FINANCIAL

LITERACY
TO
TO ACHIEVE
ACHIEVE YOUR
YOUR
FINANCIAL
FINANCIAL WELLBEING
WELLBEING
RAVI ABEYSURIYA, CFA, FCMA, CGMA, MBA

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING I

II
TABLE OF CONTENTS
Definition and benefits of financial literacy 03
01 Definition of financial literacy 03
Benefits of financial literacy 04
How to achieve financial independence and wealth 05
02 A list of income-generating assets to give you some ideas 07
Key lessons to help achieve financial independence and wealth 08

Personal financial planning 09

03 Six steps of financial planning and setting SMART goals
Why financial planning is important
09
12

Borrow Smart 13
Questions to consider before you decide to borrow from 13
04 any financial institution:
How to protect yourself from aggressive lenders/loan sharks 16
It is easy to get into debt but hard to get out 18
Manage your credit cards wisely 19

How money works 21

The secret to financial success 21
Make your savings work for you 23
The differences between saving and investing 24
05 Compound interest is your greatest friend
Some investments are too good to be true
26
28
Understanding credit ratings 29
Know the risks of investing 32
Investing in the capital market 33
Get professional advice when making investments 37

Wealth management 39
06 Asset allocation and portfolio diversification 39
Risk management 41
Be prepared for the unexpected 43
07 Why take insurance 43
Types of insurance 44
do’s and don’ts when taking insurance 46

Planning for your retirement 47

08 Why plan for retirement? 47
Key challenges of investing for retirement 49
Wisely manage your savings in retirement 50

09 Conclusion 53

10 References 54
FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 1
2
01 DEFINITION AND
BENIFITS OF
FINANCIAL LITERACY

Definition of financial literacy

Financial literacy can be defined as a combination of financial knowledge, skills, attitudes
and behaviors necessary to make sound financial decisions, based on economic and
personal circumstances, to improve one’s financial well-being, where:

 “Knowledge” means having an understanding of personal financial issues;

 “Skills” means being able to apply that knowledge to manage one’s personal finances;
and

 “Attitudes and behaviors” means settled beliefs, feelings, confidence and biases during
particular situations relating to handling one’s personal finances.

Financial literacy is
“The ability to use
knowledge and skills
to manage one’s
financial resources
effectively for
lifetime financial
security”

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 3

 Benefits of financial literacy
Financial inclusion, which is giving people  When people face financial stress, their
at all levels access to the financial system immediate reaction is to look for more
of a country, can only be effective if money. They believe that the solution
individuals are aware of the risks they are to the problem they are facing today is
taking and are prudent in how they make to go after more money but they do not
use of financial services. In Sri Lanka, low understand that the root cause of their
financial literacy has led to a high level of problem is their low financial literacy.
indebtedness and people making risky Such “solutions” will drag them deeper
investments such as in pyramid schemes. into financial stress.

Sri Lanka has the highest gap between print  Being financially literate clearly benefits
literacy and financial literacy in the region. individuals and their households, since
On average, 65% of adults in advanced they are able to make better and more
economies are financially literate. South Asia informed decisions when it comes to
records the lowest percentage of financial saving and borrowing money. They will
literacy, with Sri Lanka coming in at about be able to prioritize their needs more
35%. Evidence shows that Sri Lanka’s low efficiently and build a pool of funds
financial literacy is spread across all social for future use or borrow money with a
strata from the poor to the professionals clear understanding of the borrowing
such as doctors, lawyers, and judges. costs and their capacity to repay the
borrowings, within a reasonable period.
Many dishonest organizations operate
illegally or outside of the legal framework in  People who make sensible financial
Sri Lanka. They either mobilize high interest- decisions are more likely to achieve
paying deposits or offer informal lending their financial goals, manage financial
schemes that provide loans at exorbitant risks, build a pool of financial assets,
interest rates and thrive on the financially not become a burden to society, and
illiterate who, because of their sheer lack contribute to the economic growth of
of financial knowledge, only focus on their the country.
short-term needs and do not understand
the long-term consequences of their  Money comes and goes, but if you are
decisions. financially literate about how money
works best, you gain power over it and
“Financial inclusion, which can begin building wealth.
is giving people at all levels
 The first and most important step is to
access to the financial system
educate yourself to become skilled at
of a country, can only be making, controlling and safeguarding
effective if individuals are your money. You need to start working
aware of the risks they are on your financial IQ and become
taking and are prudent in how financially literate so you have the
they make use of financial freedom to achieve your objective
services.” successfully.

4
02 HOW TO ACHIEVE
FINANCIAL INDEPENDENCE
AND WEALTH
“Wealth is a
person’s ability
to maintain their
lifestyle for a
lifetime if they
were to stop
working today”
The education system teaches people to People are not taught at school how to
study hard, achieve good qualifications and spend their money wisely. Many do not
get a well-paid job. In other words, how to know the difference between an asset
work for money, but they do not teach you –something which puts money in your
how money can work for you. This lack of pocket, and a liability – something which
financial skills within the school curriculum takes money out of your pocket. The only
means that even highly educated people way to become financially independent is
generally do not know how to manage to accumulate income-generating assets
money. The result is that the majority of that can pay for your expenses. Smart
people get trapped in work to pay their bills people diligently build their assets such as
and are chasing paychecks all their life. fixed deposits, bonds, unit trusts, stocks,
There are many accountants, doctors and income generating real estate, anything
lawyers who work very hard, but they never that produces income or appreciates in
seem to earn enough and are in this rat race. value and has a ready market, that generate
income. However, many people would rather
The fundamental problem with working for buy a smart phone on installment basis
money is that a job is a short-term solution (taking a loan, i.e. creating a liability) instead
to a long-term problem. People believe that of investing that money in assets that
if they get that raise, or get a new job, they generate income that would finance their
will finally have enough. However, if you do smart phone. If you do not want money to
not know how money works, you can never control your life, as it does for most people,
have enough. Money alone will not solve then you will have to do things differently
anything. Most people, given more money, from the crowd.
only get into more debt.

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 5

 income even further. Reinvesting income
You can achieve financial independence into new assets triggers the power of
at any age if you follow a certain compounded interest, to which Albert
process and commit to it. How fast you Einstein once famously referred as the
are going to achieve success depends “eighth wonder of the world, because those
on two things: who understand it, earn it those who don’t
pay it.” The wealthiest and wisest investors
1. How much money you need every are always smiling, because they are
year to cover your expenses making money every second of the day.

2. How determined and focused you A small piece of snow becomes a powerful
are about building a portfolio of force such as an avalanche when it starts
cash-generating assets to cover coming down a hill and gathers more snow
those expenses. over time. Your wealth works the exact
same way. The work you need to do in the
Anyone can do it, provided you discipline beginning is often very painful and requires
yourself to live within your means and a lot of discipline. You don’t see results
build your assets. Most people want the overnight. But once your wealth snowball
convenience of financial freedom but only is built, your wealth naturally attracts more
a few go through the inconvenience of wealth. Then the power of compounding
achieving it. interest can work in your favor. Just as a
snowball compounds and grows over time,
The poor work for money. Many people find so can your wealth. Nothing can stop it from
that their expenses always keep up with growing. As long as an investment is paying
their income. They do not understand why you interest, you can keep smiling at night
even if they earn more than they used to, because you know that time is your ally. The
they still have no money left at the end longer the time you have, the richer you get!
of the month. They struggle financially
because when their income increases, Compounding interest can create
they continue to increase their spending. millionaires from average people, especially
However, their assets do not increase, but if you are young! Take an average 25-year
their liabilities do! They work to make their old saving Rs.287 per month and earning
organization rich, they work for the bank 12% compound interest, she or he would
to pay off their debts and they work to pay have a Rs.1 million by 55! This is just
government taxes. Working harder means assuming conservative 12% returns in a
that you will have to hand over an even fixed deposit, and assuming she never gets
bigger share of your efforts to these three a raise and save anything more over the
parties. 30 years. The real results could be much
greater! By investing in companies that
Rich people are rich because they live like are growing – thus paying out increasingly
the poor. On the contrary, poor people are more cash to shareholders, an initial
poor because they try to live as if they are investment could multiply many times over
rich. Do you want to be rich or look rich? in the course of a long time span. Don’t
Think about it. The rich get richer because underestimate this power of investing.
their assets generate more than enough
income to cover their expenses, and part This is all due to compounding interest
of the income is then reinvested into new explained in the section “Compound interest
assets, therefore increasing the generated is your greatest friend” later.

6
A list of income-generating
assets to give you some ideas:
1. Fixed income instruments that pay an
interest rate higher than the rate of
inflation.

2. Rent-generating real estate that

appreciates in value over time.

3. Businesses that you own that do not

require your presence all the time
but are managed well enough to be
successful and profitable.

4. Good dividend paying Unit Trusts that

appreciate in value over time.

5. Good dividend-paying stocks that

appreciate in value over time.

LKR “You become

LKR financially
free,
when your
passive
income
exceed your
expenses”

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 7

 Key lessons to help achieve financial
independence and wealth
These key lessons will help you achieve a 6. Work to learn, don’t work to earn. Find a
life where you are no longer dependent on job that will teach you the art of starting
your salary and you progressively become your own business. Surround yourself
wealthy: with people who are smarter than you,
1. What you learn will help you become and pay them well.
what you are, so choose what you learn
and read carefully. Find people who are 7. Every rich person has lost money at
the best in their field. An investment in some point. Playing not to lose money
knowledge pays the best return. You are means you will never make money.
making an important investment by just “Winning means being unafraid to lose.”
reading this booklet. Failure inspires winners and defeats
losers. When something does not work
2. Do not simply aim for more income, aim out the way you planned, let it inspire
for more assets. Keep your expenses you to try a different approach. Learn
low and reduce your liabilities. and move on.

3. If you want to buy something, first 8. Be in control over your emotions. Do not
generate enough cash flow from let fear or opinions of others dictate your
your assets to cover the cost of your actions.
acquisitions and expenses. Learn
to prioritize your needs where the 9. Saying “I cannot afford it” shuts down
purchase of luxuries would only be your brain, but asking yourself “How
pursued after you have acquired your can I afford it?” opens up your thought
daily essentials. process and triggers your financial
acumen to come up with a creative
4. Excess cash flow generated by your solution.
assets should be reinvested in income-
generating assets. 10. Pay yourself first, not last. Each month,
use a standing order to first invest a
5. Establish a company to protect your certain amount of money into income-
assets and reduce your taxes. Income generating assets before you pay your
that an employee earns is taxed as bills. If you come up short, use this
PAYE and you then get to spend what pressure to pay to inspire you to come
is left. Income that a company earns up with innovative ways to get enough
gets taxed after the company deducts money to pay the expenses or reduce
its allowable expenses, commonly your expenses. This is a difficult, but
known as net income (total income less important, principle. If you pay yourself
allowable expenses). This is the biggest last, you would feel no pressure, but you
legal loophole that the rich use! would probably not come up with new
sources of income either.

