiate between the myth and reality of money management.

— The writer is CEO, Track2Realty