Finance at Your Fingertips by Moses Ayiku, Jr. MBA OP/ED
As the saying goes, he who fails to plan, in effect, plans to fail. Money management is a crucial key to our success and the more we understand it, the better off we are. There have been ample studies that have identified money as a number one stressor for many people. Creating simplicity and consistency in personal financial management will go a long way towards easing the stress that comes with money problems.
If this sounds familiar, beware: At least two studies show that money problems could lead to divorce. Data released by financial firm TD Ameritrade found that 41% of divorced Gen Xers and 29% of Boomers say they ended their marriage due to disagreements about money. (Jan 10, 2018.)
I remember growing up in Ivy Hill, a neighborhood in Newark and attending Mount Vernon School back in the 1970s. My classmates and I would at times discuss financial issues such as how much allowance our parents gave us for household chores and how much we should be saving. Out of those discussions, some of us were able to lobby with our parents to ensure that our chores received competitive wages in a noncompetitive environment!
While we spent most of our allowances, we did get ingrained in us the concept of saving. Remember, at that age, we had no bills. Our biggest concern was to ensure we had enough money for baseball cards, candy, soda and of course the ice cream truck!
Our parents assisted us to open savings accounts. In many cases, our parents kept our savings books for safe keeping. Whenever a relative or family friend gave us money, it was deposited into the savings account. We were also advised to save about 20% of our allowance.
Over the years, I have come to recognize that we were quite fortunate to get those lessons about budgeting and saving drummed into our heads at such an early age. However, it is not everyone that is aware of some of these sound personal financial practices.
In this column, I will cover various aspects of personal financial management on a weekly basis. My aim is to provide simple, easy to understand information on how we can improve our finances. In doing all of this, we hope to empower as many people as possible to get a grip on their finances and reduce money as a stressor in their lives!
What is personal financial management? Why is it important to save and how can we deal with unexpected cashflows?
Personal financial management basically covers about five different areas: They are saving, investing, financial protection, tax planning and retirement planning. Each area is important. However, it is possible to succeed financially by taking it one step at a time and developing strategies for one area, mastering it, before going to the next.
Saving is key for all us. We save for various reasons. For one thing, it is a way to develop an emergency fund. Ideally, an emergency fund should be able, for example to cover one’s expenses for a period of 3-6 months, if no income were coming in. Things happen and that is what the emergency fund is for. Depending on one’s income and circumstances, the emergency fund could be bigger or smaller than the scenario that has been described.
The simple approach is to ensure that once we are generating an income, we determine what percentage of that income after our expenses, we put aside as savings. In effect, the income you earn, and your expenses determine the potential amount of saving. For example, a person earning $5,000 a month, with expenses of $3,000 per month would have the potential to save up to $2,000 per month.
Another approach would be to develop a percentage rate of savings. For example, someone can decide that given their income and expense levels, they must save 20% every month of their net income (that is total income less total expenses).
Savings come into play for the financing of retirement. Many people have retirement accounts that they put money in every pay period. Apart from such retirement accounts, people are advised to invest in or save additional funds to increase their retirement income.
The reason for this is that in some cases, the Retirement accounts one is investing in may not be adequate for retirement. Additional investments would assist in propping up the level of retirement investment funds. We all plan to retire at some point. Retirement is a reality we know is coming. Hence the need to save and plan for it.
We also saved to finance the purchase of big-ticket items. Home purchases fall into this group. For example, to obtain a mortgage loan for a home, a person may be told to provide a percentage of the value of the house as a deposit. This could be on average between 10-20% of the value of the house. If a person is buying items of lessor value than a home, while they may not need to save large amounts, they need to accumulate funds to finance the purchase. In doing so, this minimizes the impact of the purchase on one’s finances.
As many of you have witnessed, life is unpredictable. When it comes to inflows and outflows, there are times when we get an unexpected windfall and of course we are all happy about such inflows. This could be from an unexpected bonus, a gift or even winning the lottery. There are also times when we get unexpected expenditures. This could be due to a vehicle breaking down. Of course, in some cases, your car doesn’t give you forewarning before it breaks down!
We know that no matter who you are, you will have unexpected inflows and outflows. As a result, the prudent practice is to ensure that unexpected inflows are largely saved. Why? Because we know that unexpected outflows will surely arise. When they do, paying for them can be a challenge. However, if we save our unexpected inflows, we will have funds to cover such expenses.
As much fun as it is to simply spend like a drunken sailor when unexpected inflows arrive, please remember the potential pain of dealing with unexpected outflows and consider saving most, if not all of your unexpected inflows. This strategy can end up saving you from stress down the road. It also helps bring stability into your finances.
Imagine this, with a good policy of saving all unexpected inflows; by the end of the year, you can assess your financial situation and once your balance is positive (the money you have left after all inflows and outflows), this could open up so many options based on your choices. You could plan for a vacation that you can afford!
Or perhaps there is one item or other that you have been denying yourself. You could plan and go out and purchase it without breaking your bank! All these and more are ample motivation to put in place a saving policy for unexpected inflows.
Please feel free to share with me your questions and experiences on saving. I will do my best to respond and, in some cases, I will write on some of these questions.
Your questions and comments can be sent to localtalknews@gmail.com.
