FirstStep

An experiential exercise to initiate children to the world of Personal Finance

Once upon a time, a child was born in a lovely home with the quintessential hard-working disciplined father, the over-protective mother and the obnoxious sibling; and as the child grows up, s/he realizes quite early and unknowingly in their subconscious mind that it’s not all hunky-dory, and that everyone has to do one seemingly useless activity called ‘work’, for it pays for all of those things that one wants.

We, as parents try to do the same as well; we all want our children to do better than us and get more than what we got. And as our parents, we too have goals, dreams and aspirations and some of us have achieved them, and many of us are working towards achieving the same.


That’s pretty much the story for most of us.

As children, we were always told to evaluate between ‘needs’ and ‘wants’; and that is the understanding with which we all grew up. Some of us were fortunate and some not so fortunate. Nevertheless, our parents made all the efforts to ensure that we get all that we need and want.


Having said that many of us may benefit from a higher understanding of finance. Infact, you would agree that as we grew up, we were exposed to various subjects that enabled us to become professionals and earn money. However, personal finance was not a subject that we got adequate exposure to. And we would have benefitted had we got the correct set of inputs at the right age.

Keeping the same thought in mind, we went ahead and created FirstStep. The design of the program is such that the learning happens on the fly, as the exercise proceeds. Having said that the program has a formal debrief as well. The exercise aims at giving students an exposure in taking decisions about their expenses around their needs & wants, and bank deposits & investments which would fetch them a return. The game expects them to manage all of this for a period of one year (June - May).

The program is divided into four parts.
a. Briefing
b. The Game
c. The Score Card
d. Debriefing

a. Briefing

This section is the most crucial one, as we had to be extremely cautious about the fact that we are dealing with children. While children are quick at grasping, but because it is not a subject that they usually deal with, it takes them that much extra time to get a hang of it. However, thereafter, it is a smooth sail. The biggest challenge is to organise the students into teams of 5 and to get them seated without creating too much of confusion. Each team is to appoint an accountant in the team who interact with the Provisioner. 5 such teams are mapped to 1 provisioner. The provisioner is the person with whom the teams interact throughout the exercise. During the briefing, the children are exposed to 3 critical aspects of the game:

i) Understanding Income, Goals & Expenses, and the rules around them.

Income: The teams start with savings from last year, and they are told that they shall get a fixed monthly pocket money every month.

Goals: Teams have to decide upon two goals that they will have to achieve through the year. They are given a fixed choice of goals to choose from. These goals are things that they may want. However, in all cases the choice are such that the variants of the same products may fall in the realm of 'needs' and 'wants'. For example, in the entire list one could find a low-end mobile phone and a blackberry. The students are supposed to choose a minimum of 2 goals from the list.

Expenses: Students are explained that they will come across some mandated expenses such as canteen expenses &entertainment expenses, and some optional expenses. They have to manage within the budget available. They are also expected to buy two pairs of shoes and the goals have to be purchased within the year as well. For some purchases, there may be bonus points available, and they are a reflection of prudent decisions made.

ii) The activities to be done

To begin with, the students are given an accounting pack which contains the previous year's savings, an blank account book (two pages), pens, goal/expense cards etc.

The steps of the activity per se are fairly simple, however, the managing accounts is seemingly tough because most (~99%) aren't used to and they probably have never seen their parents managing their accounts as well.

Every month is for five minutes. During this time, the students will be shown the monthly expenses (regular / optional)

Step 1: Collect pocket money from the provisioner

Step 2: The participants need to fill up the monthly account statement (Expense, Saving, Banking, Investment).

Step 3: Rush to their Provisioner, pay for their expenses (regular/optional) and close the monthly account statement. Incase they decide to deposit money in the bank or invest their money, they need to collect bank / investment certificates. Incase they buy any of their goals or the two shoes, they need to collect cards against them.

iii) Money Management

This is section which decided whether they make the money or not. Participants have 3 choices for keeping their money. All the modes are completely liquid in nature; that is money can be withdrawn from the bank or one's investments whenever they need. However, interest is applicable monthly and on the money available in the instrument.

i) Cash-in-Hand: Doesn't give any returns

ii) Cash-in-Bank: Gives a return of 0.5% per month, however minimum deposit at one given time is of Rs. 200, and thereafter in multiples of 200.

iii) Cash Invested: Gives a return of 2.0% per month, however minimum deposit at one given time is of Rs. 500, and thereafter in multiples of 500. Investments, in our game, are not subject to market risk!!!

