6 Financial Planning Tips India can give the Rest of the World

By BankBazaar | July 5, 2015

 

rural India

Snake charming, yoga, handicrafts and tourism are things that India seems to be famous for elsewhere on the globe. But, our culturally diverse land also has a couple of aces up its sleeves when it comes to financial planning. And we can teach the rest of the world a thing or two about it.

The financial crisis which hit the world in 2008 had one of the greatest financial ramifications of all times. The effect of the crisis was felt in almost all countries of the world, with some countries still unable to recover from the shock.

It cannot be denied that the crisis originated in the West. Poor financial management in banks resulted in poor financial management at a corporate and individual level. But this time, it was proved that money management is much better in the East, particularly in India.

Here are the top 6 things which India can teach the rest of the world when it comes to financial planning:

  1. Financial prudence: Prudence is the corner stone of any personal finance practice. People in the West have, more often than not, spent more than they can afford. As a result, their finances are almost always in a mess. Biting only what they can chew is practiced by most Indians, resulting in better money management and easier debt management.
  2. Taking only educated risks: Risk taking is acceptable and is sometimes necessary when it comes to financial planning. However, rash behaviour which is spontaneous and not backed by research can be foolhardy.
    India as a country is more conservative than the West. As a result, Indians take calculated and educated risks in personal finance decisions as well. Taking educated risks, which is backed by research can not only help in managing uncertainties better, but can also help in enhancing portfolio returns in the long run.
  3. Habit of Saving: India’s savings rate has traditionally been much higher than many countries in the West. According to the World Bank statistics, India’s Gross Domestic Savings as a percentage of the GDP was 29.6% in 2013. Corresponding figures were 16.8% for United States, 15.2% for United Kingdom, 22.6% for Canada, 20.5% for France and 24.8% for Germany.
    Although India’s numbers have dropped from highs of 32.2% in 2010, Indians have a higher propensity to save compared to the West, indicating better money management and higher investment levels for the future.
  4. Have a limit on innovation in financial instruments: The 2008 crisis was primarily caused due to multiple innovations and complicated instruments, like derivatives, in the financial world. The effects of some of these instruments were not known until they were too large to stop, resulting in a complete disruption of the financial systems across the world.
    Almost all such instruments were invented in the West and were used by large banks without having a larger idea about the consequences. India has always put a limit on bringing about such complicated instruments, thus safeguarding its people. Unit Linked Insurance Plans were one such mistake by made by India. Nevertheless, strong regulations were subsequently put in place to protect investors.
  5. Strong regulatory mechanisms: India has some of the world’s best regulating bodies. The RBI for the banking sector, the SEBI for capital markets, and the IRDA for the insurance sector. They bring out various regulations and guidelines time and again to protect the interests of the investors and to regulate their respective sectors.
    Although every country in the West has regulating bodies, their mechanisms are not as strong as those in India. This is evident by the fact that when many Western countries faced severe consequences during the sub-prime crisis, the effects on India were much lesser in comparison. Proactive measures and long term insight have helped the common man in India to be largely protected from global impacts.
  6. Not living on credit: Most people in the West live on credit cards, with a majority spending money even before they earn it. Statistics show that, in 2014, 33% of Americans had 1-2 cards and 7% held more than 7 cards. 29% did not hold a credit card, implying that atleast 71% held atleast 1 card. This is a pretty high percentage compared to India, where the ownership of credit cards for urban households was 27.65% in 2012 (according to The Indian Financial Scape survey).
    Living solely on credit can be extremely harmful to finances, especially if there is no discipline when it comes to paying the dues on time.

Although the above practices are observed in general, there may be exceptions to this trend in both the West as well as in India. However, it is well known that investors in the West take more risks with their financial decisions and save lesser.

Maybe the next time they visit us, they can pick up how to charm their finances while learning how to charm the pottery wheel, or the snake.

 

YOU MAY ALSO WANT TO: Make sure you’re moulding your finances right. Use our Compound Interest Calculator to plan your long term finances.

 

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