8
03 PERSONAL
FINANCIAL
PLANNING
Six steps of financial planning and
setting SMART goals
Personal financial planning involves managing your spending, saving, and investing
activity. Personal financial planning is imperative for financial wellbeing, to live comfortably,
have financial security, and achieve your financial goals. However poor or wealthy you
are today, if you fail to manage your finances properly, the probability of your getting into
financial difficulty is extremely high. Trying to live up to a style of living that you cannot
afford will only lead to disaster. Your financial plan should include the goals, resources, and
responsibilities of the entire family. You can achieve family needs but not necessarily what
each family member wants. The financial planning process has six steps.

1. Determine your current financial

status: In order to get a perspective of where
you are, you need to prepare a list of all your monthly
earnings and expenses. Once you have a record of
your income and expenses, you will have a good
understanding of where your money is going. It is
also very useful to identify the assets (what you
own in money terms today) and liabilities (money
you owe to others today) at this point. A good way
to manage your personal finances is to use personal
finance software or tracker apps. Some are available
free of charge. Most likely, you may find that
whatever you earn, you spend, but do not despair.
I call this stage of building wealth as “poor” even if
you earn ten thousand rupees a month or hundreds
of thousands of rupees a month. It represents a
state of mind.

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 9

 2. Develop your family financial goals:
The next step in financial wellness is establishing
financial goals. Establishing your goals is the conscious
effort of examining, defining and writing down what
you want to achieve both financially and personally. Set
SMART (specific, measurable, achievable, rewarding and
time-bound) goals. Think of what you want in life and
set goals towards achieving them. Your goals can be
short-term (one year or less), medium-term (two to five
years). For example, if you want to buy a piece of land in
5 years’ time, start saving for it now. Alternately, goals
can be long-term (more than five years) such as having a
comfortable retirement. If you are working for something
that’s important to you (rewarding), you are more likely
to succeed if you have a goal and a time-bound plan of
action.

3. Identify your options - your needs and

your wants: Knowing the difference between your
needs (something you must have to survive) and your
wants (something you desire but can do without). Plan
to meet your basic needs before thinking of luxuries. For
example, ensure that your children’s books are bought
before you spend money on new electronics such as TVs,
luxuries such as expensive clothes and eating out, etc.
Many people spend money they don’t have to buy things
they don’t need, to impress people they don’t like. Do not
let your emotions control you when it comes to spending
money. Financially independent people do not care if their
friends change their phones. It does not impress them if
their friends go out for dinner every weekend.

4. Decide what is important to you: The

financial goals you set earlier will discipline your financial
management and set you on course to achieve your goals.
The trade-off is the opportunity cost or what is given up
when making one choice instead of another. Obviously,
you will need to sacrifice short-term pleasure if you are to
achieve your long-term goals. For example, having a future
retirement fund vs. momentary pleasure of smoking: If
you smoke three cigarettes daily at Rs.50 each, that adds
up to Rs.54,750 a year. If you stop smoking, you will save
Rs.54,750 a year, and if you invest Rs.54,750 a year over
30 years at 10% compound interest per annum on a NSB
fixed deposit, you will have a Rs.12 million retirement fund
in 30 years.

10
5. Develop a budget: Step one would have
enlightened your financial position. It is normal to have
your expenses exceed your income, your liabilities be
greater than your assets, or your goals far outweigh your
ability to save. Once you have decided on your priorities,
find out how much you need to pay for them. Make sure
you plan not to spend more than you earn. The way
forward would be to develop a budget. Keeping in mind
that prices usually increase over time, diligently work on
achieving your financial goals, which means planning
where you will get the income. If you cannot get enough
money from your income, raise additional money through
part-time work, home-based projects, etc. You will have to
cut your expenses and build income-generating assets.
Look for ways to spend less so that you can save some
money to help you reach your financial goals. Breaking
old spending habits will be hard, but as long as you keep
reminding yourself of your goal, you will stay motivated. A
relatively painless way to find money for savings or debt
reduction is to take it right off as your get your income.
What you don’t see, you won’t miss and can’t spend.

6. Be vigilant, measure and monitor your

progress, and revise your plan: Keep
records of your goals and mark off key milestones as you
achieve them. Refer to this information from time to time.
Writing down goals, reviewing them, and recording your
progress can motivate you. Financial planning continues
as you follow your plan. As you get older, your financial
goals and needs will change. That means that your
financial plan will have to change too. You should re-
evaluate and revise it every year.

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 11

 Why financial planning
is important ?

1. A disciplined, planned process is the best way to build wealth

2. Helps to avoid “get-rich-quick” schemes

3. Will ensure realistic goals are set and then a self-controlled

approach can be applied towards achieving those goals

4. Forces you to think and plan about long-term goals

5. Changes and adjustments can be made easily along the way

once a plan is in place

6. Gives clarity to stakeholders (spouse, children, heirs) should

the need arise.

12
04 BORROW
SMART

Questions to consider before you decide to

borrow from any financial institution:
At some point in your life, you may need to Other key considerations would be:
borrow money (take a loan). It is imperative
that you borrow smart if you want to
1. Do I really need to borrow? Would I be
better off saving for this item and paying
maintain your financial stability.
in cash in the future? Every loan comes
with a cost. The effective interest rate
When considering taking a loan for any
for borrowing is always higher than
purpose, do not fail to consider the following
the annual deposit rate. The effective
factors and ask questions from the lender
interest rate is called the annual
to clarify any doubts. Shop around for the
effective rate (AER).
best offer from different lenders considering
these factors.
2. What will be the down payment? Down
The single most important consideration payments minimize the amount you
is to verify whether you have the have to borrow. The more money paid
disposable income or surplus necessary to upfront toward the purchase, the more
accommodate the repayments of the loan money you will save over the life of the
every month or week? This is a question loan.
any credit officer who interviews you will
need to know and on which he will base his
decision on how creditworthy you are. If you
3. The purpose of the loan – Is it for
a productive purpose where the
are able to prove that you have the capacity
investment made will be able to
to repay your loan commitments, then you
generate an income for me, which will
will need to give the financial institution a
enable me to absorb the cost of the loan
standing order for the automatic deduction
repayment? Will I really have the ability
of the monthly or weekly repayment from
to generate sufficient income or save
your account with the financial institution
money from the investment made by
(FI) or for a transfer of the specified amount
taking the loan?
to be made from the bank with which you
have your account.
4. What are the security or collateral
“The single most important (something you own) and guarantees
required by the lender? Remember that if
consideration is to verify you fail to pay back your loan, the lender
whether you have the has all the legal rights to take over
disposable income or surplus the collateral provided or request the
necessary to accommodate the guarantor to pay back your loan. Lenders
repayments of the loan every that do not require security may charge
month or week?”

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 13

 very high interest rates because it is 7. What are the additional fees that may
very risky for them to give out a loan that be charged? For example, some loans
has no security. In case you are offered have front-end fees, stamp duty, early
a loan without security, make sure you repayments fees, loan processing fees,
understand all the terms and conditions etc. These can be negotiable and some
including the cost of the loan. financial institutes (FIs) waive these
charges just to be able to win over
5. What is the total cost of credit and customers. So, look around at other
effective interest rate that I will be FIs before you make a decision about
charged for the loan? The effective your transaction partner. It is a very
interest rate takes into consideration competitive market from which you can
the term of the loan or the frequency benefit if you take the trouble to shop
with which you are required to pay back around for the best deal.
the interest and installment of the loan.
Usually it is monthly but can be weekly 8. What penalty interests and fines will
or daily for micro-finance loans with no be charged if you miss an installment
collateral. payment?

6. Interest computations – Fixed or 9. What will be the tax impact of taking the
variable, flat or declining? How will loan? Currently, there is a 5% tax on all
the interest be calculated? Will I be deposit interests but no tax concession
charged a fixed interest rate that will for interest paid on any loan including
remain the same throughout the term housing loans by individuals. Business
of the loan or a variable interest rate profit is taxed after interest paid is
that will periodically increase as a result deducted. Hence, it is beneficial to
of increases in market interest rates borrow for a business.
during the term of the loan? A fixed
rate, although higher than a variable
rate, allows you to accurately predict
your future payments. Variable interest When making a decision to take
rates may lead to you having to pay a a loan, add the monthly payment
higher monthly payment in the future amount to your monthly budget.
at the discretion of the lender, if market Consider the guidelines above
interest rates increase. Interest may when inserting the figure for the
also be calculated based on flat or on new purchase. If the amount of the
declining basis. A loan with 15% declining payment for the purchase exceeds the
interest will cost you less than a loan recommendations, does not allow you
with 15% flat interest. This is because to save money, or causes your monthly
with a “declining” interest rate, you only expenses to exceed your monthly
pay interest on what you actually owe income, you may want to postpone your
the lender while with a “flat” interest rate purchase until you have more money
you keep paying interest on the original saved, find a more affordable and
amount of the loan until this amount is comparable item, or pay off other debts.
entirely paid back.

14
 Annual effective rate is calculated as: AER=[(1+r/n)n -1] Where:
n = number of times a year that interest is paid and r = nominal
interest rate
AER gives the borrower an idea of the true cost of borrowing and
is comparable against annual interest rate received on maturity
of a fixed deposit at the end of one year. For example, a nominal
interest rate of 15% paid monthly is equivalent to [(1+0.15/12)12 -1]
an AER of 16.075%.

If you do not devote adequate time to the

above imperatives before you take a credit
decision, you will invariably find yourself
in a debt trap from which you will find it
increasingly difficult to extricate yourself.

Asking the right questions will show the

credit officer and FI that you are smart
and cannot be taken for a ride. If not, the
FI will take advantage of your financial
ignorance. Don’t let this happen under any
circumstances. Get all the terms of the loan
clearly specified in an offer letter that you
can then compare with what is offered by
other FIs. This will also give you enough
material and information to make the right
decision in your favor.