b) The Game

The game is simple to execute. There are 12 months on 12 slides that give them regular & optional expenses. The months are supposed to run for 5 minutes, however, the first three months take about 25-30 minutes, as children need to get used to the idea of filling up their account statement. The image is just an example of how a typical month looks like. The activity to be done is explained in point a (ii).

c) The ScoreCard

This is an important step. While designing we kept two things in mind in so far as the output is concerned; we wanted the children to feel proud of their accomplishments and at the same time get their minds of 'how much money they made'. The scorecard is complicated, however, it is effective in meeting our thought behind the output. The calculations are done manually. At this stage the bonus and interest accrued as a result of deposits in the bank and the investment vehicle are taken into account. Finally the Goal Card is filled up which factors in not only the accruals, but also rewards their work by increasing their asset value and further more uses a coefficient factor to turn the asset value into points. These points help decide as to which team has made more money out of the available resources.

d) Debriefing

The debriefing is important, and the learning needs to be drawn out from what happens in the session, although using the basic framework of questions mentioned below:

i) What was our objective?

ii) Why does the Goal Card give different weightage to goal achievement vis-à-vis cash-in-hand or why is there a different weightage for cash-in-bank vis-à-vis money invested?

iii) How could we play better next time?

iv) How do we differentiate between ‘needs’ and ‘wants’?

v) How is money earned?

vi) What are the avenues of saving?

a) Do you have savings goal?
b) What are the ideas on how to save more?

vii) Do you have your own savings account?

=> What about an Investment Account?

viii) Should we take loans?

ix) What are fixed deposits or Systematic Investment Plans?

=> How can they help you achieve your goals?
=> What do you know about the power of compunding?

At the final stage, we have reiterated that 'Habit comes from Practice', and that the children should discuss their goals with their parents or someone who can & will help them.

As a follow-up of this session, a special initiative for the parents is planned out. Under the aegis of various regulatory bodies of the Financial Services Industry, our organisation, Reliance Mutual Fund has planned an Investor Awareness Program which is essentially a Personal Finance Workshop designed especially for the parents, aimed at

a) exposing parents to the learning that have been shared with thier child, and
b) share inputs with them to establish and manage their personal goals such as children’s education & marriage, their retirement, their home etc by making simple systematic investment plans involving mutual funds.

As a parent myself, I truly believe that this two-hour workshop will help the parents, as a family. Their actions will become a model for their children.

Please send in your feedback & suggestions which will help improve this effort. The pilot program was conducted for 275 students of Ryan International School, Kharghar, Navi Mumbai.

A special thanks to Sumit Kati, Shyamac Jal, Maadhavi Samant and Jayant M Parneria for being part of the team which created the program, and to same set of people and Mihir Shah, Vikram Masand, Gaurav Warman and Krupali Jhaveri for helping execute the program.

Making People, Organisations & Communities Successful

India has seen a rapid growth in the last few years. This growth cannot be called inclusive as it has not been able to bring about development at the grassroot levels. It is important that any economy developmental activity in today's world takes into account emergent issues, especially to do with the underserved population at all levels, i.e., individual, organisation and community.

This write-up aims at giving a peek into my understanding of the same.


Individual Level

There is a lot of traction on the individual level with a lot of focus by Min. of Rural Development and special agencies like National Skill Development Corporation (NSDC) coming into the forefront, and adding gusto to the existing set of efforts being made by various Not-For-Profit organisations to help the socio-economic fabric in the underserved areas of the country.


NSDC (http://www.nsdcindia.org/): excerpt

The National Skill Development Corporation India (NSDC) is a one of its kind, Public Private Partnership in India. It aims to promote skill development by catalyzing creation of large, quality, for-profit vocational institutions. It provides viability gap funding to build scalable, for-profit vocational training initiatives. Its mandate is also to enable support systems such as quality assurance, information systems and train the trainer academies either directly or through partnerships.

 

The NSDC was set up as part of a national skill development mission to fulfill the growing need in India for skilled manpower across sectors and narrow the existing gap between the demand and supply of skills.

The Finance Minister of India announced the formation of the National Skill Development Corporation (NSDC) in his Budget Speech (2008-09):

 

"...There is a compelling need to launch a world class skill development programme in Mission mode that will address the challenge of imparting the skills required by a growing economy. Both the structure and the leadership of the Mission must be such that the programme can be scaled up quickly to cover the whole country."

 

Its objective is to contribute significantly (about 30 per cent) to the overall target of skilling / upskilling 500 million people in India by 2022, mainly by fostering private sector initiatives in skill development programmes and providing viability gap funding.

