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!

Factors Influencing Purchase Choices Among Urban Youth

An article in The Economic Times (http://bit.ly/bWICOw), once featured an interesting article on the purchase choices made by the youth around us. Through this blog I have made an attempt to look at the factors from the perspective of Financial Services Sector and especially from the perspective of 'financial literacy' as an idea that my organisation and other conscientous organizations in the BFSI sector want (request) the youth in the 18-22 years bracket to embrace.

Hereon, instead of calling 'financial literacy' an idea, I shall refer to it as a social product.

The seeding of financial literacy needs to happen at an even younger age, but its never late to start. This kind of an education drive has never taken centre-stage, and today Apex bodies such as SEBI (Securities & Exchange Board of India) alongwith other market participants are drafting concrete plans and implementing the same to ensure that we are able to build a rich and vibrant economy, of which today's youth is a non-negotiable part. This is especially important also because the Government has gone on a political-party-independent drive to add 500m skilled job in the country by 2022 (www.nsdcindia.org), and also on a drive to improve the governance system in the smallest administrative cell in India, 'the panchayat'. For both of these drives, the Government has chosen the PPP (Public Private Partnership) route to ensure scalability, economies of scale, process efficiency and measureable productivity.

With these two in place, it doesn not take a rocket-scientist to expect a lot of money getting generated and getting consumed. Keeping all of this in mind if the concept of 'financial literacy' is not seeded well, then we would have a situation where money is possibly being saved, and but not getting invested at the right avenues, hence building the foundation of a catastrophe in the long-term. Considering an imminent of urbanisation of population (doesn't mean that all of the population needs to move to metros, but what matters is the thought process).

Well, to conduct this study a unique network of 'student transmitters' across campuses was used; these act as insight seekers & conversation seeders. The network reached 6 metro cities and connects with over 10000 students. The sample size makes the study worth reckoning.

The study talks of 7 factors that influence purchase choices among urban youth...

1. Talk Value
2. Utility
3. Substance
4. Conversations
5. Social Relevance
6. Engagement
7. Present at Point of Need


TALK VALUE  

The product does not need to be the centre of attention but should be able to place the young buyer in a position of exclusive attention during conversations. For instance, a growing number of iPhone users are beginning to purchase unique applications, despite the availabilty of many free ones.

My take basis my observations & interactions with the youth has been that if we are able to place our social product amongst the youth in form of a 'knowledge piece' that arouses contextual interest, and one that can be put into use, it will drive the youth to understand more of it. And once the benefits are seen, people would like to flaunt the knowledge building interest amongst others. The same thing happened in its own way for IT, and the Urban India saw a sudden increase in the use of computers amongst the youth in 1995-1997.


UTILITY

Budgetary constraints mean that the products and features must have longterm utility, particularly when it comes to high-end purchases.

My take on this is that 'high-end' has a flexible definition whic is directly proportional to my ability to take risks with my disposable income. So, a 'high-end' purchase for me will not / may not be so for someone earning more than me, like my boss. So, if its all about the risks that we can take with our disposable income, we need to ensure that we have a low-entry barrier for the products that the youth can chose from once they become literate. The next thing comes in is long-term utility which is all about products designed to meet specific future needs; need-based maturity and not purely value-based maturity kind of products.


SUBSTANCE

Yes, enticing packaging is no longer enough. Youngsters today have evolved and place a higher currency on the content. It might not glitter, but it better be gold!

The way I look at it, products need to be simple. Infact, a senior colleague was mentioning yesterday that we need to innovate to keep things simple, and that the masses aren't quite ready for exotic financial products; what was meant that financial products have to match the maturity of the buyers en-masse; and its not about whose-products-are-more-exotic.


CONVERSATIONS

At the point of sale, the youth make a choice easily if prior conversations about the brand have taken place within their friends/peer group. These discussions serve as easy references. For instance, laptop purchase decisions are also influenced by conversations in peer groups.

My point is that organisations should now look at making communications to their target segment interesting (and one doesn't have to einstein to know that), but the needs of the youth in terms of communication are pretty different, and the conventional wisdom around it will not work. So, are we using new media types such as facebook & twitter to update information, or are we looking at ways of engaging the youth.


SOCIAL RELEVANCE

A small but significant trend which is emerging. Students prefer buying products that have a positive impact on society. For instance, young people have started influencing their parents to only purchase ecofriendly home electronics, even though they maybe more expensive.

This is great, because if this is a component of purchase decisions, then we need to focus on various activities that not only deliver social value, but also projects them properly. Basically, what I understand is that making money is not bad, but everyone wants to see as to how much as we seeding back into the masses. So, this is not about socialism in its archaic context, but about how 'social' and 'capitalist' work hand-in-hand in the society... neo-capitalism.


ENGAGEMENT

Given the high level of clutter, young people's choices tend to tilt towards brands that engage them in a sustained manner. The target group also responds more positively on activations. For instance, games/events in college festivals where the product is strategically embedded in their environment stand a better chance of achieving higher brand recall.

So, its not just about one-on-one conversations, but also about whether there is someone talking about us, when we aren't there; are we able to engage our customers, and its beyond the online media.


PRESENCE AT POINT OF NEED

The target group feels more connected and evinces loyalty to brands that are available when they need it. So the propensity to choose the same brand the next time is higher. For example, a new sanitary pad brand was available in dispensaries inside colleges, which created a brand connect with the female target group.

The question is how accessible are we, and that's not an easy one to work around. But, why forget the way telecom companies simplified their product and made it available with every mom-n-pop store, junk store etc. Innovate to remain simple.

Learning from Indian Bosses

Time to rethink what we read and who me follow!

Wharton professor of management Peter Cappelli on leadership lessons from India: http://bit.ly/atsfWd http://bit.ly/d97kvg

Peter Capelli presents an interesting perspective... The interesting thing is that many of these practices we do witness happening around us all the time, but, are biases around 'what is best has to be from west' stops us from looking at these; and while I say that, it is not entirely true too, for I have known of a lot of people (read, quite a lot) including me who have been studying these behaviors of indian bosses closely. There are ills as well, which is OK, considering that they are a part of everything & anything; the 'matter which matters' is to look at the replicable behaviors and move forward! So, net net, it makes me feel proud, and it ain't so bad as it looks!

Follow both the links, and read the entire article presented in two forms... He says...

The idea that what is good for business is good for America -- a common phrase in an earlier generation -- seems a distant memory. Where do we look for business leadership?

Let's outsource it!

In an interesting sign of the times, the most impressive business leaders at the moment may be in India. What makes them impressive is a commitment to social goals that extend beyond the interests of their firms and -- here's the good part -- stunningly impressive performance.

They don't appear to be paying any price in terms of performance for being good citizens.

The Indian economy...

> largely sidestepped the financial crisis because of wise banking practices,

> her overall growth rate is second in the world,

> her major corporations are growing at rates of 20 percent to 40 percent per year,

> her companies have been on an acquisition binge, and the evidence suggests that when they acquire foreign companies, those companies perform better.

A study of Indian businesses based around interviews with the leaders of 100 of the biggest companies in India.

Indian Business Leader Priorities...

1. Chief input for business strategy;

2. Keeper of organizational culture;

3. Guide or teacher for employees;

4. Representative of owner and investor interests; and

5. Representative of other stakeholders (e.g., employees and the community).


Some of the identified key differences between Indian and Western bosses...

1. Social Purpose

2. Invest in Employees

3. Take the long view

4. Work from their strengths

5. Act as a role model