Not involving the family in the personal finances of the household is a problem we so commonly encounter. People admit to the merits of involving family members in discussions about financial matters but seldom act on it.
When a friend’s father passed away recently, we were horrified to discover a trunk full of share certificates. All acquired through IPOs in the 1980s and 1990s and retained in paper form. The son is now running helter-skelter, to get these dematerialised. He rues the fact that his father was so secretive about his finances, and did not involve the family, even when he had aged and could not keep up with the technological changes in the investing space. Not involving the family in personal finances of the household is a problem we so commonly encounter.
Enough has been written about how the spouse should know where the assets are, and how it might help in the eventuality of an unexpected death. There have been many instances of widows being fooled of their inheritance by cunning relatives and unscrupulous operators. It takes time and effort to learn personal finance, but it is not so complicated that someone should live in ignorance all their lives about such an important matter. Involving the family in financial decisions is something many households hesitate to do, for various reasons, and the consequences are not always pleasant.
A young couple routinely overspent their credit cards. The interest accumulated and they kept paying the minimum balance due. When the husband finally turned up at the credit counsellor’s office, he admitted that he let his wife spend the way she liked, as he considered it his responsibility to find the money for such expenses. He seemed very guilty and ashamed that he was not earning enough. That an expense is something that one cannot afford, is not a statement one likes to make, the counsellor explained to me. Many men and women suffer in mindless pride and in denial, that they cannot afford some of the expenses they aspire to make.
A middle-aged neighbour was troubled by the fact that he could not afford to send his son abroad to pursue a master’s degree. The boy pointed out that his friends were all going and that he would face the prospect of a life of low earnings and poor employment opportunity, since his father is denying him this right to study abroad. Preposterous as it sounds, he saw it as a privilege and considered the father a stingy man who would not liquidate some assets to make it happen. Surprising part is that the father remained reluctant to discuss the assets of the household with the son and propose that the son must take an educational loan instead.
“Why is it that discussions about money do not happen in a household? Why don’t people disclose what the earnings are, what the spending limits should be, what the assets are and why they have been acquired?”
— Uma ShashikantWhy is it that discussions about money do not happen in a household, as normally as it should? Why don’t people disclose what the earnings are, what the spending limits should be, what the assets are and why they have been acquired, what the financial goals are and how they are being funded? There is so much at stake, and much heart burn and disappointment could be avoided if there was some transparency in the financial decisions. People admit to the merits of involving family members in discussions about financial matters, but seldom act on it. What can we do about it?
First, it should be part of the normal conversation in a household about allocating money for specific uses. It is not fashionable to make household budgets anymore. But the practice has a huge merit in involving members of the family to discuss the choices and make decisions. Except for the super-rich household, most have a limited amount of money which must be allocated to various uses. Instead of treating every spending decision as a bottomless pit into which any amount of money can be poured based on whims, the family can get used to treating them as serious decisions on choice and allocation.
Try telling your child that you are willing to allocate a fixed amount of money for their birthday celebrations. Allow them to make the decisions about how to spend that money – on clothes, on gifts, on the party, on décor and food, on friends and movies. Let this decision not be one where every desire is simply accommodated by the indulgent parent but is made considering the costs and the choices. Your child will learn finance first-hand. Understanding opportunity cost while making financial decisions is precious. Giving up on an expensive gift to fund the movie trip with friends is the choice your child won’t make easily and that is how it should be.
Second, make the saving goals the family’s joint decision. There’s no need to be secretive about what is being saved and invested. The family must know what the larger future goals are, and why sacrifices must be made in the present to make that happen. The postponement of instant gratification and the ability to think long term, are important skills that everyone in the household will benefit from. Larger financial goals such as buying a property, funding children’s education, saving for retirement are all important to everyone in the family.
Involve the family in the discussion with the financial adviser and let them know how the goals are being estimated, and how these are being funded. Let them know how the choices about asset allocation are being made. Let there be a healthy discussion on whether buying more gold or property is serving the needs of the household for its future needs. Be willing to define and defend the investment choices. It helps immensely to be accountable to the household for the asset allocation decision.
Third, foster the money culture of the household by being logical and consistent while making financial decisions. Value for money, caring for objects of value, evaluating objects over experiences, developing emotional intelligence about money, are all habits a household must build over time. Money decisions are made every day, and some see it as bothersome to bring it up too often. Which is why setting broad principles and adhering to them helps. The mandatory spends on food, education, utilities, EMI, transport might need only a one-time discussion about how much and what the limits are. But the discretionary spends on entertainment, holidays, impromptu purchases, and so on, can add up. If these remain impulsive decisions that are made on the fly with no consistency, no one learns how to make them. Be aware of the dangers of centralising these decisions.
As you make these choices together, you will find that everyone gradually learns what the family owns, owes and how it makes its money decisions. Do not trade off this precious bonding and openness for inexplicable secrecy.
(The writer is Chairperson, Centre for Investment Education and Learning.)