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 15

 How to protect yourself from aggressive
lenders/loan sharks
Beware of aggressive lenders. Avoid “easy” information to avoid nasty surprises in the
loans from lenders who entice you to borrow future. Always look for the fine print and the
and discourage you from reading and disclaimer clauses, and question the FI on
understanding the loan documents. They why these clauses should be there in the
might try to take advantage of you. Always first place.
insist on reading all the loan documents
and ask for explanations so that you Most lenders calculate the periodic
understand all the conditions attached to installment payment using a standard
the loan before you sign. It is your right to formula (given below). There is a big
ask and the responsibility of the lender to difference where the loan installment and
provide you all the information you need the interest rate are quoted on yearly,
before agreeing to take a loan. Both you and monthly, and weekly basis
the lender should be honest in disclosing

( + )
Periodic installment calculation: . [( ] where
+ )
P = is the principal amount borrowed
r = is the periodic interest (if annual interest rate it is divided by number of installments)
n = number of installments for a year
For example, periodic installment for a Rs.10,000 loan over a 12-month period at 15%
. ( + . )
annual Interest (1.25% per month) is = , .[ ( + . )
] = Rs.902.58 per
month.

Yearly interest rate: If you took a loan of Rs.10,000 for one year with 15% interest per annum,
you would pay a monthly installment of Rs.902.58. Your payment would be Rs.10,831 plus any
other fees/charges: You will pay a total interest of Rs. 831 plus the Rs.10,000 that you
received as a loan. The effective interest rate is 16.1%.
Monthly interest rate: If you took a loan of Rs.10,000 for 12 months with 5% interest per
0.05(1+0.05)12
month, you would pay a monthly installment of Rs.1,128.25. i.e. 10,000 .[ (1+0.05)12 1
] Your
total payment would be Rs.13,539.05 plus any other fees/charges. You will pay total interest
of Rs. 3,539.05 plus the Rs.10,000 that you received as a loan. The effective interest rate is
79.6%.
Weekly interest rate: If you took a loan of Rs.10,000 for 52 weeks with 2% interest per week,
0.02(1+0.02)52
you would pay a weekly installment of Rs.311.09. i.e. 10,000 . [ (1+0.02)52 1
] Your total
payment would be Rs.16,176.72 plus any other fees/charges. You will pay a total interest of
Rs.6,176.72 plus the Rs.10,000 that you received as a loan. The effective interest rate is
180.0%.

16
The poor who have no collateral to offer Before you take a loan, ask the lender about
and are financially ignorant are the most the total amount you have to pay back over
vulnerable to aggressive lenders and the entire period of the loan. This is called
loan sharks that offer monthly or weekly the total cost of credit and includes the
interest rates. Due to a lack of alternatives, amount you borrowed + interest cost for the
sheer poverty and helplessness, they are whole period + any other fees/charges. If
deceived into accepting monthly or weekly you shop around for the best lender, you will
payments, as the installments appear most likely end up paying less with better
tolerable. They will hardly question the total repayment terms. Borrowing from the wrong
interest payable that is the true cost of lender could cost you a lot, so research your
borrowing, which is reflected in the effective options and choose wisely. Be confident
interest rate charged by the lender. when asking financial institutions for total
cost of borrowing and terms and conditions
so that you make an informed decision that
is best for you.

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 17

 It is easy to get into debt
but hard to get out
If you borrow money, plan carefully how
you will use your loan and how you will
pay it back – and stick to your plan. Always
use borrowed money for the purpose you
borrowed it. Avoid borrowing to pay off
another debt unless it reduces the total
cost of credit. Borrowing more to pay your
existing loans will get you deeper into the
debt trap so that it becomes even more
difficult for you to get out. If you think you will fail to pay on time as
laid out in the contract, inform your lender in
To pay back your loan, you have to make advance and re-negotiate your loan. Do not
your money work for you. Borrow for try to buy time by paying with a cheque that
productive investments such as buying a “bounces” (issuing a cheque when you do
piece of land that appreciates. Alternatively, not have enough money on your account is
you can grow something or expand your a criminal offence). Do not give any false or
business prospects with that money. Pay misleading information.
back the loan and maybe borrow more
later, if it is necessary. Use loans wisely Do not borrow because others are
and never rush into borrowing. Think twice borrowing. It is not wise to take a loan just
before borrowing for luxuries, or things because other people around you are doing
that lose value (e.g. foreign travel, vehicles, so. Ask yourself if you really need the loan.
household electronic items, expensive Mostly, it is better to save than to take a
clothes, etc.). Borrowing for consumption is loan. Take a loan only as a last resort.
totally unproductive.
When’s the last time you saw a high interest
“Avoid borrowing to pay credit card balance move much lower after
off another debt unless it making a payment? When you get into
high interest debt, you are now fighting
reduces the total cost of against the inevitable force of compounding
credit.Borrowing more to pay interest. Nobody makes a real fortune
your existing loans will get overnight, and nobody goes broke in one
you deeper into the debt trap night either. The exceptions to the rule
so that it becomes even more regress back to where they should be over
difficult for you to get out.” time. That’s why lottery winners oftentimes
end up broke years later.

The habits that you live with define your

wealth. If your spending habits cause
you to fight against interest, you will
fight that fight the rest of your life.

18
Manage your credit
cards wisely
It is easy to get a credit card, but managing
it is not easy. Using credit cards is
borrowing money. You need to repay what
you borrow. Using credit cards requires a
very high degree of financial discipline to
pay your full balance outstanding on the due
date every month, on each card, without
fail. Do not ever spend more than what you “Poor use of your credit card
can afford to pay in full each month. If you can rapidly place you in
fail to pay your balance in full each month, debt.”
interest will accrue at the rate of 28% per
annum or 2.33% per month and get added At least here, the bank is the loser and
to the total amount you owe the following you emerge the winner. If you actually
month. Thereafter, your outstanding balance calculate the date on which your credit card
will continue to grow fast until you reach purchases get billed in your statement for
your credit limit due to interest on interest. repayment, it can even give you a much
You cannot make progress in your financial longer period than 3 weeks of interest-free
life borrowing money at 2.3% per month credit.
and you may not be able to get out of the
debt trap. Poor use of your credit card can The total number of active credit cards in
rapidly place you in debt. Paying off debt the country as at April 2022 stood at 1.97
can take several years and lots of sacrifice. million, whilst the total amount the card
Credit card debt is something you bring on holders owed to commercial banks was
yourself and it is much easier to stay out of Rs. 138.19 billion. The numbers imply that
trouble than get out of trouble. approximately one out of every 20 persons
in Sri Lanka carry a credit card.

The wise use of a credit card is to take The key to avoiding credit card debt is to
advantage of the interest-free credit make a habit of charging only what you can
period allowed by the FI to repay the afford. Once you start using your credit card
amount outstanding. It gives you at to fund a lifestyle that is above your means,
least 3 weeks to repay especially when you risk getting into credit card debt. The
you do not have the funds available at more credit cards you have, the easier it is
the time you need to make a purchase. to get in over your head. Many cardholders
Most people do not understand this have two to three different cards and when
basic concept. You lose nothing and one card is ‘refused’ after reaching the
the bank does not earn anything out of maximum spending limit, a second or third
your credit card if you have a standing card is used.
order for the payment of total amount
outstanding on the due date. Financial institutions do a great job
convincing you that you absolutely need
their money and that you should enjoy life
with enticing advertisements that offer a

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 19

 host of products and services at discounted When making use of interest-free credit
prices. They even go to the extent of card installment payments, bear in mind
offering 12 to 60 months’ interest-free the consequences of missing even one
installment payments to persuade you to monthly payment. Missing payments could
borrow. However, that lifestyle you enjoy will lead to the financial institution charging you
be short-lived. The irony is that luxuries tend a hefty late payment fee as well as interest
to become necessities and you will reach at the standard rate of 2.3% per month on
a point where you will become trapped in the entire amount outstanding even if part
a rat race for your entire adult life, living of that has been settled. Various fees such
paycheck to paycheck just to afford those as over-the- limit fees, etc. will increase the
luxuries and the long-term price you pay total cost of your charges.
for them is huge. Some have committed
suicide because they were neck-high in Do not always carry your credit cards with
debt. One of the main causes for high debt you. Having a credit card can give you easy
among the younger generation is consumer access to money you would not typically
credit that lures you to spend more than have. If you leave the card at home, you may
what you earn and ultimately devastates think twice about buying items you don’t
your financial future. You may vehemently really need.
deny that you are trying to keep up with the
neighbors or social class, but unconsciously Of course, if you have reached a stage
it is happening due to the consumerist where your assets generate income that
society we live in. What is truly required is cover more than your expenses and can
a minimalist lifestyle and to live within your afford to pay off your monthly credit card
means with strict financial discipline. Make balances in full and have the financial
sure that you spend your money on what discipline to stick to your budget, you can
is important and meaningful for you, and have your credit cards. You can indulge in
simplify your lifestyle. Purchase only what attractive seasonal promotions and rewards
you need without using consumer credit, offered by credit card issuers to suit your
which in practice means you will have to lifestyle.
really think whether the purchase makes
sense before you purchase and wait longer “Don’t buy something just
to buy things. because it’s discounted off its
normal list price; buy it if it is
Beware of mistaking discounts for value to something you really need and
you. In other words, don’t buy something is a price you can afford.”
just because it’s discounted off its normal
list price; buy it if it is something you really Debit cards and mobile wallets that debit
need and is a price you can afford. If you see your bank account as you purchase an item
that a Rs.60,000 TV is now on sale for a 50% are a more sensible and convenient way to
discounted price of Rs.30,000, and you buy buy your daily essentials without carrying
that TV, don’t think that you’ve just saved cash and going to the bank or ATM to get
Rs.30,000. On the contrary, what you have cash frequently. Debit cards and mobile
done is that you’ve just spent Rs.30,000 of wallets also provide a measure of safety
your limited cash. Similarly, hotel stays are from theft. They offer the advantage of not
offered with as much as 50% discounts for carrying large amounts of cash for high
credit cards for you to splurge on holidays value purchases and avoiding the negatives
that you do not actually need or cannot of a credit as you can utilize only the funds
afford. you already have in the account or mobile
wallet.

