Financial Habits of Indians and Americans

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As a personal finance blogger, I read three US based blogs on personal finance. They are Ramit Sethi’s IWillTeachYouToBeRich, JDR’s GetRichSlowly and Trent’s TheSimpleDollar

While I keep learning from the above personal finance blogs, there are a few Indian values that can add to the financial awareness of the US citizens. The United States and India are working together to synergize their strengths across sectors such as nuclear energy, aerospace, defense, and biotechnology.

What about the area of personal finance?

The purpose of this post is to share the different financial habits of an American and an Indian. Learning starts once you are aware.

When it comes to personal finance, it’s generally about income and expenses, savings and investments. Let’s look at some of the areas where Indian and US citizens are as different as chalk and coal. Income disparities don’t really matter on the aggregate level. For example, if a US guy earns many times more than an Indian, he also spends many times more on his haircut. There’s something called purchasing power parity and so let’s forget about income for a while.

Let’s get down to three elements of personal finance: Savings, Expenses and Investment.

Savings

Indians are compulsive savers. The Gross Domestic Savings of Indians is 34.8% of GDP. But in the US, if you take a survey on savings habit, asking how much you save is asking for trouble. The respondents will give you a fuddled look. It’s better to ask whether you save or not. That’s what the Federal Reserve Survey did.

The Federal Reserve survey says that in 2007, 6.0 percent of US families reported that their spending usually exceeds their income; 16.1 percent reported that the two are usually about the same; 35.7 percent reported that they typically save income “left over” at the end of the year, income of one family member, or unusual additional income; and 42.2 percent reported that they save regularly.

In 2007, the most frequently reported motive was retirement related (33.9 percent of families), and the next most frequently reported was liquidity related (32.0 percent of families), a response that is generally taken to be indicative of saving for precautionary reasons. At least since 1998, these have been the dominant reported reasons, but saving for retirement has increased in importance. Source:

Federal Reserve Survey of Consumer Finances

Expenses

We Indians don’t really understand how you can spend more than what you earn. But for an American, he’s born with those genetic abilities. If you are spending more than you earn, you are not just not saving, you are also getting into a debt trap. Looks like that an American is adept in getting into a debt trap!!

Investments

In India the saving is invested very conservatively. It’s primarily in low risk Bank Fixed deposits which take a lion share of 56.5%. Stocks, Debentures and Mutual Funds take away only 10.5 %. Indians have put more money on Insurance (17.6%) than stocks, Mutual Funds combined and they take Insurance as an investment option. The savings allocated to various financial assets is as under: (RBI Data)

Looks like that the US citizens are primarily interested in taking precaution for their retirement life and the lion share of their investment goes to retirement accounts. As we can see from the table below that the US citizen has much more options to choose from. But getting a wider choice is adding to the information overload, I think.

So what can an Indian and an American learn from each other?

Every time I come to the point of preaching something, I remember my favorite quote: “I want to learn. But I don’t want to be taught”. But you can teach yourself for sure.
So the starting point of learning something from each other would be to become aware of each other strengths and weaknesses.

Not to take on each other weaknesses. Like we see increasing number of Indians getting into credit card debts and making huge financial mistakes. But to learn from the other’s strengths.

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