NSDC is also working very aggressively on setting skill-standards in India and am sure are researching and contacting skill-standard bodies in other countries as well. Setting skill-standards and then working towards a metricised approach to building competencies is the way forward. Do look at the skill-gap analysis available with them. Other apex bodies have established active workgroups to build a focus on skill-building (www.cii-skillsdevelopment.in/ and http://www.ficciskillforum.org/) and help establish Sector Skills Council (SSC) like the ones established in developed economies, like UK (http://www.sscalliance.org/)

There are a lot of organisations & individuals who are now preparing themselves or have already got into the fray of skill-building at the grassroot level, and that is commendable. In fact there is a clear business opportunity in this area and those who have the understanding of skill development and have the will to move out of their environmentally controlled cubicles, would see the scope. Organisations like Work Skills India (a Bharti venture), NIS Sparta (a part of Reliance Telecom), and IndiaCan (a JV between Pearson & Educomp) have already gotten themselves in this space, and like many other individuals & organisations are striving to help the country achieve their target. International agencies from all over the world are making their pitch to get into this next big wave of 'creating employable individuals'.


Organisation Level

The next level is that of helping organisations build at the small enterprise level and this is one area in which a lot of work has happened, and there are a plethora of organisations who are helping these organisations to establish themselves. The Indian government has a special ministry called the Min. of Micro, Small & Medium Enterprises (MSME) to aid the effort. Policy makers view MSME sector, which is the second largest employer after agriculture, as a critical vehicle for creating jobs and eradicating poverty. Accordingly, many MSME public support programmes have been in vogue in India for a long time. Such programmes have met with varying degree of success. Lately, to enhance outreach and efficacy of such programmes further, public schemes increasingly focus on MSME associations for tasks ranging from enhancing awareness to implementation to creation of support institutions in Public-Private-Partnerships (PPP). The issue of capabilities of MSME associations in design and execution of such schemes, has assumed critical importance.

Banks & Lending Institutions are also working on helping these organisations grow. Infact the Reserve Bank of India has announced the availability of loans upto INR 500,000 without any collateral guarantee (http://www.fisme.org.in/RBICircular.pdf). There is also Small Industries Development Bank of India (SIDBI) which is actively working with to empower MSME sector with a view to contributing to the process of economic growth, employment generation and balanced regional development.

SIDBI Foundation for Micro Credit (SFMC) was launched by the Bank in January 1999 for channelising funds to the poor in line with the success of pilot phase of Micro Credit Scheme. SFMC's mission is to create a national network of strong, viable and sustainable Micro Finance Institutions (MFIs) from the informal and formal financial sector to provide micro finance services to the poor, especially women.

SFMC is the apex wholesaler for micro finance in India providing a complete range of financial and non-financial services such as loan funds, grant support, equity and institution building support to the retailing Micro Finance Institutions (MFIs) including two-tier MFIs so as to facilitate their development into financially sustainable entities, besides developing a network of service providers for the sector. SFMC is also playing significant role in advocating appropriate policies and regulations and to act as a platform for exchange of information across the sector. The launch of SFMC by SIDBI has been with a clear focus and strategy to make it as the main purveyor of micro finance in the country. Operations of SFMC in the coming years, are not only expected to contribute significantly towards development of a more formal, extensive and effective micro finance sector serving the poor in India, but also ensure sustainability at all levels viz. at the apex level (SFMC), at the MFI level and at the client level to ensure continuance of such arrangement. Most importantly, SFMC has strived to create a mechanism in which there should be no barriers to growth. Under the dispensation, there is focus on innovation and action research.

The Federation of Indian Micro and Small and Medium Enterprises (http://www.fisme.org.in/) has been working to integrate the efforts. After opening up of Indian economy, close to the heels of establishment of WTO, eight state-level SME associations gave birth to FISME in 1995 to gear up the Indian SMEs at the national level to the challenges thrown open by changed economic realities. Today as umbrella organization of SMEs, FISME has associated associations in all the progressive states of the country.

A program called 'Capable' is being launched with the larger overall goal of improvement in MSME associations' awareness capacity and capability to facilitate MSME competitiveness enhancement. The objectives of the program are two-fold:

• Capability Development of MSME associations to improve their a) efficacy & sustainability, and b) Implementation capability of MSME development programs and schemes.

• Facilitating better designing, management and effective implementation of various Government sponsored schemes intended for MSMEs and associations.

 

Lately the entrance of the concept of Social Enterprise has also seen a lot of work. There are a multitude of people wanting to fund these. While venture capital an private equity funds have been helping start-ups build the foundation of some great ideas, there is now a new breed of organisations that are focused on building the social enterprise structure in the country. PE Funds like Acumen Fund are in the constant search for ideas that are exciting, and those which could be seeded to build as successful organisations.