20
05 HOW
MONEY
WORKS
The secret to financial success
The secret to financial success lies in In other words, whether you live within
whether you live within your means. The your means (not buying what you want but
amount of money you save on a regular only what you need and can afford within
basis and prudently invest during your your income level). Remember the proverb,
working years matters. If you budget “The wise man saves for the future, but the
properly and live within your means, you will foolish man spends whatever he gets.” No
see a positive cash flow that will allow you matter how wealthy you are, you have to
to determine what you can afford so that monitor your spending and have an idea of
you don’t reach too high, lest you fall. If you how much you are spending compared to
are earning more than you are spending, your income. Irrespective of whether you
you have everything you need to build your are an executive earning Rs. 200,000 or a
wealth so that you can live comfortably driver earning Rs. 35,000 a month, if you are
later on. The most important thing that spending more than you get, you are bound
determines whether you will be financially to get into difficulties.
successful is controlling your spending or
living within your means. Too much debt makes it that much harder
to reach your goals. Having monthly loan
How you build your wealth will be a function obligations means that the money needed
of what your current lifestyle needs are to service those loans can’t be used for
and putting a fixed amount away before something else, something that increases
spending, which will grow for the future. your wealth. The deciding factor is whether
This will be a function of your investment your thoughts are living in the past, present
goals and a function of your risk tolerance. or future, which will make the difference

The Consequences and Rewards of your Financial Choices

Lifestyle of Debt
Increasingly Expensive Lifestyle

Stress
Discontentment
Slavery
Sleepless Nights DEBT

Living within your means INCOME

Peace of Mind
Financial Freedom
Security
Future Blessings

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 21

 in your financial behavior. People who live People sometimes ask me for help after they
in the past may be more cautious but also realize that things have gone out of control.
less likely to default on debt. People who All these people have one thing in common:
live in the present tend to focus more on the Not necessarily age, occupation, or lifestyle
moment and less on changing their financial choices. The trait that they all share is that
situation. People who live in the future may they are unhappy. Here’s where one cannot
feel that they can predict the future, which hide from the “buy now, pay later”, instant
could lead to taking on too much debt or gratification mentality. There is a price to
making bad investments. None of the above pay for your spending decisions and the
time perspectives is a perfect scenario, price can be steep. People who choose
and just like everything else in life, each to live beyond their means while they are
perspective has its pros and cons. But working are likely to pay a hefty price during
the optimal scenario is to strike a balance their golden years for their spendthrift ways
among all three. Creating a balance between at a time when they need the money most
present desires and future goals will ensure for their retirement.
happiness both now and in the future.

Foregoing smart financial planning

during the working years, when you
have both time and resources on your
side, means you will be in for a rude
awakening when you realize that you
are staring at retirement with depleted
savings. What was supposed to be a
time of leisure suddenly looks pretty
bleak, with a few decades of retirement
ahead and little money to draw on.

22
Make your savings work for you
There are two ways to make money: One money work together. Just like you demand
way is to work for money, which is what we extra wages with increasing inflation, you
all do. Another way is to get your money to have every right to demand an adequate
work for you by saving and investing, which return or wages from the borrowers for
we all neglect to do. While money doesn’t using your money depending on the risks
grow on trees, it can grow steadily when you you have to take. The second way is if you
save and invest wisely. You don’t have to become an owner of something that you
be a genius to save and invest your money. hope increases in value over time. When you
You only need to know some basics and need your money back, you sell it provided
the determination to be prudent about your someone else will pay you more for it. For
finances. example, you buy a piece of land thinking
it will increase in value as that area gets
When your money goes to work, it may earn developed with new roads, housing, etc. You
a steady income. For example, a borrower expect to sell the land in five, ten, or twenty
pays you to use your money for a period years when someone will buy it from you
of time. When you get your money back, for a lot more money than you paid for it.
you get it back plus “interest.” Or, if you buy And sometimes, your money can do both at
stocks in a company that pays “dividends,” the same time—earn a steady income and
the company may pay you a portion of its increase in value, such as buying a property
earnings on a regular basis. Your money that generates rental income as well as
can give you an “income,” just like you. You appreciates in value.
can make more money when you and your

“There are two ways to make money: One way is to

work for money, which is what we all do. Another
way is to get your money to work for you by saving
and investing, which we all neglect to do.”

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 23

 The differences between
saving and investing
Saving
Saving is the practice of setting aside part
of your current earnings for future use. You
have to sacrifice current spending to save
for a better future. When you save regularly payable to a depositor of licensed financial
over a long period, your money will “grow”. institutions is limited to Rs.600,000 under
the deposit insurance scheme of CBSL) and
Savings are very helpful in addressing that too after a long delay. Further, there is
unexpected or unforeseen problems such a tradeoff for ready availability. Your money
as illness, accidents, unemployment, is paid a low wage as it works for you. There
robbery, drought, funerals, floods that is hardly any effort required on your part to
destroys your belongings or crops, etc. In look after your savings. The value of money
such situations, your savings can help you in savings accounts gets eroded over time
to recover. Make sure that you keep money due to inflation. A Rs. 1,000 in 1980 is worth
for emergencies. If you ever have to use only Rs. 89 today in real terms. In other
part of your emergency fund, top it up again words to buy the identical basket of food
as soon as you can. A cash reserve of 2 items you bought in 1980 for Rs.1,000 you
months of your income in savings would need Rs. 10,240 today.
help to meet these unforeseen occasions.
In addition to providing a safety cushion, a Therefore, what you perceive as “safe” is not
cash reserve reduces the likelihood of you very safe because of default risk and a more
getting into debt. subtle loss of purchasing power over time
due to inflation. If you leave all your money
in a savings account for a long time, they
Keeping your savings safe can subject you to a considerable loss of
If you are very risk-averse, and keep your purchasing power as the interest they earn
money under the mattress or in a pot buried doesn’t keep up with inflation.
in your kitchen, you may still find that your
money has been stolen or eaten by moths For example, if you had invested Rs.1,000
or lost its value. No matter where you save, in 1980 in an NSB Savings account and
make sure that your money is safe. Usually, earned interest at the average savings
you put your savings in places where rate of 9.67% for 20 years, the balance in
you perceive as safe and that allow you the savings account would be Rs.6,335,
access to your money at any time. Most thus losing Rs. 3,905 (10,240 – 6,335) in
people use saving accounts at licensed purchasing power.
banks and finance companies regulated
by Central Bank of Sri Lanka (CBSL) to keep It is like saving enough to buy a loaf
their savings safe as they are more reliable. of bread, and 20 years later when
Remember none of these institutions are you withdraw that money plus the
100% safe because if the institution accumulated interest you earned over 20
becomes bankrupt you may get only part of years, you find that the money can only
your money (amount of compensation buy half a loaf.

24
This is why you need to invest part of your investor would be Rs.16,520 giving an
money to earn more over long periods of additional Rs.10,185 over the NSB savings
time, say three years or longer. Most smart account and Rs. 6,280 over inflation for
investors keep only enough money in deferring consumption. Similarly, for a risk
savings products to cover unexpected or taking investor investing in 1,000 shares, if
unforeseen expenses. the share price moves from Rs.36 in 2006
to Rs.302.70 in 2022, the total return would
be LKR 288,829. This enabled the team to
Investing allocate over Rs.372,000 for risk taking and
Investing is the current commitment of proper select selection. Simply adopting a
money for a longer period to generate a buy and hold strategy of a few good stocks
future return that will reward the investor can make an enormous difference in your
for (1) the period of time the funds are future life style.
committed, (2) the expected rate of
inflation, (3) risks – that is the uncertainty of
the future. Investing is putting your money
to grow. An investment can be in the form “Investing is the current
of tangible assets (such as livestock, gold commitment of money for a
and property, and your own business), and longer period to generate a
intangible assets (such as debentures, unit future return that will reward
trusts and shares of another business). the investor for
(1) the period of time the funds
Investing, at its heart, is a deeply optimistic
activity. It requires you to forego the
are committed,
enjoyment of your money today in the hope (2) the expected rate of
of earning a lot more to safeguard your inflation,
lifestyle in the future. When you “invest,” you (3) risks – that is the
have a greater chance of losing your money uncertainty of the future.”
than when you “save” in the short term. The
money you invest in fixed deposits, unit
trusts, government treasury bills and bonds,
and corporate debentures and stocks can
increase as well as decrease in value. You
could lose your “principal”— the amount
you invested. But you also have a greater
opportunity to earn more money. Of course,
there is no gain without pain: Greater effort
and hard work is required on your part to
carefully identify the risks involved prior to
investing.

Compared to saving Rs.1,000 in a NSB

savings account for 20 years, where you
earned an interest of Rs.6,335, the return
for investing Rs.1,000 in a default risk-free
treasury bill for 20 years for a risk-averse

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 25

 Compound interest is your
greatest friend
The biggest weapons you have to fight inflation are:
1. Compound interest.

2 Length of time you allow your assets to grow before you retire.

3. The portion of your return that is greater than inflation.

( + )
Future Value calculation: .[ ] where
PMT = monthly payment
r = is the monthly interest (if annual interest rate it is divided by 12)
n = number of months
For example, monthly payment is Rs.287 over 30 years (360 months)
at 12% annual Interest
( + . )
(1% per month) is = .[ ] = Rs. 1,003,054.71.
.

You could become a millionaire (Rs.1,003,054) by simply saving Rs.287 per month at 12%
(interest compounded monthly) for 30 years. Although, you only saved Rs.103,320 (287x
360 months), the balance Rs.899,734 is interest on interest. The effects of a simple 4%
difference in the rate of return generated by an investment over a 30-year time horizon
would lead to your ultimate wealth being over 2 times greater: That is if you get 16%
(1+0.0133)360
interest compounded monthly, you will end up with Rs.2.5 million 287.[ ].
0.0133

26
Know the rule of 72: Divide 72 by the It is time for Sri Lankans to shift from
interest rate and the result is the number of savings to investing and to take charge
years it will take to double your investment. of their financial destinies. Gone are the
If you earn 6% interest on your money, it days where you viewed the stock and bond
will take 12 years (72/6) for your original market as a pastime of the idle rich “playing”
investment to double in value and if you the market, an elite version of gambling.
earn 12% interest, it will take only 6 years for Investing is serious business, a necessity
your original investment to double in value. for accumulating the money essential for
What is most important is how much real retirement or other financial goals.
returns (interest rate less inflation rate) that
you could generate. Thus, higher the real Compounding interest at its core is best
return (return over inflation), you get from served by conservative investing. Someone
your investment, the richer you become. who chases speculative and very trendy
It should be clear to you now the importance stocks won’t see the power of compounding
of your striving for the highest possible interest. How can you when your capital
real returns on your investments, whilst moves up and down wildly, growing fast and
protecting yourself from risk. Bear in mind then crashing hard to remove all your gains?
that if the bank or the company defaults,
you lose all your money, which is why
diversification and finding out the default
risk is so important.

