One of the skill-sets that our education system doesn’t provide is financial literacy or personal financial management prowess. One can be trained in Financial Management or Accounting from high school all the way to university and pursue a career in managing other people’s finances but fails dismally to manage his or her own income. Financial management comes with huge responsibility and accountability to the shareholders and many other stakeholders. With personal financial management one has to be accountable to oneself and this calls for high degree of personal discipline in planning, budgeting, and investing. Nothing happens by sheer luck. Even those who win lotto, they plan, decide and act. What happens after winning the lotto that’s another story, some use the money wisely and others foolishly making the proverbial saying riches to rugs come true.
Capture them young and teach them the language of money so that as they grow they value and preserve value of money. I am impressed by some cultures especially Jewish and Indian traditions of teaching children about investment at an early stage. Parents and guardians have a duty to teach children about advantages of financial literacy. Leading by example is key. Some good practices that parents do is to open fixed deposit accounts or buy shares for their children. Such practices seed ideas of savings and investment.
Over the years, I have observed that there are some people who are good at managing other people’s businesses but they fail to manage their personal lives including finances. Personal life is in shambles whilst professional life is perfect. Would you entrust your finances to someone who can’t manage their own finances? Some people wonder why promotions elude them not knowing that their inability to manage personal finances impact on their career growth. Painful revelation but the truth. Signs that someone is failing to manage personal finances include reliance on salary advances month after month, borrowing beyond one’s means to repay resulting in debt burden, consumptive habits with no investment in assets including savings, poor credit rating, failure to provide for the family, bankruptcy, defaults, foreclosures and addictions to many worldly vices such as corruption, gambling, and fraud.
Financial literacy refers to array of financial skills and concepts that enable a person to understand and effectively use personal finances. Prime to master are skills to do with personal goal setting, budgeting, and investing. It goes without question that lack of these skills is called financial illiteracy. Manyara Kirago, a renowned personal financial management counselor and life coach, would always ask; “What would you do differently, if, somehow your life were rewound five, ten, or even 20 years back? Would you have furthered your education? Would you have started a business? Would you have made that investment you missed or maybe acted on advice that you now regret not having acted on?”
There is a plethora of programs that one can undertake to acquire and improve personal financial management skills. There are many skills that fall under the umbrella of financial literacy some of which are household budgeting, learning how to manage debts, understanding credit and investment products. One doesn’t have to be a guru in financial management but it is essential to have some working knowledge of key financial concepts such as cash, interest, time value of money, payback period, profit and loss, and cash-flow. Despite abundance of information on personal financial management, there is rampant financial illiteracy among many societies. The lack of financial literacy creates many challenges such as accumulation of unsustainable debt burdens, poor credit ratings, loss of properties, and low self-esteem.
Educate yourself about finance through reading a range of free learning resources. Some of the basic strategies one can consider are as follows:
· Budget your income and expenses. Unfailingly track how much money you receive each month against how much you spend in an excel spreadsheet, on paper, or in a budgeting app. A simple equation to follow is Income minus Expenses equals Savings (I-E=S). Spend within your limits. Overspending results in borrowing and overdrafts which become costly in terms of interest payments.
· Develop a savings culture. Annually choose a savings goal and make a down payment or deposit and decide how much you want to contribute toward it each month. In hyper inflationary environment whereby savings lose value, you are better off spending your cash on assets that you can easily convert to cash or assets that generate revenue such as rental properties.
Some employers offer their employees free training on personal financial management as part of broader employee wellness programs. Take advantage of such programs and plan for your future including retirement plans.
My investment mentor always says ‘Cash is King’. Know how to manage cash. Any windfalls or cash that come your way must be invested wisely. He further says ‘money follows a person who speaks its language.’ In health circles they say we are subjects of what we eat and in financial literacy terms we are subjects of our relationship with money. Good relationship leads to wealth creation whilst bad relationship leads to poverty.
Funds permitting get advisory services from financial advisors or your personal banker. These professionals help you structure your personal budget, debt management, retirement saving, insurance, investment options, and even tax planning.
Some principles that may assist in developing personal financial stability:
* Don’t borrow for holidays but save for holidays.
* Don’t borrow to buy clothes, beer, and food but save to buy clothes, beer, and food.
* Don’t borrow to fund a wedding but save for a wedding.
* Don’t abuse credit card facility. Only use facility when it’s absolutely necessary. Without proper knowledge, checks and balances, it is easy to get into serious troubles.
* Invest in value adding assets and consider various asset classes to diversify risk.
* Don’t bury your head in the sand when faced with financial problems especially debt payment, face them head-on one by one.
* Don’t suffer in silence and live with death, seek help and assistance from friends, and family.
Lastly, financial literacy applies to all age groups.
* For children and teens consider teaching them how to save by giving them allowances. Remember pig banks and competition on who has more coins at the end of the year. Open up youth saving accounts linked to long term goals such as education. Have honest, open dialogue with children especially regarding financial mistakes.
* For young adults in their 20s and 30s empower them to budget and spend within set financial guidelines. Allow room for financial independence in line with monthly budget. Encourage them to have saving plans that can cover at least six months of personal expenses especially rent, school fees, and insurance. This six months buffer acts as emergency fund in case of any eventuality such as loss of employment. Embark on long term investment plans such as mortgages, and retirement plan.
* For adults in their 40s and 50s increase funding toward retirement plan. Maximize your financial earnings through career progression, and side businesses. Endeavor to eliminate outstanding debt. Restructure financial plans to suit your circumstances. For example downsizing so as to create savings for children’s university education.
* For adults in their 60s and post retirement age adjust lifestyle to suit income levels and retirement plans.
Hopefully this article helps you make financially sound decisions. As Travis Cook said, “My hope is that with increased financial capability, more of us will be able to transition from surviving to thriving. Resulting in sufficient resources to support our own ever-changing, highly subjective pursuit of ‘happiness’.”