Community Level
An economic community as I see it are of two types, basis their composition, however, emerging from the same concept of 'organisation':

1. Community of Small Enterprises
2. Community of Micro Enterprises

I have intentionally kept Medium Enterpises as they may possibly have the ability to handle themselves in terms of their growth in the perpsective that I am about to share. The challenge with most organisations in this sector are two folds:

1. Unavailability of managerial competence
2. Unavailability of reckonable brand

My thought around both are that there is considerable business opportunity around the two.

• Managerial Competence

The right competence is something that I would like to see beforehand in case I want to invest in an organisation (running/start-up), as I want to be sure that the monies would be used properly and that I should have a decent return on equity. Having said that, the lag is the unavailibility of managerial competence in these organisations that take loans to build and/or run. Financial institutions should look a the way in which their funds are being put to use. One could be content that the money being given is a 'loan', so, how does it matter whether the managerial competence is available or not till such time the money is returned along with interest and that the proposition doesn't become a NPA. Here is the difference.

A usual lending agency would have this philosophy, however, lending organisations who are in the business of lending to high risk enterprises of considerably small size should be in a position to offer services which would help build the managerial competence, as this would aid in assuring assured and timely return on the money lent.

Can private agencies look at this as a business opportunity where SMSEs are trained and coached on increasing their own effectiveness as managers hence bolstering the chances of increased efficiency of their organisation. This will not only ensure that the return on investment is secured, but an efficient organisation would ensure that it takes more lending as the 'efficient & effective' organisation now starts to grow. The growth will also ensure better payout to workers and hence increasing consumption... and that's how the cycle moves on an upward spiral. This model could be adopted by lending agencies or they could get into a partnership with organisations which can build such competencies.

• Reckonable Brand

I visited some villages and what came out strongly is that there are three specific activities that happen in a village. And one need not be an economist to understand the same; production, consumption and sale of excesses. The interesting component is 'sale of excesses'. The excesses are sold in nearby towns (accumulation centres) and from there it goes to distribution centres from where it comes to your and my house. The inefficiencies in this system is not something unknown to anyone.

However, in this environment we have the example of successful cooperatives such as Amul which went ahead and collected milk from everywhere and packaged it and retailed it. The model was so successful that it was replicated by some private enterprises too.

The business opportunity lurking in mind takes off from here. Let's look at an average MSME industrial belt. There are hundreds who manufacture various goods and they are sold across to those who need it which essentially are larger organisations or in larger markets. Let's take the case of the products that are designated to be sold to the market. The inefficiencies of marketing, branding and quality hound them; with every manufacturer having their own benchmark. On the other hand, one could look at a scenario where all the products are pooled together by a cooperative society for the cluster, quality checked against decided norms, and then packaged with a common brand.

For example, if I pick up all the goods produced in the industrial area at Kalyani (70kms from Kolkata) and brand all of the goods with 'Kalyani' as the brand. The cooperative that does it, is owned and funded by partnering manufacturers, but run by professionals. The benefits are that the brand establishes itself as a mark of certain level of quality, uses the 'pooled' funds to mobilise markets and uses economies of scale in distribution system; and hence becoming an efficient system and returning more value to the manufacturers. The manufacturers get to retain their identity and continue to sell to their existing customers as well. As we move on the cooperative could actually revive the organisations that have perished (bankrupt) by sensing the need of the market and getting the same produced. Everyone is a shareholder, so everyone benefits.

The same could work in the micro-industrial sector in another form. Let's say, a similar cooperative is created by a tribal village, and all of their excess produce and handicrafts could be branded by the name of their village and retailed to larger stores in big cities or fed to the same people who were earlier purchasing from individuals. Everyone is a shareholder, so everyone benefits.

This is an idea that I have been toiling with for sometime, and I spoke to a few stakeholders and prospective end users, but they have shown a mixed response towards it. The apprehension lies into venturing in the unknown and someone as the good shephard who takes the onus.

I urge all in the learning and development space to pay attention; the time has come to focus on things that will help the country grow and make it a superpower, and it is in your hands.

Please feel free to comment on this article. The pursuit is to become better.

Wealth Creation

Teaching your child to 'save'... build the habit!

Background

One has to be more innovative and inclusive than what our parents were when we were kids (not that I have grown up). Our parents also had a limited understanding (barring a few parents I knew).

So, what could one do beyond the piggy bank thingi. To answer this one must remember that there are five important components of wealth creation, and that savings is just one part, and undoubtedly not the only part that should be developed as a habit lest we want to build super-conservative wealth-creators.

The 5 things are...
a) expense management,
b) savings,
c) investment,
d) debt management, and
e) risk management.