“Investing
is serious
business,
a necessity for
accumulating
the money
essential for
retirement or
other financial
goals. ”

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 27

 Some investments are too good to be true
Beware of investments that look too good sales tactics: Thoroughly investigate
to be true, as they will most likely end up the investment product offered and find
in total loss to you. Don’t get taken in by out the risks involved before investing.
“get rich quick schemes” such as pyramid Genuine borrowers will be happy to provide
schemes (where you are promised payment you with independent analysts’ research
if you introduce more members to the reports and credit ratings, etc. and give
scheme). TV commercials, newspaper you time to make an informed decision.
advertisements and salesmen calling on Most importantly, you should invest in only
you promote a variety of investment options licensed, regulated financial institutions.
and financial services. The unscrupulous However attractive the proposition may be,
often talk highly of the returns offered if it is not a licensed regulated FI, you do so
to appeal to your greed and rely on your at your own risk. Further, be very suspicious
ignorance of risk. You need an independent of individuals who claim to be representing
third party to clarify risk. Do not believe well-known organizations who may take
the sales talk! You will often hear “your your money giving you fake certificates.
investment is guaranteed. There is no way
you can lose money.”
Once invested, you need to
Make no mistake, the borrower itself cannot continuously monitor your investments
give a guarantee, because the borrower is to ensure that they are earning the
anyway legally required to repay the loan return needed to meet your goals and
on its due date. Only a financially strong are within your risk tolerance level.
third party can give a guarantee that if the
borrower defaults they will come forward Follow your investments to keep you
and repay the loan. If a loan or investment is involved and educated about the markets
guaranteed, the guarantee by the third party and the trends driving interest rates and
should be unconditional and irrevocable, stock market.
enforceable under all circumstances.
In other words, the guarantor should not
be able to find a way out of not honoring
the guarantee when the borrower
defaults. Do not yield to high-pressure

“Beware of investments that

look too good to be true, as they
will most likely end up in total
loss to you. Don’t get taken in
by “get rich quick schemes”
such as pyramid schemes
(where you are promised
payment if you introduce more
members to the scheme). ”

28
Understand credit ratings
A credit rating reflects a carefully formed
independent opinion of the ability to
service the promised interest and principal
payment on a timely basis by an entity (in
other words, the default risk). Default risk is
the risk that the borrower will be unable or
unwilling to meet payments of interest and
principle in full and on time.

The opinion of the agency is published in

the news media for the benefit of the public. Credit ratings are issued by credit rating
Credit ratings are not guarantees against agencies (CRAs). They fall under the purview
loss. Neither are they recommendations to of the Securities and Exchange Commission
buy, sell or hold securities, which have to be of Sri Lanka (SEC). Currently, three agencies,
based on many other market and investor- Fitch Rating Lanka Ltd (FRL), Lanka Rating
specific considerations. They are simply Agency Limited, and ICRA Lanka Ltd are
opinions about relative measures of default registered with the SEC and provide credit
risk. Credit ratings are mandatory for all ratings.
banks and finance companies that solicit
public funds in Sri Lanka. You have the right Ratings provide a relative ranking for
to demand to know the credit rating of any measuring of default risk for a given
deposit-mobilizing financial institution and borrower or an issue in comparison
do not invest in any financial institutions with all other rated instruments. At the
that do not have a credit rating. top of the scale, AAA (lka) rating means
that the risk that the issuer will default
“Default risk is the risk that is extremely low, and as one descends
the borrower will be unable or the scale, the risk of default increases,
unwilling to meet payments and at the lower end of the rating
spectrum the probability of default is
of interest and principle in full much greater.
and on time.”

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 29

 Table 1 shows the long-term bond rating
scales and their definitions from a domestic
currency perspective. In addition to the
rating, a detailed credit analysis report is
published by credit rating agencies.

Most investors in fixed income instruments

have no means of evaluating the default
risk or risk of full or partial loss of their
investment. In addition, they have no means
of comparing the default risks of many
potential investment return opportunities
available to them. When one invests in
any investment product other than a
government bond, which is risk-free, there
is an element of default risk. Default risk
is due to the institution failing to honor
its commitment present in bank savings
and fixed deposits, corporate bonds or
debentures, insurance claims, and finance
company deposits.

Whether one is investing in a bank,

“Whether one is investing
finance company deposit, corporate bond,
debenture, or an insurance policy, investors
in a bank, finance company
can use credit ratings to determine whether deposit, corporate bond,
the risk of that investment meets one’s own debenture, or an insurance
risk-tolerance level and the return offered is policy, investors can use
sufficient for the risk one is taking. If you fail credit ratings to determine
to verify the risk using a simple tool such as whether the risk of that
a rating (which is free) when making above investment meets one’s own
mentioned investments, you are making a risk-tolerance level and the
huge mistake.
return offered is sufficient for
Without knowing the rating, the investors
the risk one is taking.”
will have to make their investment decisions
based on the popularity of the institution.
A majority of the investors in Sri Lanka
only have a vague idea of the risk involved
in investing as they do not undertake
a thorough investment appraisal. They
continue to assume that the government
will come to their rescue if the institution
goes bankrupt. Most of them only look
for returns, and the default risk is rarely
considered. In Sri Lanka, we have not had
banks defaulting but have had several
finance companies that failed where
depositors lost their money.

30
 Table 01 - Debt Rating Scale for Sri Lanka
Rating Definition
Investment Grade
AAA (ika) Highest credit quality.
‘AAA’ ratings denote the lowest expectation of credit risk. They are as-
signed only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to adversely affect-
ed by foreseeable events.
AA+ (ika) Very high credit quality.
AA (ika) ‘AA’ ratings denote a very low expectation of credit risk. They indicate very
AA- (ika) strong capacity for timely payment of financial commitments. This capaci-
ty is not significantly vulnerable to foreseeable events.
A+ (ika) High credit quality.
A (ika) ‘A’ ratings denote a low expectation of credit risk. The capacity for timely
A- (ika) payment of financial commitments is considered strong. This capacity
may, nevertheless, be more vulnerable to changes in economic conditions
than in the case for higher ratings.
BBB+ (ika) Good credit quality.
BBB (ika) ‘BBB’ ratings indicate that there is currently a low expectation of credit risk.
BBB- (ika) The capacity for timely payment of financial commitments is considered
adequate, but adverse changes in economic conditions are more likely to
impair this capacity. This is the lowest investment-grade category.

Speculative Grade
BB+ (ika) Speculative.
BB (ika) ‘BB’ ratings indicate that there is a possibility of credit risk developing,
BB- (ika) particularly as the result of adverse economic change over time; however,
business or financial alternatives may be available to allow financial com-
mitments to be met. Securities rated in this category are not investment
grade.
B+ (ika) Highly speculative.
B (ika) ‘B’ ratings indicate that significant credit risk is present, but a limited
B- (ika) margin of safety remains. Financial commitments are currently being met;
however, capacity for continued payments is contingent upon a sustained,
favourable business and economic environment.
CCC (ika) High default risk.
CC (ika) Default is a real possibility. Capacity for meeting financial commitments is
C (ika) solely reliant upon sustained, favourable business or economic develop-
ments. A ‘CC’ rating indicates that default of some kind appears probable.
‘C’ ratings signal imminent default.
DDD (ika) Default.
DD (ika) Securities are extremely speculative, and their worth cannot exceed their
D (ika) recovery values in any liquidation or reorganisation of the obligor. ‘DDD’
designates the highest potential for recovery of amounts outstanding
on any securities involved. For example, ‘DD’ indicates expected recovery
of 50% - 90% of such outstanding amounts, and ‘D’ the lowest recovery
potential, i.e. below 50%.

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 31

 Know the risks of investing
Every investment comes with a risk. Risk is
the possibility that the investment’s actual High
return will be different than expected, and
includes the possibility of losing some
or all of the original investment. In fixed Share
interest products such as fixed deposits
and debentures, you have default risk and
purchasing power risk (the returns being Property

Relative Return
lower than inflation where you cannot buy
the same amount of goods that you could
have bought before with the maturity
proceeds of the investment). Investments
in shares, unit trusts and gold have market Fixed
risk or volatility (day-to-day fluctuation Interest
of prices due to behavior or sentiment
of investors and other factors). Property
investments have liquidity risks where
you may not be able to quickly convert
them to cash. It is important for you to
know your risk tolerance: The amount of Cash
psychological pain you are willing to suffer Low
for your investments. If you are talking to a Low Relative Risk High
professional investment advisor, he or she
will provide you a general idea of all the risks
involved even before he or she talks about
the returns. The opposite will be true for
unscrupulous advisors.

“Every investment comes with a

risk. Risk is the possibility that
the investment’s actual return
will be different than expected,
and includes the possibility of
losing some or all of the original
investment.”

32
Investing in the capital market
Types of investments

Bonds popularly called debentures in

Sri Lanka are used by entities such as
the government, financial institutions
and companies to borrow or raise debt.
Institutional and individual investors invest
(lend money) to them for payment of TREASURY BONDS

interest where there is an agreement to

payback the principal borrowed at a specific
future date. Debentures can be bought and
sold from the Colombo Stock Exchange
(CSE). Their value can rise or fall over time.

A share represents part ownership of a

company. If you have shares in a company,
you may receive dividends from the profits
the company makes. The price of a share
usually changes over time. If the price of a
share increases, it will be worth more than
the price at which you bought it. But if the
price falls, it will be worth less than what
you paid. The price of a share depends
both on the performance of the company
concerned, dynamics of the industry the
company operates in and on the general
economic situation.

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 33

 How to invest
In order to reduce the risk and maximize the
return of your investment, the following are
vital.

Have a strategy for your financial future

Having a well-planned investment strategy
can make all the difference. Without
a strategy, there is a tendency to act
impulsively, for an example, panic sell
following a steep decline in the stock market.
A tool many investors use is the investment
policy statement (IPS), which spells out
investment objectives and constraints,
i.e. return requirements, risk tolerance and
constraints (time horizon, liquidity needs,
laws and regulatory restraints, taxation,
unique preferences and circumstances
of the client). A professional investment
advisor will try to understand the client’s
needs and develop an IPS and document the
responsibilities of all parties in managing the
investments. Based on your investment goals
and risk tolerances, the IPS will recommend a
suitable asset allocation that the investment
advisor will manage for you. The IPS will
be reviewed and updated regularly as and
when the client’s objectives, constraints or
circumstances change.

Diversify your investments to reduce risks

Different asset classes have different levels
of risk and return characteristics, and they
behave differently under the same market
conditions over time. Therefore, the positive
performance of one asset class can offset
the negative performance of another asset
class. Hence, investors need to diversify
across asset classes and within an asset
class.

34
Review your portfolio regularly
Regularly review your portfolio to ensure that
the portfolio provides the diversification you
require. Reassess the returns of your portfolio
against benchmarks in order to keep track.

Price is what you pay; value is what you get

Keeps things simple, only invest if you
understand the future earnings potential of
the asset you are investing in. The fact that
a given asset has appreciated in the recent
past is never a reason to buy. Owners of
stocks, however, too often let the capricious
and irrational behavior of their fellow owners
cause them to behave irrationally as well. A
climate of fear is your friend when investing; a
euphoric world is your enemy.

Investors tend to think of ‘risk’ in

predominantly negative terms, as something
that should be avoided. However, in the
investment world, risk is inseparable
from performance and rather than being
undesirable, risk is simply necessary.
Understanding risk is one of the most
important parts of financial education.

