What my MBA did not teach me about money

 

foreword

 Mark Twain once famously said, “It ain’t what you don’t know that gets you into trouble, but it’s what you know for sure, that just ain’t so”.

 The quote used in the book sums up the essence of this wonderful book. What gets us into trouble are the beliefs and perspectives that we pick up over our life’s journey and its experiences. The authors, Sandeep and Sanjit, have not only the technical expertise because they are from the financial services industry themselves, but also a deep understanding of the nuances of the money and investment game to explain these experiences.

“What my MBA Didn’t teach me about Money” is a great resource to help its readers avoid some key mistakes in their investment journey. It will help investors to understand risks, take risks and also manage these risks. At the same time, it makes the readers aware that they have biases when it comes to money. It prepares a mindset to acknowledge volatility and uncertainties which happen to all of us in life and in investing. For all these shortcomings that lie within all of us, the authors have provided simple and practically applicable solutions.

• The role of money in the lives of people.

 
• What does it really mean to be wealthy for people? 

• The positive and negative money experiences that come to our mind immediately. 

• What to do if you come across a sudden windfall?

 • Why so many of our resolutions around finances go haywire despite the best financial planning? 

• Why the rich keep getting richer despite doing the same things as you are? Do the Rich behave differently, do they make the same mistakes, what drives their financial behavior?

To that end, I strongly recommend this book. It is a must-read not only for the investors who want to succeed financially but this book is also recommended for financial services practitioners who are looking to grow wealth for their clients.

Preface

 This book is not an attempt to criticize any MBA program or to give feedback on what should be and should not be included in any successful program. The learning and experience gained during our MBA (at Indian Institute of Management, Lucknow and Indian School of Business, Hyderabad) programs were a life changing experience for us. They gave us the confidence to face the world.

As fresh MBA graduates, we were all pepped up to change the world and face any challenge in front of us. However, harsh as it may sound, the ability to fulfil these ambitions hung primarily on the availability of money. We did not realise at that time, that the one most important thing required to change the world is financial independence.

“It ain’t what you don’t know that gets you in trouble, but it’s what you know for sure, that just ain’t so.”

Acknowledgements

 A big thank you to all the people who read our versions of this book and gave us valuable feedback on how to make it better. We are grateful to all the people who have put efforts in our lives for us to experience what we have, and consequently, be able to write this book. Thank you, God!

A Quick Note About The Authors 

This book has two authors. Both of them are a few generations apart. Sandeep is an alumnus of Indian Institute of Management, Lucknow (IIML) from the class of 1988, and Sanjit is an alumnus of Indian School of Business, Hyderabad (ISB) from the class of 2011. Sandeep and Sanjit went to the same school - St. John’s High School in Chandigarh, and are active members of its alumni association, SJOBA. That is how they came to know each other.

Combining narratives, numbers, and strategies to approach personal finance has been a challenge. At the end of a long, heated debate on how to explain a specific topic, both of them eventually arrived at similar solutions. The strategies offered in this book are things both of them live by themselves. They hope you enjoy reading their perspectives throughout this book.

Introduction 

This book is about personal finance. It acknowledges that there is a dichotomy. Personal and finance are two words which do not gel very well.

Finance is at the other end of the spectrum. In finance, money is the primary objective. Banks, financial markets, salaries, incomes, expenses, taxes, all talk about money. The institutions and setups do not care whether you had a good day or a bad one. They are not bothered with what is happening in your life, what your goals are, or if you live in a good house. Even your work or actions are only essential means to earn money. What you want personally does not matter to the world of finance.

Inside the book

 Life plays many tricks. Choices we make do not always go as per the intended plan. A business idea can be a dud, a relationship can go sour, helping a friend might be a handful more than expected, medical emergencies can crop up, even budgets for long-planned goals like children’s education and their marriage can overshoot. All these choices cost us money.
In part 2 of the book titled: What My MBA Did Not Teach Me About Finance, we talk about some key concepts of finance. Trust us, we have put in a genuine effort to make it simple and easy to understand in the most non-mathematical way. Some key frameworks and strategies are discussed here. We hope you benefit from using them in the long run.

``The investor’s chief problem – and even his worst enemy – is likely to be himself.”

part 4 titled: What My MBA Did Not Teach Me About Me.

 The world is full of financial intellectuals who are experts in their field but are bad money managers and have committed blunders in managing their own finances. The problem is not making money, but how to handle and grow it once you have it.

How to use this book 

The book discusses a lot of ideas and concepts in brief (and at times in detail). We understand that all of the content cannot be retained in the human mind in one go (except for those few gifted people who can). So, it is our intention that you come back again to the book from time to time. If you are using a print edition, we suggest the use of a pencil to mark things you would want to come back to or explore more about. If you are using an electronic edition, highlight, make notes. Please use Google as frequently as you like for any terms you are not familiar with.

This book also talks about the softer aspects of money and personal finance. It talks about beliefs. We understand that beliefs about money can be personal and vary from individual to individual. So we have only briefly discussed what we could not do without, to explain our point, and omitted the “gyaan”.