As a primary-grader, points (d) & (e) are not required to be practised. As a secondary-grader, point (d) may be introduced in the curriculum, and point (e) may be restricted to an academic expression.



The Three Most Important Things

Simple exercises could be created to ensure that children learn this art. To begin with lets start with the three most important tools that are required...

A. A Piggy Bank

• Break-to-Open variety, and
• Lock-n-Key variety

B. A Bank Account & a Mutual Fund SIP Folio
Depending upon how old the child is, one may introduce...

• A PPF Account
• A Mutual Fund Investment Folio
• A Recurring Deposit Account

C. An accounting notebook



How to do it...

A. Earning

1. Explain the child that s/he will get money from the parents account every month.
2. One could earn more if one helps in doing certain jobs at home (usually a dad-daughter or mother-son contract)

B. Goal Identification
Help the child to identify a goal over a short horizon (1yr) and one on a longish horizon (three years... may not be easily understood for some children and at certain ages).


C. Saving Practices

1. The child has to decide how much money goes into the 'Break-to-Open' Piggy Bank - This is the exigent fund.
2. The child has to decide how much money goes into the 'Lock-n-Key' Piggy Bank - This is the contingency fund which may only be opened by the 'custodian' on request (mother/father), and is to take care of some out-of-the-blue expenses. The money taken from here needs to be treated as a loan (without interest), and has to be returned on a pre-fixed date.
3. Help the child decide how much is s/he going to save out of the 'income' money on a monthly basis. This money should be kept with the local custodian for investment (refer to point 4 below)

D. Expense Practices
All expenses (daily expenses such as lunch money et al, and occasional expenses such as a gift for a friend's birthday) would be made from this money.

The child needs to maintain a daily account of expenses. Don't pound the child with a heavy ledger, but create a simple one in a notebook. Don't do it on the computer rightaway. Let the habit build, and then one can migrate to using a computer based money management xl sheet. One needs to do it in a notebook as that helps build the daily practice, and the child lives the moment. Computers allow convenient tools such as drag-n-drop and cut-copy-paste, but these are not advisable when it comes to building a habit.

1. Help the child decide how much money the child will expend on a daily basis (parents' consultative skills need to be at play here. Fix up a moderately stretched target). If the child is not engaged in the 'daily-expense' mode, then you could skip this.
2. Help the child decide the monthly expenses for events such as birthday gifts, family going-outs, school excursions etc.

E. Investment Practices
The money saved needs to be allocated as per the goals identified. The money saved can be put into broadly 3 buckets.

a)  Money saved out of 'good' expense management (Net of expenses made in points 4a and 4b.)

b) Money saved out of 'good' saving practices (Point 3c)

I suggest that parents take a break in this planning activity after discussing Point 4 for the first time with the child. This would give the parents an opportunity to think through whether the goals are a possibility or not. Remember, that the child needs to taste success, otherwise the interest would be lost, and the practice would never get nurtured into a habit.

Once calibrated, in the second dinner-table meeting re-look at goals and calibrate expense, savings, and income, with your child. Call for decisions accordingly.

> For money saved out of Point 5a, put the money in the bank account and once in a quarter shift the money to a lumpsum investment in a mutual fund.

> For money saved out of Point 5b, put this money in an equity-based Mutual Fund through the SIP folio. Let it get deducted directly from the 'income' source.


F. Review

1. Involve the child in updating the passbook from the bank. Don't do the internet accounting way. By visiting the bank you would ensure that the child understands albeit unconsciously about the various things that happen in a bank, and moreover, this will help burn few of our calories as well. Once the passbook is updated, ask your child to go ahead and update one's own accounting notebook.
2. Let the child see the Mutual Fund statements and highlight the growth in the fund that is happening, and how it would help the goals get nearer. Ask your child to go ahead and update one's own accounting notebook.
3. Review the balances in the contingent and exigent fund balances as per the child's accounting notebook. The contingent fund should steadily move to a limit of 3 month's expense, and the exigent fund should move to a limit of 1 month's expense. When it comes to adults, the exigent fund needs to be kept safely at home to be used in case of an emergency, and the contingent fund should be kept in a financial instrument that is highly liquid.

G. Reward
Its important that the child knows that it is rewarding to invest, and hence, go ahead and celebrate and treat your child to a thing s/he fancies... maybe a chocolate or candybar or an ice cream; whatever it be, it shows that you recognise and acknowledge the good practices.


H. Caveat
All this is not possible unless you and me save and invest prudently. So, the question is do we do all of the above. Is it a habit with us or we keep the conversation restricted to an over-the-drink-intellectual-conversation.



Best Wishes!