Practical Money Management

(This article was published in the October issue of the mgazine “Educare”

Learn the basics of money management now

By Hiren Shah

I once came across an engineer who told me how lucky I was to be a chartered accountant’s son and receive training on practical money management and how badly he had been fleeced because of his lack of knowledge of accounts and finance. I read about a case in management consultant Pramod Batra’s book on how a motorcycle dealer from Escorts was fleeced by his own accountant and got a heart attack at the Escorts office when the Escorts accounts staff apprised him of major embezzlement. The third interesting case that I remember from my experience is my immediate engineer boss, who was to get several double promotions in one year and later go on to build a big business of his own. Here is what he had to say about accounts “I used to ask our professor in the MBA about the logic behind accounts preparation of balance sheets but he could never answer properly”. What he could not learn in two years in the MBA, he managed to learn within a few weeks by sitting with the accountant. When I was a commerce student in the accounts class, my father told me, “Don’t ask questions on accounting rules. Just follow them and make the balance sheet. You will understand automatically.” Since everybody has to manage money, a knowledge of accounts is always an added bonus.

Before the personal computer came into being, accounting was a cumbersome and a complicated problem. It entailed knowing the entire financial accounting system — the preparation of vouchers, ledger posting, trial balance, profit and loss account and the balance sheet. However, on the computer, one only has to feed the voucher in an accounting software and the computer does the rest. This makes it considerably easier for a layman to learn if he wants to. One should know how to make one’s personal balance sheet, where all one’s personal investments, assets and bank transactions are given. This is not difficult at all because all it entails is bank and cash entries. Once the grouping is done on any accounting package with someone who knows accounts, this is child’s play as the accounting reports also get updated simultaneously. If one really applies oneself diligently, one can learn the deeper logic in a few weeks and can then operate even if something happens to the computer. Those insights can then be utilised to study balance sheets of companies.

In MBA programmes, the focus is more on finance or understanding balance sheets rather than accounts, which has more to do with preparation. In my view, since money management has to be done by everyone throughout life, it is better if he has a good understanding of both. Some of the best things I learnt from my father are very well explained in the books Rich Dad, Poor Dad and the book The Millionaire Next Door, which is a study of American millionaires by two PhDs.

Most young people want to be wealthy but do not know what being rich really means. According to both the books, though normally the word “rich” may imply a high consumption lifestyle with the best brands of both necessities and luxuries, in reality, that is far from the truth. According to the authors, being rich basically implies being financially independent, which implies that one’s regular income from investment is such that one can survive from that alone and can choose not to work if one wants to. Looking at my father who is a good saver, investor and tax planner, I would say that that is quite a formidable combination. It is not difficult to achieve it, if practical money management is taught in schools to everybody and not just commerce students alone. Both the books bring about the practical aspects in their own unique manner.

The book Rich Dad, Poor Dad is about a boy whose friend’s father is rich. When the two boys are refused entry in a high-profile party, it instills in them a fervent desire to be rich. For this purpose, they are given practical training by the rich father right from the age of 9.

The objective of this article is to highlight the importance and basics of financial education. In the book, the author says that practical financial intelligence is a synergy of accounting, investing, marketing and law. He also says that children spend years in an antiquated educational system, studying subjects they will never use, preparing for a world that no longer exists. Each child needs to know the rules — a different set of rules. Money is one form of power but what is more powerful is financial education.

What is more interesting is what the book reveals about high consumption lifestyle. This is what it has to say about perpetual spenders. It says, “They get a few bucks in their hands, again the emotion of joy, desire and greed take over. But the joy that it brings is often short-lived, and they soon need more money for more joy, more pleasure, more comfort, more security. They don’t want to lose the big houses, the cars, the high life that money has brought them. They worry about what their friends would say if they lost all their money. Many are emotionally desperate and neurotic, although they look and have more money”. My father encouraged thrift from the time we were in secondary school. He would do things like not refusing any of our bigger wants but picking on our smaller wastages or expenses, to inculcate the principle “A penny saved is a penny earned”. As soon as we passed the Class X, both me and my brother (an engineer) were prevailed upon to learn practical accounts.

What is written about young people running after money reminds me of my trading experiences in the stock market where I came across many young people who had burnt their fingers very badly. As against investments in shares, which has a horizon of two years minimum, trading is more like a business where one buys and sells shares within a day (day trading), a week or two (swing trading) or position trading(three months). This is based on a study of graphs through a subject called technical analysis, which traces the movements of share prices rather than fundamental analysis, which focuses more on the performance of the company. Technical analysis has three aspects — trading psychology, money management and trading strategy. Each person has to have his own unique system depending upon his psychology — his fear, greed and balance of both. What one should remember is one man’s meat is another man’s poison – one trading system may make somebody a multimillionaire and another a pauper and trading system that suits oneself is something one learns from trial and error.

The most intelligent man I met in the stock market was a broker who had a background in merchant navy (most individual brokers are commerce graduates). He told me that he had a position trading system which he had been perfecting over a period of ten years and was still coached by a mutual fund advisor. He also showed me some literature in the most advanced books on trading (one of them was by the originator by a TA indicator himself) which was totally against what was written in the ordinary books available in the market He was much more intelligent than a couple of other people I worked with who spoke on Television. When I asked him why he chose to be anonymous, he replied “Genuine traders make much more money by trading than by talking or consulting”. His views corroborated with a book by an American author on Random investing, which stated, “If one is really talented in trading, one can become a millionaire in no time with a reasonable amount of capital”. One of the assistants who came to install my TA software also told me about his boss and owner who was also a trader and a speaker at CNBC. “If he is such a great trader, why should he be doing this business (TA software). He can make much more money in trading.” The whole industry works on the principle of “Why should you kiss the maid (trade in the stock market which is tough) when you can kiss the mistress (be a consultant and fool rookies and other people), which is relatively easier.

The fact is that trading has a 95 percent failure rate in the United states as well and some of the worst casualties are highly intelligent people whose egos were so high that they could not adjust to the reverses in the stock market and made heavy losses. There would of course be exceptions to the rule. I know another 29 year old young man who trades much better without graphs than any of his more illustrious colleagues that I came across, but such people are more an exception than the rule. It is better to use TA for studying long term graphs on when to enter and exit for long term investments rather than trading which is like sophisticated gambling. Actually, technical analysis is such an interesting subject than anybody can be fooled by it but in the highly manipulated Indian market and even otherwise, no system is good enough to capture the vagaries of the market in the short term. People who are still interested should still be aware of all the pitfalls. Two of the best books that I have come across:-

• Financial Trading: How to Trade Successfully for a Living, by Alexander Elder
• Trade your Way to Financial Freedom, by Van Tharp

I would recommend The Millionaire Next Door, which gives a thorough practical financial orientation and how to be rich realistically in the long run rather than do short term somersaults. This book gives practical examples of two brothers or friends or colleagues, both of whom may have started their careers. One may be a good earner but a high earner. The other may be a poor earner but good saver and investor. After some years the poor earner has a much higher net worth than the good earner. The book is full of such interesting practical examples and gives a very good insight of what practical financial concepts and management are all about. It may not make you a millionaire but can definitely prevent you from becoming a pauper.


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