The theory and concepts in personal finance are not complex. They are not beyond the comprehension of ordinary folks who have to make financial decisions. But many are not able to put that theory to practice. They know that they must stabilise their income; but they quit their jobs in haste. They are aware that they must spend within their means; but they impulsively splurge. They have told themselves several times that they must save; but they don’t begin. They like the idea of investing regularly; but their money lies unutilised.
How does one deal with such people? Many choose to be rude. Don’t you know this, they stricture. Shaming someone who has poor money habits is very common. It seems obvious to the others that bad financial decisions are taken because the person making those decisions is ignorant, foolish or grossly misinformed. But that may not be the case.
Those who make bad financial decisions may actually know that they are being foolish. But their motivations are different. As Atticus tells Scout in To Kill a Mockingbird, one needs to get into the other person’s skin and walk in it. Empathy can make all the difference.
Those who walked home for hundreds of miles last year, refusing to stay in camps and facilities for migrants, made a choice driven by their hearts. In a situation that seemed scary and when there was likely to be no job or income, staying close to one’s family mattered to them most. They made the decision that they would not let their families suffer alone. Whatever be the situation, they would be in it together. We failed to see their need; we still fail to acknowledge their income-less plight. Empathy is tough.
A daily wage labourer buying lottery tickets is quite aware that he may not win after all; the gambler that stakes his small gains, again and again, knows that the odds are stacked against him; the novice day trader that has taken to full time punting knows that markets can turn against him. They all act in desperation. Their motivation is the realisation that there may be no other way they can get wealthy. In their minds it takes a miracle to push them up into the wealthy league and they believe that miracles may just happen. No one empathises with the punter.
While offering financial advice and while nudging households to develop healthy saving and investing habits, it is important to be empathetic. Stepping into the shoes of the investor and to understand, without judgement, their motivations and compulsions while making financial decisions is critical. There is always a story about why an investor behaves the way they do. Find that story and you may find some worthwhile solutions to their personal finance problems.
A middle-aged first-time entrepreneur spent most of her earnings in being more than generous with her employees, friends, relatives and neighbours. She gave away money, food, clothes as if it were mandatory. Her sisters accused her of using money to develop relationships and warned her that others would exploit her. They tried to convince her to save, with no success.
In a conversation, it emerged that she had been scarred by her husband’s bankruptcy. The sound of lenders screaming at the door and the shame of fleeing town still haunt her. She wants to be this person who has enough; she wants to tell the world that she is not short of money; she wants to ensure people did not abandon her.
When we created a scheme in which she would invest for the future of her employees, she readily agreed to contribute. Opening an investment account for her along with her employees and crediting it along with others was easily done. She began to save without effort.
A young father had built up enormous credit card debt and hid it from his wife for too long. He lost his job unexpectedly and when the bank representative came home to collect the dues the wife was shocked. She had always been worried about his lavish spending habits. But he managed the money and did not involve her. She had no idea that her husband was piling on a mountain of debt.
The psychological and emotional reasons were not hard to find. He had been the underperforming sibling in the family; he also was not much of a performer at college or school; he was keen to portray that he was doing much better in life. He was outspending his relatives and peers to simply establish a position for himself. He was confident everything would be eventually fine and lived in denial of his reality.
His wife began a baking business. She roped her husband in to support her. She told him that no one would know their reality, but they would slog together and repay the loans. She offered him the cover he needed and kept his mistakes a secret. That was enough to turn him around. In four years they have bounced back to run a successful enterprise that is making profits. They have a lifestyle truly supported by their earnings and income.
There is little empathy in the personal financial world for those that do not follow the much publicised path to financial independence. Everyone knows the rules and those that do not abide are sinners. How can one spend what one hasn’t earned, scoff the righteous. How could he not have life insurance, sneer the informed peers.
But the reality of those that slip, fail, fall behind or decide poorly might be different. They may hold beliefs that are honed by their experiences and might need help to see differently. They may be nursing complexes that need a patient ear. They may seek confidentiality and trust in the fear of shame and exposure. But they also need help with their personal finances. It is just that they need a large dose of empathy along with personal finance advice.
(The writer is Chairperson, Centre for Investment Education and Learning)
