Personal financial management tips (I)

It has become necessary to feature an article on individual personal finance in these uncertain times. The reality is that regardless of whatever “season” we find ourselves, one’s personal finances or lack of it, has a critical role to play in our adult lives. Personal Finance can be described as a term which focuses on […]

It has become necessary to feature an article on individual personal finance in these uncertain times. The reality is that regardless of whatever “season” we find ourselves, one’s personal finances or lack of it, has a critical role to play in our adult lives.

Personal Finance can be described as a term which focuses on managing an individual’s financial resources in order to achieve financial goals. Individual financial goals could include buying a home, saving up for children’s education, saving up for retirement, creating a fund for emergencies, etc.

As soon as one starts earning an income, one needs to develop a budget and some sort of structure around the resources available, even as you juggle income receipts, your expenses, savings, investments, insurance, etc.

We discussed in one of our previous articles on the need for each individual to develop strategies for not just survival but living.  We advised that each one should endeavour to have a mission, vision and core values to act as a compass in one’s life.  These are the realms of long term planning which is common in organisations, but now being adopted by individuals.  Financial management tips are a concomitant feature of short term planning otherwise called a budget.

The beginning of any financial planning is the development of a budget for a particular period.  A budget is a financial tool that is set up to give one a clearer picture of one’s revenues and expenses, over a certain period.  The aim is to achieve financial freedom through a balanced budget. On an excel spreadsheet, one can simply draw up a table, itemise revenue on a column and monthly expenses on another and sum up each column differently. Individuals should try to be true to oneself and make this as reasonable as possible. This will simply tell you if you’re living over and above your means, or you need to cut down or adjust or prioritize your expenses, or even have some money to save.

The general rule is to target to utilize 50% of your income as ‘fixed costs’ (Needs) that remain the same on a monthly basis. These include rent, utility bills, loan repayments, etc. 30% of the same income is allocated to variable expenses (Wants), such as grocery shopping (Luxury), entertainment, retail therapy, etc.; while 20% is to be saved. However, this isn’t cast in stone, as you find out you can make some adjustments when you analyse your expenses, thus having more or less to save. It is recommended that one should stick to the budget as much as possible and evaluate periodically, for adjustments, if required.

Securing financial freedom is certainly not easy.  As such, in addition to the above, an employee needs to have structures to support the plans for the much-needed freedom.

Creating structure around your finances aids the achievement of one’s financial goals. To do this, it is advised that you set up the following: Systems, Processes and Structures so as to be organised.

Employees should have a banking relationship by having accounts such as Current Account.  A current account is your regular “go-to” account for most of your banking needs. Highly flexible, it allows you to receive monies and payout same, on-demand and subject to availability of funds, in the account. Thus, your monthly salary and payments (such as subscriptions, grocery shopping, transportation costs, etc.) are processed through this account. Due to the availability of various channels of electronic banking, your bank can follow you everywhere you go and you don’t have to go the physical brick and mortar bank.

Secondly, one should also have a savings account with the same bank or another bank.  As the name implies, you are to save in a savings account. Therefore, banks usually reward their customers for saving with them, by paying interest on these accounts, subject to certain conditions, such as putting a limit on the number of withdrawals per month. If you’re within the withdrawal limits set, your account will earn interest on money saved; if not, you lose the interest for that month. Most research on Personal Finance recommend saving about 10% to 20% of one’s monthly income in this type of account. Thus, one can set up a direct debit from a current account with the instruction to transfer up to 20% of monthly income, into this account. Another rule of thumb is to ensure that there’s always at least the equivalent of 3 – 6 months of living expenses in this account, accumulated over a period.

Your savings goals will contribute to how aggressive you should be at growing this account balance. Are you saving to buy a house? Car? Or to further your education?

If you are able to consistently do this for at least two years, you would have saved a reasonable amount of money. At this point, you can also invest part of your savings in other products that are close to cash in nature, of low risk and have more attractive returns. Some of these include Treasury Bills, Fixed Deposits, Bankers’ Acceptance, Commercial Paper, etc. Depending on your goals and timelines for achievement, your Banker or Financial Advisor would be able to provide additional guidance on the products to settle for.

In crisis periods such as the Covid-19 pandemic challenges, the employee can be sustained from some of his savings, and plan to recover what would be spent as soon as one is able to do so after the period of the crisis.

We would pause here due largely to space constraints but would conclude this important topic by next week.  Discussions on money matter are strategic and important as such, it requires all the time, energy and attention. 

 “My Lord! Enrich me with knowledge…” (Quran 20:114)

For the Lord gives wisdom; from his mouth come knowledge and understanding (Proverbs 2:6)