How should we share expenses? Should we share bank accounts? This is a question from a young 20-something millennial who has come to interview me for a woman-focused website. She’s about to get married and is wondering how to deal with marriage and money. Some stories her friends have told her worry her no end. How did you do it, she wanted to know. There was no concept of his or hers, we just pooled everything and spent as little as possible, I say. But I think the lessons from our lives of 25-30 years ago will have little resonance for today’s young. They are starting off in a better place in many ways. For most of my generation there was no question of my money or your money—it was the family’s money. In many cases, it was the joint family money. But for the Indian urban mass-affluent millennial, the deal is now very different. They rightly should think about and sort out money matters before they get married.
As a new financial year begins, I take a walk down memory lane and remember what I did more than two decades ago and what I would do differently if I could revisit my younger self today. It was the sixth year of my career and the latest hike just made the cut to begin paying taxes. I remember the joy of the increased salary getting deflated like a balloon on hearing that taxes will actually take away most of the hike. I opened my Public Provident Fund (PPF) account that year and then 16 years later collecting the corpus. You can read about that story here.
As first income earners, our first investments are usually linked to saving taxes and making it to the Section 80C limit. Several years pass for most people before the fact sinks in that this exercise is to be done every year. Year after year. The March-end rush to look for an investment to hit your money with is actually counterproductive. It benefits those selling products with high commissions because they are waiting for people who leave it to the last few days of the tax-saving deadline, to reel in with high-cost products with limited benefits. One of the most common problems in portfolios of middle-aged Indian middle class people is the kachra of multiple life insurance policies. Each year the agents will come and sell you something new and by the time you are 40, you have 10-20 policies. These people failed to see long term, looked at each year as a single tax-saving opportunity and did not look at their long earning years as a continuum.
An old colleague calls up. He is quite distressed. He wants help to stop lending. It seems, he says, his forehead has this sticker called ATM: “I have been lending all my life and it has never come back. People I have lent to now joke about not paying me back. I am just fed up. What can I do?” I feel his pain. I’ve been through my own journey of lending and not recovering the money. Losing respect for yourself and the person who borrowed and then losing the relationship as well—it falls into a pattern. We’ve all been there—been trapped, set up, emotionally blackmailed or asked outright for a loan. It could be a child’s wedding, a child’s education, medical bills, a business investment, or money to fund lifestyle or even a drug habit. I remember a distant uncle landing up on our doorstep many years back asking for a loan. I must have been eight or nine. Wide-eyed, I eavesdropped shamelessly, as my dad politely told him no. It was only later that I understood that the guy was a swinging junkie who was collecting for his next fix! Whatever the sudden emergency, you need to have a standard operating protocol in place to deal with the loan leeches.
The dust has settled for the moment on the question of whether retail investors should exit debt funds. The answer is no, they should not because in terms of flexibility and post-tax returns they do better than fixed deposits. But, both the regulator and mutual funds need to make changes that identify clearly risks investors may not know they carry. Debt funds are far more difficult to understand than equity, and unless the risk in these funds is clearly marked out, retail investors will hesitate to cross over from fixed deposits to debt funds. Debt funds are used more by firms than retail investors. Firms own two-thirds of the debt funds, while retail investors less than a tenth. Compare this with equity, where retail investors own almost half the assets. Corporate treasuries are constantly looking for that extra return from debt funds and choose those AMCs that bargain down costs and offer an extra return kicker. But higher return comes with higher risk.
The Infrastructure Leasing and Financial Services (IL&FS) contagion is spreading. After mutual funds and non-banking financial companies (NBFCs), it is the turn of the exempt pension funds to be worried about their investment in bonds from the beleaguered institution. The story is: as non-performing asset-laden banks dried up lending to firms, these companies turned to other sources of money as a firm needs working capital to keep the wheels of business turning. Money comes from two sources—extra funds that other firms have and household savings. Institutions such as banks, mutual funds, insurance firms, pension funds, and NBFCs act as intermediaries between households, who are the lenders, and firms who are borrowers. In the IL&FS case, there are bonds that have not kept to the interest payment schedule and were, thus, classified as below investment-grade by credit rating firms. Once that happened, the exposure to such bonds held by mutual funds came to light. Next came the exposure of NBFCs to these bonds.
Ask any average middle class person what they want from the Budget and the answer is lower prices and less tax. In a way these are contradictory goals because lower tax rates could mean a revenue shortfall. A tax revenue shortfall can cause a government to borrow more, causing the deficit to increase and that could cause a price rise. Didn’t make the link? Let me try and unpack this. The annual budget presentation is a financial statement of the central government where the collection of revenues and its spending is laid out. The government gets most of its revenue from taxes (both direct and indirect) and about one-fifth from non-tax sources. Direct taxes are paid by companies and individuals under various heads (income tax, tax on house property, tax on profits and so on). Of the total revenue, income tax on non corporates (that means us) is about one-fifth of the total revenue for the year. Corporations pay a bit more than we pay. Almost half of the revenue comes from indirect taxes—it used to be excise and sales tax, but now this revenue comes through goods and services tax (GST). The shortfall in revenue over what has to be spent is called a “deficit”. This deficit gets funded largely through the money the government borrows.
We just don’t get the big picture. The more I talk to people about money, the clearer it is that we compartmentalize our money lives so tightly that we totally fail to see the big picture. Every conversation with whoever I meet now swings around to money. People share their stories, their worries and their fears. They share the power equation within home that money causes. While housewives have always shared stories of the skewed power money equation, working women have equally scary stories. That’s because those who earn more than men have a triple burden—to manage work, home and the male ego. But most often the usual story is the fuzziness about how we think about money and how we simply are not able to see the whole money story.