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Choosing a financial product is a disastrous starting point for saving and investing

The way to escape from the jungle of financial products is to start with knowing oneself

Choosing a financial product is a disastrous starting point for saving and investing

If you don't spend some of the money that you earn, then you are saving it. If you go by the dictionary definition of savings, then that's all there's to it. However, if the savings are to do anything but exist, then the saver has to go a big step beyond that. The logical next step that people take is to invest the money in some fashion. The distinction between just saving and actually investing the savings is something that a lot of people make. They understand instinctively that the value of money decreases with time and therefore idle money must work and grow.

This much is a normal part of the background knowledge about money of almost anyone who earns anything at all. After this starts the confusion. There are a huge number of things one can invest in. The types of things that most of us are aware of are property, gold, bank deposits, stocks, mutual funds and a few more. Within each, there's an absolute jungle of options, with these types of investments literally adding up to thousands of variants.

At this point starts the struggle of most savers-investors. Time is short and the choices many. The obvious outcome is that the most persuasive salesperson we meet ends up being the decision-maker of our financial lives. Financial decisions become reduced to product choices, which become dependant on which product is worth someone else's while to pitch to us.

The obvious antidote to that seems to be that we--each one of us--should learn to choose the right financial products ourselves. That's obvious, but wrong. The reason is that if you start believing product choice to be the most important thing, then you've already lost the battle. It's true that the entire visible machinery of selling financial products is organised around products. Even the government's regulatory machinery is organised around products. And yet, this way of approaching savings is absolutely wrong. Not just wrong, but disastrous.

The starting point of figuring out your savings and investments is not gathering knowledge about the products that are being offered to you, but gathering knowledge about yourself. Why do you need to save? What will you do with the money? When will you need it? Are you sure of the amount you will need? What if it's a little less? A surprising number of people have never sat down and thought about these questions.

Of course, it sounds like you'll need to foresee the future but that's not true. Most of us have precise needs that we can predict--specific financial goals which we need to meet at specific times. The way to escape from the jungle of financial products is to start with knowing oneself, i.e., of knowing the predictable financial goals in our lives.

Here's why: If you want to meet specific financial goals, then each will need to be served with something that has a different time frame, risk and return level. For example, you'll need money for your daughter's higher education after six years. You'd like to buy a house in no more than ten years. You'd like to go on a vacation to Europe after two years. You'd like Rs 5 lakh to always be available for emergencies.

Each of these goals is very precise. The risk you can take with it, as well as the amount of money needed can be quantified quite precisely. Therefore, it is relatively easy to decide what kind of financial products can help you fulfil them.

The key thing to understand here is that you, as a person, does not have a single pool of savings. Instead, you have a range of financial needs and goals, each with quite different needs. It is each one of these needs that has a pool of savings. And as for the task of mapping different products to different goals, stay tuned.