Your objective should not be to invest in

the least risky alternative such as an FD,
but to obtain the best possible return
commensurate with the risk you are willing to
bare. This is only possible if you are willing to
learn and get professional advice. If not, you
will end up taking higher risks than necessary
unknowingly and losing money like most
investors do today.

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 35

 Benefits of investing in the capital market
1. Capital appreciation - Investments in listed securities such as shares, debentures
or unit trusts can provide greater long-term returns than savings accounts and FDs in
the form of capital gains and dividends. Securities prices over the long-term tend to
outperform inflation.

Period No of years Average return Average 1 year Risk premium

p.a. (%) treasury bill from shares
yield (%)
1985 – 2012 28 26.59 14.29 12.30
2002 – 2012 11 32.98 11.56 21.42
2009 – 2012 4 53.53 11.33 42.20

2. Liquidity and flexibility - Shares and debentures can be sold easily at the prevailing
market price and do not incur significant transaction costs or time. Securities are traded
in units and lots that are affordable by investors of different income levels.

3. Diversification - The range and variety of securities listed in stock exchanges

provide investors an opportunity to minimize their exposure to specific company risk by
spreading their investments across a wide selection of securities. This benefit is made
more real by Unit Trusts, which invest pooled savings using specialized professional
expertise that is beyond the ability of an individual investor.

4. Collateral - Securities can be used as collateral to secure financing such as loans

from lending institutions.

History has repeatedly

shown that investors who
stick to a sound strategy
for the long-term come
out ahead. Despite many
short-term crises, stock
markets have historically
recovered – driven by
long-term consistent
company earnings growth.

36
Get professional advice when
making investments
When investing, seek professional advice Do some due diligence before you select
from an investment expert, who is not an investment advisor. You could contact
incentivized on up-front commission, the SEC for a list of licensed professional
who has a proven track record, a high investment advisors, or talk to a colleague
level of competence and is bound by a who has been successful in making
rigorous code of ethics and standards investments. However, do not blindly trust
of professional conduct that is strictly any “expert.” He/she may be trying to sell
enforced by a globally recognized his/her own products in order to receive
institution. You should not entrust your life a commission. Try to get various opinions
savings to a smooth-talking sales person. and trust your own informed judgment.
Equally, you should never entrust your Choosing an investment advisory firm
money directly to an adviser. Instead, use a (often described as a stockbroker, fund
custodian such as a large reputable bank. manager, or wealth manager) that helps
This reduces the opportunity for fraud, since you to build your investments is the single
the adviser does not directly handle your most important decision you will make as
deposits or withdrawals. an investor. It does not matter if you are a
beginner or have been investing for many
years; it is never too late to ask questions.

“When investing, seek

professional advice from
an investment expert,
who is not incentivized
on up-front commission,
who has a proven
track record, a high
level of competence
and is bound by a
rigorous code of ethics
and standards of
professional conduct
that is strictly enforced
by a globally recognized
institution.”

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 37

 Before you decide to invest your hard-earned money with an investment advisor who you
can trust and feel good about, there are a few questions you should ask.

1. Does the investment firm have the required licenses and can they provide client
references? A good first step would be to check with the CSE or SEC. Secondly, speak to
a few of their existing clients.

2. Does the investment advisory firm manage investments with prudence, taking
fundamentals into consideration, with a goal of providing clients returns that are
consistent with their risk-tolerance levels?

3. Does the investment advisory firm provide a clear understanding of the risks of the
investment? Listed below are some questions you could ask in order to get a better idea
of the risks.
a. How will this investment make money? Specifically, what must happen for this
investment to increase in value?
b. How much does this investment have to increase in value before I break even?
c. How easy would it be to sell if I needed my money urgently?

4. Does the investment firm maintain compliance and risk management systems,
information security and controls to protect client information?

5. Has anyone in the firm been disciplined by any government regulator for unethical or
improper conduct or been sued by a client for the breach of fiduciary responsibilities?

These questions are not exhaustive. However, they will help you identify an investment
firm that will best meet your personal investment objectives. A good investment advisory
firm should welcome such questions from its potential clients, no matter how basic,
because a good investment firm knows that an educated client is an asset, not a
liability.

38
06 WEALTH
MANAGEMENT
Wealth management is about matching
an investor to a portfolio. It is not stock
picking or investing cleverly. A concentrated
portfolio faces greater risk of loss than a
well-diversified one. Wealth management
begins by understanding yourself,
understanding markets, and finding a
balance between capital preservation and
future growth in your investment portfolio.
Managing wealth is not about getting rich
quickly or speculating on the stock market.
Wealth management is a well-considered
journey to prosperity. As people get richer,
“A concentrated portfolio
the task of managing and retaining wealth faces greater risk of loss
becomes more complex. than a well-diversified
one.”

Asset allocation and portfolio diversification

When investing, an individual investor Many poor people invest in gold, which
should always take a portfolio approach. they pawn when they need money and
Which means that he or she should the wealthy invest in land, houses or
evaluate individual asset classes and apartments. They misguidedly assume that
securities in relation to their contribution their values only go up.
to the investment characteristics of the
whole portfolio that is suitable for that There are numerous instances in the
particular individual’s circumstances. world where prices of gold and real
Portfolio diversification helps investors estate have crashed, and such assets
avoid disastrous investment outcomes. had to be sold at a substantially lower
It is well known that many retired people price than their original purchase price
had put most of their money in a particular to generate cash for emergencies such
finance company in Sri Lanka that went as ill health.
bankrupt. They were financially ruined, and
could not even meet their medical expenses
and passed away. The lesson is “not to That is where the portfolio of diversified
put all your eggs in one basket,” or in other asset classes and further diversification
words, take a diversified portfolio approach within each asset class help to manage
and reduce the risk associated with your risks. It will help you stay invested in
wealth without necessarily decreasing their turbulent times and help you avoid the
expected rate of return. dangers of over exposure to a few asset
classes and taking on an imprudent amount
of investment risk.

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 39

 Portfolio investment options for an A professional investment advisor will
individual investor could comprise of construct a portfolio with a target asset
several asset classes. For example, fixed allocation based on economic and capital
income instruments such as government market expectations, security analysis,
treasury bills and bonds, listed corporate and client’s objectives and constraints as
debt instruments, local and foreign listed set out in the IPS. Asset allocation is an art
stocks, and cash and cash equivalents. as well as a science. It’s the investment
All these asset classes are liquid or easily alchemy by which you balance several
convertible to cash. In stocks too you have ingredients for the proper mix of risk and
two classes: There are growth stocks and reward. What matters is the risk and return
income stocks. Income stocks are less risky characteristics of different asset classes
as they provide a steady income stream, i.e. and correlations between these asset
dividends even in down markets. You also classes: For example, when interest rates
need to have some liquidity in your portfolio. go up, stock (and property) markets come
The norm is to have an amount equivalent to down. The opposite occurs when interest
your expenses for 3-6 months in the money rates come down. What the advisor will try
market or in quickly cashable savings to achieve is a broadly diversified portfolio
instruments. In addition, your investment that is best suited for that particular
portfolio could comprise of less liquid client to protect his or her wealth against
assets, such as real estate, precious metals unpredictability of the future.
such as gold, art, and various alternative
investments, (for example, private equity).

“What matters is the risk

and return characteristics of
different asset classes and
correlations between these
asset classes: For example,
when interest rates go up,
stock (and property) markets
come down. The opposite
occurs when interest rates
come down. What the advisor
will try to achieve is a
broadly diversified portfolio
that is best suited for that
particular client to protect
his or her wealth against
unpredictability of the
future.”

40
Risk management
Risk management is an important part of the
portfolio construction process. What is important
is not the risk of any single security or asset class,
but rather how all the asset classes perform in the
portfolio. To evaluate an investment, you should
consider the different risks that could affect its
performance.

Market risk considers a broader picture. If you

invest in stocks, you have to accept that the overall
economic and political condition of the country, or
even world events such as the oil price, war, etc.
will cause your investment’s value to fluctuate.
Market risk is relevant also for investments in single
companies, bonds, and alternative investments.
A market decline could impede the investment’s
performance, even if the quality of your investment “What is important
remains the same. Investments also follow trends. is not the risk of any
For example, real estate could appear to be a “good” single security or
investment, encouraging more people to buy real asset class, but rather
estate, driving up prices for some time. Once the how all the asset
overall sentiment of investors switches to the belief
that real estate is overpriced, your property could
classes perform in the
lose potential value even though the structure portfolio.”
hasn’t changed.

Default risk as explained previously is related

to the quality of the underlying investment, and
it is more apparent when investing in a single
company, through stocks or bonds. If the company
or even a financial institution is mismanaged and
goes bankrupt, it is possible you won’t receive the
promised return or the capital you invested.

Liquidity risk as explained previously is how

quickly you can convert your investment into cash,
without losing in the process.

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 41

 Inflation risk is the decline of the
purchasing power of the rupee due to
inflation over time. Returns from investments
that provide safe but low returns may not
keep pace with inflation.

Interest rate risk arises when market

interest rates change, which can erode the
capital of fixed-income instruments. For
example, if you invest in a debt instrument
at a low coupon rate and market interest
rates go up, you may incur a capital loss if
you sell your fixed income instrument prior
to its full term. Conversely, if you invest at a
higher coupon rate and market interest rates
decline, you can benefit from capital gains if
you sell your investment prior to its full term.

42
07 BE PREPARED FOR
THE UNEXPECTED
Why take insurance
When you get insurance, you take away An insurance company offers its protection
some of the financial risks of unexpected by grouping together people who all feel
events. Insurance is a way of financially exposed to the same risk. By collecting an
protecting ourselves, or others, for amount of money, a premium, from each
the payment of money if an expected person, the insurer can accumulate a fund
loss occurs. It removes uncertainty by called an insurance pool, out of which
transferring financial consequences to losses can be paid.
someone else – usually an insurance
company. The insurance company
compensates for a specified loss caused by
an accident, fire, burglary, illness or death in
return for an agreed amount of money paid
in advance (this is called a premium). This
compensation may also be made to a third
party (e.g. if you knocked somebody down
while you were driving). If you have life
assurance and you die, your family will be
paid the amount your life is insured for. Your
vehicle or motorcycle must have insurance
cover. Insurance only applies when you buy
the insurance before the event happens.

The insurance policy is the contract or legal

document that explains in detail under what
situations and conditions the insurance
company will pay you. You will only get
paid if the loss is covered by the terms of a
particular policy.
“When you get insurance,
Insurance covers risks you cannot prepare
you take away some of the
for so you don’t have to save huge amounts financial risks of unexpected
of money. Insurers can predict the number events.”
of losses they might have. They won’t know
exactly, but experience and statistical data
will give them a pretty good idea. In fact,
only a small proportion of policyholders will
actually suffer a loss in any given year.

