154. Ignorance — Main Impediment to Wealth Creation (7. Building Finance Intuition)
“Where ignorance is our master, there is no possibility of real peace.” — Dalai Lama
In my last few blogs on building financial intuition, I wrote on what I believe to be the main levers to create wealth — earnings, asset allocation and time.
Now I want to turn my focus to what I have observed to be the key derailers on the way to creating wealth.
By no means, am I contending that financial wealth is the only wealth or should be the most coveted wealth. In fact, in my mind, health is the most important form of wealth, closely followed by meaningful human relationships. Further down are a robust sense of self and a productive vocation and finally, financial wealth. I arrived at my pecking order by looking at how lack of each form of wealth impacts life. As Charlie Munger used to say, “invert, always invert.
Importantly, financial wealth is an important and a critical form of wealth. If at all, in the increasingly materialistic world, it seems to be the most desired form of wealth.
I am drawn to the methods of wealth creation not just because lack of it can make life very inconvenient or even miserable but also because a sustainable pursuit of wealth can elevate all other aspects of life (health, personal identity, relationships and vocation).
In no particular order, here are what I believe to be the key derailers of wealth — ignorance, lack of protection and fortification, health and just plain old humanness.
Even after explicitly realizing that pursuit of wealth is necessary and after learning about the various levers of creating wealth, it is still hard enough to actually go through with what it takes to create wealth. Without a heartfelt purpose and the knowledge of how to go about it, the chances of any success dwindle down to a low bar. Make no mistake, I personally know people who made rather envious levels of wealth without this knowledge. They were driven by a strong purpose and they are exceptions. For the most part, people do not end up coming any close to their potential just because they are not aware of the means to achieve it. This is particularly ironical because the secrets to creating wealth are rather simple and are lost in plain sight.
“A man is responsible for his ignorance.” ― Milan Kundera
Many are ignorant of basic financial hygiene. For example, not many have a reasonably accurate sense of their average monthly expenses. They typically forget a few big ticket but infrequent expenses such as yearly health insurance premiums. Many do not have a good sense of how much their vacations costs. This typically results non-trivial underestimation of expenses.
Future value of money is not often understood well. As a direct consequence, the corrosive impact of inflation is often under-appreciated. Another big consequence is not being able to reasonably project future expenses (I believe this is a result of what is called “presentism” in psychology circles) — particularly the important ones like expenses in retirement, children’s education goals etc.
Another manifestation of ignorance is not keeping up the differential inflation trends for various expense categories like health and education. Despite being fairly conscious of this, recently I caught myself short — what I thought of a conservative estimate for my daughter’s higher education expense turned out to be materially short. Thankfully, my maniacal focus on margins of safety (in my personal financial plan, I refer to this as lines of defense) came in handy.
“Nothing is worse than active ignorance.” — Johann Wolfgang von Goethe
Many consider putting money in fixed income products (debt funds, fixed deposits etc) as “investing”. But, in reality, they can at best be considered “savings” (post tax returns rarely beat inflation). Corporate bonds are slightly better but then, it is hard to assess credit risk.
Understanding the difference between the essential nature of equity and fixed income investments is absolutely critical to creating wealth. For, it is the “ownership” assets (equity) that hold real potential to beat inflation. I have observed that most people do not take time to understand this.
When planning investments, it is important that one try to minimize taxes and expenses as much as possible. But many treat these kinds of savings as the end goals and end up investing in inappropriate products. For example, it is not uncommon to find people buy real estate just for the sake of saving income tax. Also, a mutual fund that yields say 15% net of 3% cost is a better product than one that returns 10% after charges of only 0.5%.
“A wise man makes his own decisions, but an ignorant man mindlessly follows the crowd.” — Chinese Proverb
Another common mistake is not to differentiate between insurance and investment. I have come across a number of people (including myself) who bought hybrid products that cater to both insurance and investment. Unfortunately, investment returns turn out way sub-par and insurance coverage abysmal.
One can learn all of these concepts in under the time that it takes to watch a “Bahubali” or “Batman” movie. However, not many take time and effort to learn them. Ignorance of these basic finance concepts is probably one of the biggest impediments to creating wealth.
Bottomline
“Ignorance is the root cause of Suffering” — Patanjali Yoga Sutra
“According to the World Bank, hygiene promotion is the most cost-effective health action to reduce disease” — cdc.gov website. This is not difficult to appreciate given that one of our first (and for a long time, only) defenses against COVID-19 pandemic was washing our hands with sanitizer/soap. Ignaz Semmelweis, a mid-nineteenth century physician, discovered that by surgeons washing hands between conducting an autopsy and taking on childbirth duties, maternal mortality could be significantly improved. Basic hygiene such as washing hands saved so many lives.
Similarly, I strongly feel that mere implementation of basic financial hygiene has potential to materially elevate one’s financial condition. Consequently, ignorance of financial hygiene is, in my view, one of the biggest impediments to wealth creation.
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A bit on my background
I help people make better decisions.
I coach people on “Making Better Decisions”, “Financial Intuition” and “Building Great Careers”. I’m open to run sessions on these topics in institutions — this will help me create larger impact.
I’m also an Investment Advisor (RIA) registered with the Securities and the Exchange Board of India (SEBI). As an RIA, I analyze and prepare financial plans to help people achieve their financial goals.
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