Learn What not to do with Your Money Financial literacy is more than just knowing the right things. Not doing the wrong things would be more useful…

Learn What not to do with Your Money

 

Financial literacy is more than just knowing the right things. Not doing the wrong things would be more useful…

 

It is almost a truism that most people need basic financial literacy and it’s generally assumed that this literacy must take the form of knowing what to do with money. However, the truth could be exactly the opposite. It would be far more useful for people to instead learn what not to do with their money and this education is not available anywhere. 

Everything that passes for financial literacy involves teaching how the investment world works, what the different types of investments are, who they are useful for, how to fit them into your financial needs and so on and so forth. This is all good stuff and investors must know it, but it’s not where people go seriously wrong. Where they go wrong is that when someone tries to hawk bad financial products dressed up as good ones they can’t recognise what’s happening. And, if you are in the market for financial products, then sooner rather than later, someone does exactly that.

This doesn’t just apply to outright frauds like the Citibank case in December 2010, but also to products that fall within the borderline of legality. For example, let’s say that you invest in stocks and prefer to choose fundamentally sound companies and stay with them for the long term. If you do this, then it won’t be long before your broker will try and guide you into some highly leveraged high risk action in index derivatives. His pitch will basically amount to telling you that you are a complete fool to ignore the massive returns that are to be had for the asking if you follow his advice, except that he won’t mention the risk part till it’s too late.

The canonical example is, of course, that of Ulips versus term insurance. There are hardly any Indians who have enough (or even any) term insurance. This is the basic financial product that everyone must buy in a very large quantity before they do anything else about their finances. And yet, even if you have the financial literacy to try and do so, there is an entire industry out there dedicated to diverting you towards Ulips, because they can make far more money there.

I think the problem is that existing channels of financial education are committed to not being critical of anything. They’d like to be polite and not step on any toes, especially commercially powerful ones. This makes them pretty much useless in this very important way.
For the investor, not doing the wrong things should actually be learnt before doing the right things. Unfortunately, this is something that they’re likely to learn the hard way.

Source : prepared by Dhirendra Kumar