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 43

 Types of insurance

Life insurance is an agreement between an insurance

company and an individual, where the insurer promises
to pay a certain amount of money to your family or other
designated beneficiaries when you die.

Health insurance covers certain medical costs as

included in the insurance policy. Make sure you understand
which medical conditions and services will be covered and
up to which amount. Most policies place a lot of emphasis
on what they do not cover and it is very important to have
a good discussion with the insurer to find out exactly
what medical expenses will be covered and the conditions
attached so that your medical claims are sure to be honored
by the insurance company and they don’t disclaim liability.

Property insurance provides protection against property

damage. The person insured is given compensation when
damage occurs to the particular property that had earlier
been insured. An example is when your house burns down
or is damaged by a flood: In such a situation, the insurance
company will provide compensation to enable you to replace
the lost/damaged property.

Liability insurance provides you with insurance

protection if you cause damage to someone’s health or
property. It only covers the other person’s losses. Your
person and your property are unprotected, but liability
insurance protects you from being held responsible for
the other person’s damages. For example, if your building
collapses as it is being constructed and hits a person thus
injuring them, this type of insurance will take care of the
medical costs of that person. In addition, the insurance
coverage will pay for the person’s belongings that were
damaged at the time of the accident.

44
Disability insurance provides protection to you in case
you lose your job or are unable to work due to a disability as
a result of an accident. If you are insured against disability,
then the insurance company will compensate you for your
loss of earnings.

Travel insurance provides protection during travel against

unexpected situations, such as sickness, injury, if you miss a
flight because of reasons beyond your control, or if you lose
your luggage.

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 45

 Do and don’ts when taking insurance
1. Identify the best insurance 5. Report thefts, accidents and other
company, consider their paying damages to the police before
ability indicated by their credit rating, going to ask for compensation
conditions, processes and the time it from the insurance company.
would take to have your compensation The insurance company may refuse to
paid. Get quotations from different compensate you if you have no police
insurance companies, agents, brokers report to confirm how the accident
and speak to friends who have bought happened and what property was lost
insurance or the Insurance Regulatory or damaged. For any claim, make sure
Commission of Sri Lanka (IRCSL). Talk to you keep written proof (e.g. the medical
them about your insurance needs. Think costs and the police reference number).
carefully about the options, and then You need to provide information that is
choose a policy that meets your needs. important for the insurance company to
calculate your compensation.

2. Give correct information about

yourself for the insurance 6. If you think that the insurance
contract documents. If you don’t company has unfairly refused to
give the right information, the insurance compensate you, or has not given
company might not pay your claim.
you enough compensation, you
can complain to the insurance
company. If the insurance company
3. Carefully read the contract. Ask refuses to consider your complaint,
where you do not understand. Only sign or you consider that the insurance
when you are satisfied on all points – company has not responded fairly
including the insurance cover and the to your complaint, you can approach
premiums you will be paying. the IRCSL or the Sri Lanka Insurance
Ombudsman. Their services are provided
free of charge.
4. Make a quick and honest claim.
If you incur any loss covered by the
insurance policy, inform your insurance
company immediately. When making
any claims, always tell the truth. It
is a criminal offence to give wrong
information. If you give false information,
your claim will not be paid.

46
08 PLANNING FOR
YOUR RETIREMENT

Why plan for retirement?

Retirement is the stage where you stop If you are employed in the public sector, you
working completely and cease to receive are entitled to a government pension upon
income from your human capital – your retirement. Many people in the public sector
salary, or professional or business income. retire when they are eligible to get the
Many people do not stop work completely pension. The problem with the government
because they do not plan early enough pension (usually a percentage of the last
for their retirement. This forces them to drawn monthly salary based on the number
continue working even after the normal of years of service) is that it hardly keeps
retirement age. For formal employment, the up with inflation. Several years after retiring,
minimum age of retirement in Sri Lanka is 60 when you need the most amount of money
years. People retire either voluntarily (resign for living and medical expenses that have
or retire before the minimum retirement age) escalated over the years, your government
or involuntarily (forced to retire because pension received would not be enough to
of age, fired from work, or forced to stop make ends meet.
working due to sickness or disability).

“Many people do not

stop work completely
because they do not
plan early enough for
their retirement.”

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 47

 If you are employed in the private sector, A substantial proportion of the Sri Lankan
you will have 8% of your salary deducted labor force (over 27%) is made up of self-
and sent to Employees’ Provident Fund employed persons and workers engaged
(EPF). Your employer must also make a 12% in the informal sector and they do not have
contribution of your salary to the EPF and 3% any pension or provident fund scheme. They
contribution of your salary to the Employees’ are left to fend for themselves even when
Trust Fund (ETF) every month. It is always incapacitated by age and disability. Many of
important to get your statements from the them are left without any source of income
EPF and ETF to ensure that your money of their own to fall back on and are forced
is being saved every month. Your total to rely on family support. As such, many of
contributions to EPF and EPF returns can them are faced with a bleak future in the
be withdrawn when you reach the age of twilight years of their lives.
retirement. Further, your total contributions
to ETF and returns thereon can be Therefore, everyone needs to plan for his
withdrawn every five years. The investment or her retirement. The earlier you start, the
policy of both funds are focused on higher the probability of you reaching your
providing a long-term positive real rate of retirement goal. It will be a useful addition to
return to the members, while ensuring the your pension or provident fund investment
safety of the fund and availability of an income after retiring. If you are not getting
adequate level of liquidity to meet refund a pension or provident fund income, these
payments and other expenses of the fund. savings and investments will be your
The EPF investment portfolio consisted of security for old age.
93.2 percent in government securities, 3.8
percent in stocks, 0.8 percent in corporate
It is important to ask yourself how
debentures and the remaining 1.8 percent
much income you will require when you
in fixed deposits as at end 2021. The
retire to be able to maintain yourself
problem with EPF is that it has provided a
and any dependents you may have
low return i.e. around 9-10.5% per annum for
during retirement. Planning early, by
the period 2017 to 2021; prior to this since
saving and investing wisely, will help
1980s, the average return stood at 11.5% to
you meet your needs during retirement.
members and even lower by ETF (however,
you are eligible for other benefits such
as life insurance and medical expenses
while contributing to ETF but not after you
withdraw your money).

When you consider the average annual

inflation per annum of 10.4 % for the same
period 1980 to 2017, you will realize that
the real rate of return you received from
EPF of 1.1% (11.5% less 10.4%) over the
same period, is quite small. Therefore,
your monthly saving of 23% of your
salary over your working life will not grow
to an adequate sum where your final
withdrawal amount would be enough for a
comfortable retirement.

48
Key challenges of investing for retirement
There are three key issues. investors in Sri Lanka still think they cannot
1. Firstly, what is the size of the nest egg live with that risk. Going forward, it will be
you will need when you retire? That more accurate to say they will not be able to
is when you have to live with your live without it. Without a carefully measured
investment income. I use a simple rule amount of risk in an investment portfolio,
called the “Thousand Bucks Rule”: if you either have to massively increase your
someone who thinks they will live about savings to reach your retirement goal, or
20 years after retirement wants Rs 1,000 accept that you’ll end up with less at the
per month, they need Rs 240,000 as end.
principal (i.e. 1,000 x 12 x 20), ignoring
inflation; if they need Rs. 100,000 per Assuming you invest Rs.1,000 per year
month, they must have Rs 24 million for 25 years in a 12-month fixed deposit
available as capital ignoring inflation. If at NSB that pays a 6.5% annual interest,
you need Rs.200,000 per month, you you will end up with Rs.58,888. In
must have Rs.48 million and so on to comparison, if you invest in a portfolio of
generate the investment income to live. 60% stocks and 40% bonds that provide
a return of 16% per annum for shares and
2. Secondly, how can you preserve your 8% p.a. for fixed income instruments,
capital without losing your original you will have Rs.150,866 in 25 years, that
investment or principal, because is about 2.5 times more of retirement
investing involves risks or volatility savings.
of returns? That is, your investments
may not bring the desired outcome or The danger of investing in stock markets
expected returns. is not losing the principal invested as
most investors in Sri Lanka presume. The
3. Thirdly, how can you protect your capital more serious risk is that you will react to
from inflation that erodes your principal your losses by selling during a period of
or purchasing power? market decline, thereby denying yourself
the benefit of a recovery. That is where the
Sri Lankans enjoyed high interest rates balanced portfolio of both shares and fixed
until recently and had got used to high income instruments comes in. It will help
interest-paying bank and finance company you stay invested in turbulent times, it will
deposits as the primary mode of investing give you a good dose of the stock market’s
for retirement. However, since the end of higher long-term return potential, and it will
the two decade civil war, interest rates help you avoid the dangers of not taking on
have declined over 50% and rates are a prudent amount of investment risk.
most likely to remain low going forward.
However, with the onset of the ongoing “Without a carefully measured
macroeconomic challenges and pandemic amount of risk in an investment
induced constraints, interest rates have portfolio, you either have to
noted an increasing trend driven by the massively increase your savings
contractionary monetary policy. Unlike to reach your retirement goal, or
deposits, when investing, you have to accept that you’ll end up with
bear the risk of the value of your principal
fluctuating due to market volatility. Many
less at the end.”

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 49

 Wisely manage your savings in retirement
Most people spend much of their working Allocating your expenses into needs, goals
lives saving for their future. Yet, after so and aspirations can help provide a better
many years of being disciplined about framework for managing your cash flow
saving, you may find it difficult to transition and living comfortably. To do this, itemizing
from working and saving to retiring and is an important step. No different than
spending from your hard-earned nest what you would do at other phases of your
egg once in retirement. It is absolutely life, you’ll need to budget your daily living
imperative that you understand that the expenses such as housing, utilities, food,
EPF, ETF and gratuity you have received and healthcare. Next, consider goals and
after you retire is for you to invest wisely in aspirations, which might include visiting
a diversified portfolio of investments so that grandchildren, foreign travel, hobbies, or
you generate sufficient monthly income for even larger purchases. You might also wish
you to live on for the rest of your life. It is not to make charitable donations or leave a
for you to spend and bust it doing things legacy for your family. Be sure to prioritize
that you could not do previously for short- your desires according to what is most
term gratification such as buying luxuries important to you.
or spending a large proportion of the money
received on things that do not generate a Determine a withdrawal strategy
monthly income, which most financially that is right for you. Once you have your
illiterate people seem to do in Sri Lanka. spending plan, you will want to figure out
Make no mistake, if you do, you will run how to draw down from your assets. Have
out of money, as you will no longer have a a “bucket” of guaranteed income consisting
steady paycheck to support your expenses. of pension, monthly fixed deposit interest,
and annuities. This could cover needs such
Create a realistic spending plan. as housing, food, utilities, travel, medical
It is just as important to establish a plan for expenses, and insurance. Allocating your
living through retirement. There is a balance funds to these necessities can provide a
to strike here — you do not want to run out sense of financial security knowing that
of your savings too quickly, but you also do you’ll still be able to pay for life’s basic
not want to miss the opportunity to enjoy necessities, even if you spend money for
this time in your life. It is important to be foreign travel or non-essential items.
realistic about how you spend, as you will
want to be able to manage it properly. At
other phases in life, you might think of this
concept as a budget, but, in retirement, try
to think about it as a spending plan.