Part 1

 What My MBA Did Not Teach Me About MONEY

Chapter 1 

The Two Perspectives

 As Sameer picks up doughnuts of six different colours requested by his daughter, he gets an SMS notification from a mutual fund company. The SIP is due in two days. He looks at the SMS and reads the figure. Mentally, he notes that he needs to push it up by at least 10% more by the end of the year. He knows these small little top-ups will help him achieve his goals much faster. 
At home, Priya heats water in the kettle and prepares the tray with two bags of green tea. She waits for her dear husband Sameer and the doughnuts. It’s going to be, at the most, half a doughnut, she promises herself. No more, just half!
 Outside the kitchen, their three-year-old, Myra, is all ready, waiting for her daddy to get her the doughnuts. She has seated her favourite toys on two chairs along the dining table. Her friends Mickey the cow and Piku the dump truck will also get a doughnut each, which she will eat later on their behalf. Priya smiles to herself knowing from whom Myra gets her taste for the doughnuts. 
Sameer is 35 and Priya is 31 years old. They have been married for seven years. The second baby is due in six months. Sameer’s parents are retired and live independently in Karnal, Haryana, which is two and a half hours away from his residence in Gurugram. Sameer has a younger brother Sumit, who is a voice-over artist. He lives in Mumbai with his wife, Poorni. Sameer and Sumit both take care of their parents jointly. 
Sameer bought a car 5 years ago and a house 2 years ago. Together, the EMIs are comfortably covered by his salary. Sameer saves well and invests regularly through SIPs. His aspirations are to be able to do a foreign trip with his family every 3 years and buy a new car every 6 years. In the next 10 years, he wants to get his children’s education taken care of and in 15 odd years their marriage expenses. For these, Sameer has planned his finances well. He is well onto his goals. Priya is currently on a break and plans to get back to her job in about a year’s time after maternity. Sameer and Priya are frugal spenders and respect the money they earn

The First Decision

 Work has been smooth for Sameer. However, lately, a group of the bank’s large wealth management clients, who had got together and invested in leveraged equity derivatives linked products, have suffered deep losses. The amounts invested were in the range of INR 5 million to INR 20 million. Each of these portfolios has suffered about 25% loss in value due to the recent upsets in the stock market. Certain large listed entities had defaulted on debt issued by them, causing a major credit event. The credit event has caused great turmoil in the stock markets. Consequently, the market moved much more than expected and triggered margin calls for these clients. The losses per client are not small by any measure.

The Second Decision 

As he reaches home, he is greeted by an excited Myra who runs and hugs him. They sit on the table and it is doughnut time. Priya gets the tea and the table is set. Sameer sees that Priya’s brow is up. He knows what the discussion is going to be about - Starwood Preferred Guest or Taj Inner Circle?

 Sameer and Priya like to travel and stay in 5-star hotels. They are charmed by the ambience of Starwood Hotels, but also adore the hospitality of Taj Hotels. The two hotel chains are very different experiences but they now need to commit to one. This is because Sameer’s credit card company has offered him a special onetime offer to buy either’s membership at discounted rates. On top of it, there is a 12-month EMI option with only 1 percent nominal interest rate. Along with the purchase, Sameer will get a load of points which can be translated to other benefits.

The Two Perspectives of Finance

Sameer has two perspectives on money that he uses separately in order to make decisions regarding money. These perspectives are so distinct that different parts of his brain are used to put them in order. In fact, if a Chinese wall truly exists, it exists inside this risk manager’s brain on how to handle money in personal life and the professional management of money.
 The first perspective is personal. This is how Sameer feels about money in relation to his personal and family needs, desires and aspirations. These feelings involve his parents, his wife and child, their goals, their aspirations, and the timelines of their lives. Money here is a medium to run his life. This is the perspective which dominates Sameer’s brain when making a decision about spending on a hotel membership.

Square Peg in a Round Hole

 We all have a dual concept about money, like Sameer. At home, money pays bills, gets food on the table, pays for shelter as rents or EMIs and utility bills. It even pays for the future of our family and their daily dose of entertainment. There are unlimited sets of choices that we can spend the money on. Most of it is done by how spending that money makes us feel. It becomes an unconscious habit.

Figure 1: Personal Finance 

Unfortunately, trying to use logic and reasoning to make personal money decisions is like fitting a square peg in a round hole. The wiring of our brains and the design of the world around us is rigged with pitfalls and missteps when making these decisions. Yet there is an overlap between the human perspective and the financial perspective where the world still functions, even approximately. This is the area of personal finance.



Personal Finance is Hard Personal finance is hard because how you feel about money always gets in the way of how you should think about it. Your human perspective wants an easy solution, whereas your financial perspective wants an optimal solution. The conflict results in a financial limbo. 
On top of it, personal finance is not taught anywhere. We get a lot of training to learn about language to communicate, religion to maintain moral order, personal care and hygiene to stay healthy, and even take time to learn to drive a car to transport ourselves. Unfortunately, personal finance gets ignored.

The Need for Two Perspectives

 Sometimes the choices we make about our personal finances do not work out well. In hindsight, we look at these choices and realize that they were not logical. These choices were made out of the feelings we felt at that point in time. This may make us feel bad, but it is not our fault. We were not equipped with the right knowledge and tools to make those choices. We only had our limited experiences to guide us. These experiences ran short of the larger picture and needed to be upgraded. The first step in doing this is acknowledging that some upgrades are required. The second step is to use a strategy to upgrade.

Chapter 2

 The Personal Finance Cycle 

 The buzz of Delhi always excites Priya. She was brought up in West Delhi and went to Delhi University to do her B.Com. By the time she finished her undergraduate degree, computer application was an upcoming field. Priya’s uncle advised her to get a Masters of Computer Applications degree. The course turned out to be a great boon and, at the end of it, she got placed in one of India’s leading IT firms. IT has been her career since. She has grown well and is now in her second job since the past 4 years. The company has been supportive during her maternity break and she has a bright career ahead.

Personal Finance Cycle 

Money already circulates in the world we live in. Each of us takes actions to interact with money. These actions have outcomes. Inflow actions like earning and investing increase the flow of money. While outflow actions like spending and harvesting (gains) decrease the flow of money. Inflow and outflow actions can be sequenced to make the personal finance cycle. The personal finance cycle can be visualized in Figure 2.

                     Sense of money