You are financially literate, so what?

Your financial behaviour can still be messed up.

The problem with financial literacy

According to Wikipedia, in a financial literacy survey:

In Australia, 67 per cent of respondents indicated that they understood the concept of compound interest, yet when they were asked to solve a problem using the concept only 28 per cent had a good level of understanding.

This quickly summarises all that is wrong with financial literacy.

You may get a new tool, but you may not know how to use it best. Imagine yourself holding a knife from the sharp side. 

Being financial literate is no guarantee that you would make the right money and investment decisions.

If that was the case, Chartered Accountants, MBAs (Finance) or commerce graduates would not be falling into all the obvious traps – buying ULIPs for investments, investing into real estate trying to become property moghuls, not realising the amount of interest they are paying on the loans.

Not to mention, you sent the concept of diversification limping down a one way street.

One of my clients aptly described his situation as, “The amount of interest I am paying, it feels like I am working for the bank.” Sigh!

Let me add that he works for one of the largest multinationals, at a senior position.

Here’s more. The same client was keen to “book profits from mutual funds” since markets were high. I had a hard time explaining. I had to actually write a full note to describe what profit-booking was actually meant for.

Now, didn’t he know the basic financial concepts? Of course, he did. Enough to win a competition. And yet this is the state of things.

So, where’s the problem. It is not financial literacy.

It’s the behaviour, stupid!, so goes the variation on the more well known “it’s the economy, stupid!”

The bigger problem is that you cannot change anyone’s behaviour. One will change when one wants to.

Suresh Lulla, a mentor, explained this concept to me very beautifully. I don’t remember the exact words but this is what the gist is.

In organisations, performance issues are labeled to good or bad attitude towards work. “He has an attitude problem.”

Interventions are carried out to change the attitude hoping that  behaviour would change and that would bring in the required commitment towards the job. This is the ABC approach –> Attitude, Behaviour, Commitment.

Unfortunately, that is not how it works. The way it works is the absolute reverse, the CBA.

You have to first get the commitment of the person to the job, what difference is s/he makes to the organisation when the job is done well. Once the commitment is in place, behaviour would change automatically.  Will that change attitude? Only God knows. Pray!

In short, what drives change is COMMITMENT.

What commitment can be sought from the consumer of financial services, the investor – you, which will automatically change your financial behaviour?

In my view, this commitment can only come from one thing – your Goals. When you can picturise your money fulfilling some important things in your life, you would start to look at it differently.

You need to have a hassle-free retirement, give the best education to your children, have your dream home that you can come back to after a hard work day and have fun traveling the world.

If you can commit to these, you can be sure of responding with a very different behaviour.

Hence, goal setting is the most important activity that you, as an investor, should focus upon and may be learn too.

It is only for the accomplishment of your goals that you will align yourself to the right financial behaviour. You would then automatically seek the resources, the tools and the advice that will help you reach these goals.

Of course, this is easier said than done, specially all by yourself. Therefore, yet another commitment you need to make is to seek help.

You could rely on your family, friends and peer groups for this help. It works out for some people. Not for most. As mentioned before, you may not come to know which side of the knife you may be holding.

The answer is to get a personal advisor. It is the same reason for which Sachin Tendulkar or Saina Nehwal or Maria Sharapova have a personal coach – to remain committed, seek feedback and pursue ongoing improvements, to become the masters of the field that they are known for.

It would be great if you can find an advisor who you can trust, share with and seek good counsel.  You will be amazed at the results.

My personal view is that when you work with an advisor, learning goes up multiple times and your action is more focused.

The advisor, the coach is the proverbial “third-eye”.

So, yes while there is enough talk of financial literacy and getting you to understand more about handling money and investment related matters, let’s not miss the woods for the trees.

First, get your goals in place. Align your behaviour to achieve your goals. Your attitude to life would change.

All the best!