“llocating your expenses into

needs, goals and aspirations
can help provide a better
framework for managing
your cash flow and living
comfortably.”

50
The amount you withdraw can also vary Protect your legacy. Have a nominee
at different stages of your retirement. For for all your fixed deposits and have a joint
example, you may want to withdraw more current account with your spouse, son or
early on when you are more active and daughter, or a sibling just in case you pass
perhaps want to travel or enjoy leisure away suddenly. You may want to make
activities. Later, when you are less inclined sure your wealth will be used in a way that
to be active, you may need a smaller income corresponds to your core values. Remember,
to support your lifestyle. You can also do your estate consists of everything you own
just the opposite — take it easy on the including cash, investments, life insurance
withdrawals in your early years and maybe policies, and personal property. Having
even supplement your income with a part- a will and perhaps a living trust that are
time job. Then, as you feel more comfortable regularly updated will give you more control
about your income stream, gradually and make it easier for those involved to
increase your withdrawals. As medical manage your legacy. Working with a lawyer
expenses tend to increase with age, this can help determine whether a will or a
can also be a smart approach for many trust makes sense for you. As part of this
people. The beauty of a flexible withdrawal process, it is also a good idea to confirm
strategy is that you can adjust based on your beneficiaries. These designations on
your personality and individual goals. your accounts can supersede your will, so
make sure those who are noted are the ones
Be mindful of the unexpected. While you want to inherit your wealth. If you fail
it is important to map out a strategy for a to do so, you loved ones will have to spend
spending plan and withdrawal approach, time and money on a testamentary case
it is just as important to prepare for the or, even worse, the financial institutions
unexpected. or the government may very well inherit
your wealth. There are billions of rupees of
unclaimed funds with financial institutions.
With life expectancy increasing and
health-care costs rising, medical
expenses are also critical to a
retirement planning strategy.

Remember there is no medical insurance

once you reach the age of 70 years.

“Having a will and perhaps

a living trust that are
regularly updated will
give you more control and
make it easier for those
involved to manage your
legacy. Working with a
lawyer can help determine
whether a will or a trust
makes sense for you. ”

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 51

52
09 CONCLUSION
This booklet is about becoming more A retirement crisis looms in Sri Lanka as it
successful in managing your finances, in a is one of the fastest ageing populations in
way that enables you to get more from your the world and individuals will have to take
money and accumulate wealth. It provides a bigger role in retirement planning. People
you the minimum financial wisdom you do not seem to be prepared, as they lack
should have for your adult life. the financial skills needed to deal with the
economic challenges of retirement.
Most people are unprepared to deal with
rapid changes in the financial landscape.
Research has found that financially
There is a proliferation of financial products
savvy adults are less likely to have
from credit products to mobile wallets, many
problems with debt and more likely to
of which entice people to spend money
save for retirement and other reasons.
they do not have, which – if they are not
restrained – could put them into difficulty.
Governments are pushing to increase As a result, policy makers should consider
financial inclusion by boosting access stepping up the effort for financial
to financial services, but unless people education. Given the importance of financial
have the necessary financial skills, these literacy in today’s economy, helping all
opportunities can easily lead to high debt, adults acquire financial knowledge in school
mortgage defaults, or insolvency. This is and the workplace can prove particularly
especially true for young people who suffer successful. Research has shown that
from low financial literacy. targeted financial literacy programs that
are focused on specific behaviors and
populations can lead to smarter financial
decisions.

“Most people are

unprepared to deal with
rapid changes in the
financial landscape.
There is a proliferation of
financial products from
credit products to mobile
wallets, many of which
entice people to spend
money they do not have,
which – if they are not
restrained – could put
them into difficulty. ”

FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 53

 REFERENCES

Frank K. Reilly & Keith C. Brown. 2012. “Investment Analysis and Portfolio Management”
South-Western Cengage Learning.

Jamie Mcintyre. 2009. “Think & Grow Rich!” 21st Century Publishing.

Laurence B. Siegel. 2009. “The Future of Life-Cycle Saving and Investing: The Retirement
Phase” The Research Foundation of CFA Institute.

Martize Smith. 2018. “Millionaire Scope: Secrets of Wealth & Prosperity”

Michael Jonah Jones. 2012, “Everything You Know About Money Is Wrong!“ Jonah Jones at
Smashwords.

Mwesige Emmanuel & Mustafa Mugambe. 2017 “Financial Literacy Handbook – Increase Your
Financial Skills”

Restless Development. “Financial Literacy Manual – A Guide for Teaching Pupils”

Robert T. Kiyosaki. 2011. “Rich Dad Poor Dad: What the Rich Teach Their kids About Money –
That The poor and Middle Class Do Not” Plata Publishing LLC.

Terry D. Clark. “The Simpler Way to Managing Money and Getting Your Finances in Order
Without Going Crazy” TDC Enterprise.

54
CFA
CFAINSTITUTE
INSTITUTE
STATEMENT OF
STATEMENT
INVESTOR OF
RIGHTS
INVESTOR RIGHTS
The “Statement of Investor Rights” was 3. My financial interests taking precedence
developed by CFA Institute to advise buyers of over those of the professional and the
financial service products of the conduct they organization;
are entitled to expect from financial service
providers. These rights reflect the fundamental
4. Fair treatment with respect to other
ethical principles that are critical to achieving
The “Statement
clients;
confidence and trust of Investor
in any Rights” was developed by CFA Institute to advise buyers of financial service
professional
productsThe
relationship. of list
the applies
conducttothey are entitled
financial to expect from financial service providers. These rights reflect the
products
and services such as investment management,critical
fundamental ethical principles that are 5. toDisclosure
achieving ofconfidence
any existing
andortrust
potential
in any professional
relationship. The list applies
research and advice, personal banking, to financial products and services such as investment
conflicts of interest in providing management, research
and advice, personal banking, insurance and real estate. Whether you are
products or services to me;establishing an investment plan,
insurance and real estate. Whether you are
working with a broker, opening a bank account or buying a home, the Statement of Investor Rights is a tool to
establishing
help youangetinvestment plan, working
the information you needwithand the service you expect and deserve.
a broker, opening a bank account or buying a
home, the Statement
Demanding of Investor
that financial Rights is a tool
professionals abide by Understanding
6. these of my
rights helps you buildcircumstances, so and/or firm
trust in the person
to help
youyou get the
engage information
with, you collectively
and thereby need and therestores trust, respect, and integrity in finance.
that any advice provided is suitable and
service you expect and deserve. based on my financial objectives and
constraints;
WHEN ENGAGING THE SERVICES OF FINANCIAL PROFESSIONALS
Demanding that financial professionals abide
by these rights helps you build trust in the
7. Clear, accurate, complete and timely
AND ORGANIZATIONS, I HAVE THE RIGHT TO THE FOLLOWING:
person and/or firm you engage with, and
communications that use plain
thereby collectively restores trust, respect,
and integrity in finance. language and are presented in a format
1. Honest, competent, and ethical conduct that 6. Understanding
conveys of my circumstances,
the information effectively; so
that complies with applicable law; that any advice provided is suitable and
WHEN ENGAGING THE SERVICES
2. Independent and objective advice and based on my financial objectives and
OF FINANCIAL PROFESSIONALS
assistance based on informed analysis,
8. An explanation of all fees and costs
constraints;
AND ORGANIZATIONS,
prudent judgment, and I HAVE
diligentTHE
effort;
charged to me, and information
7. Clear, accurate, complete and timely
RIGHT showing these expenses to be fair and
3. TO THE FOLLOWING:
My financial interests taking precedence communications that use plain language
reasonable;
overcompetent,
1. Honest, those of theandprofessional and the
ethical conduct and are presented in a format that conveys
organization;
that complies with applicable law; the information effectively;
9. Confidentiality of my information;
4. Fair treatment with respect to other clients; 8. An explanation of all fees and costs
5. Disclosure of any existing
2. Independent and objective advice and or potential charged to me, and information showing
conflicts of interest in providing
10.
products or
Appropriate and complete records to
these expenses to be fair and reasonable;
assistance based on informed analysis, support the work done on myinformation;
behalf.
services
prudent to me;and diligent effort;
judgment, 9. Confidentiality of my
10. Appropriate and complete records to
support the work done on my behalf.

Visit cfainstitute.org/futurefinance

32
FINANCIAL LITERACY - TO ACHIEVE YOUR FINANCIAL WELLBEING 55
About the Author

About the Author

Ravi Abeysuriya is the CEO/Director of Senfin Securities Limited, Chairman of

Colombo City Holdings PLC, Sherwood Capital (Pvt) Ltd and an
Independent Non-Executive Director of Seylan Bank PLC, HNB Assurance
PLC, and Bio Foods (Pvt) Ltd. He is also the Advocacy Chair and Board
Director of CFA Society Sri Lanka. Formerly, he was the CEO of Candor
Group, Head of Strategic Business Development of Hayleys Group, Managing
Director of Amba Research Lanka and Managing Director of Fitch Ratings
Lanka.

Mr Abeysuriya also functioned as a permanent member of the Financial Sector

Reforms Committee (FSRC), a Prime Ministerial Task Force appointment and
was twice appointed as a commission member of the Securities and
Exchange Commission of Sri Lanka.

He was also a Director of Sri Lanka Insurance Corporation Ltd (SLIC) and was the Chairman of its
Investment Committee. Mr Abeysuriya has also functioned as a member of Board Risk Oversight
Committee and Financial System Stability Consultative Committee of the Central Bank of Sri Lanka and
President of several Finance and IT associations.

Mr Abeysuriya is a Fellow Member of the Chartered Institute of Management Accountants, UK, Chartered
Global Management Accountant, USA and a Chartered Financial Analyst, USA and has an MBA from
Monash University, Australia.

Mr Abeysuriya was named as "Lifetime Achievement" award laureate by CFA Institute, USA in 2017 for his
outstanding work and dedication to the investment management profession.

Beginners Guide To

FINANCIAL
LITERACY
To Achieve Your Financial Wellbeing