Growing up in a developing country during the 80’s and 90’s has given me strong foundations that have helped me through many facets of my life. There are great things to appreciate and to be proud of. Where I grew up, family is considered the most important aspect, links are tight, people work hard, long lasting friendships are abundant and deals are sealed with a firm handshake. Despite the multitude of positives, many shortcomings are however undeniable. After all, the term ‘developing’ is not awarded without merit.
One of these shortcomings relates to money. I don’t mean here the lack of it, (although ultimately its also true), but rather the lack of education and understanding of how money works. It might be evident for many that there is a significant shortage of financial education in developing nations. The question that comes to mind is; is this a result of having inadequate policies and obsolete structures that drive money education deficiencies? Or is it attributed to societies having inadequate principles and lack of understanding of money systems that drive deficient policies and outdated government and corporate structures? The right answer is debatable, yet we can assume that the average person would not go beyond what is widely available and known.
It has to start from somewhere
In the book “The Psychology of Money“, the author Morgan Housel argues how people’s relationship with money is based on their own unique experiences. Whether you grew up during a stock market bonanza, or when inflation was high, these experiences would form your views towards money. In other words, people’s relationship with money is greatly influenced by the upbringing and environment in which they grow up.
The ‘money education’ I was initially exposed to came from home. I was brought up in a lower middle class household. We had enough but never too much. My siblings and I were sent to private school, summer camps and enjoyed multiple extracurricular activities. Looking around I quickly realised there were distinctive traits in my upbringing that were not as common among my neighbours and other friends. We were moving closer to upper middle class. My parents had effectively managed to progress economically and socially with a combination of strong values, vision, capitalising on opportunities and deploying money strategies that were ahead of the average family.
My dad, a son of a Lebanese immigrant, possessed a natural knack for salesmanship, a strong entrepreneurial mindset and an uncanny ability to connect with people and create new relationships. He was a strong proponent of hard work, leading by example and most importantly, having a safety net. These core attributes and traits would help him later on to acquire fundamental ideas on business that shaped his thoughts towards money and wealth.
His sales skills allowed him to start making money at a young age, though learning the concept of credit would prove to be key during those formative years. He understood a salary by itself would not get him far. Diversification and creating other income streams started to become important. He would go on to launch several business ventures over the course of the following years. In most of these ventures, he was the equity partner having some strategic oversight but leaving the daily operations to others.
Fostering Money Education
All these ideas had a significant influence on me. Yet it was something else that complemented this initial ‘money education’. I recall my dad (sometimes my grandfather as well) would give us a weekly allowance commonly known as ‘Domingo’ in Mexico. Sometimes it would come as a reward for having good grades at school or on other occasions for having done some work at home. The goal was to instil in us from an early age some financial education by managing this allowance, and incentivise putting money aside so that we could afford something in the future. This didn’t come easy. The temptation and urge to spend it in the moment was at times quite hard to resist as a young kid. Thus we would also get introduced to the ‘piggy bank’ which meant once the money was put aside it wouldn’t be possible to access it.
I was sold on this idea. I embraced the challenge of being disciplined with my weekly allowance and would fill up the piggy bank with as much money as I could. On some occasions we would even have a little competition between siblings. Through this practical and entertaining way I started to learn about savings and personal finance. There wasn’t a compounding effect though consistency would reward me with a large pot after some time passed. It would make me think the money has multiplied magically inside that little porcelain piggy bank.
From Savings to Investments
But once we have them, what should we do with these savings? That’s when we start thinking about investing and deploying money to generate more money. People similar to my dad who grew up in developing countries and enjoyed social and economic progress, lived through a time of high inflationary rates, political instability and the nationalisation of the banking industry. Their preferred choice, naturally, would be to invest in real assets.
Real estate would be their first option. An investment property such as a residential house or commercial warehouse, a vacation home or a plot of land. Others would prefer physical assets such as buying gold or foreign currencies (although this is a financial asset) that can offer a hedge against inflation and/or a potential devaluation of the local currency. Another option for those with a more entrepreneurial spirit would be launching a new business and pooling friends’ money together into a joint venture. These would be the core traditional investment options deployed in an effort to build wealth.
There were also those who would opt to invest in financial assets. However, that would remain accessible only to a very small portion of the population. A few basic options included locking in an attractive interest rate with a certificate of deposit (CDs) or buying an annuity product from insurers. Investing in the stock market, a mutual fund or buying corporate debt would be nearly impossible to access for the average person in those years. Given the banking nationalisation that Mexico underwent in the early 80’s, it is fair to assume that the confidence levels were critically low pushing people further away from banks and the financial market.
Fast forward to the 21st century, knowledge, ideas and technological advancements have spread much faster benefitting many developing economies. Banking adoption has increased which has also contributed to fostering a culture of savings. Accessibility to financial markets has become more prevalent with financial information, investment education and trading tools widely available to the individual investor.
Whether you’re more comfortable investing in financial or in real assets, I won’t argue which one yields the higher rate of return. The key to me is to have a savings mindset and start putting your money to work. The old rule of putting aside at least 10% of your income should be the bare minimum. In my opinion one should aim to put aside 20% or more. Your future self will definitely appreciate it. As JL Collins, the author of “The Simple Path to Wealth” states: spend less than you earn, invest the surplus and avoid debt.