Financial Literacy: Personal Financial Management

Sep 03, 2017 News

---

Dr. Terence Smith, Deputy Governor, Bank of Guyana

Essential components of personal financial management
For individuals and families, the benefits of financial literacy are significant. For both rich and poor

alike, financial literacy provides greater control of one’s financial future and reduces vulnerability to fraudulent schemes. In this regard, good financial choices depend on reliable and useful information, presented in an understandable way.
According to the literature, essential components of personal financial management include an understanding of how to budget strategically, use credit, save to build personal wealth, and shop for and choose suitable financial products.
How you manage, spend, and invest your money can have a profound impact on your life especially your retirement. Understanding and learning financial literacy can take a while, but the basics are quite simple, they need repeating and never change. Individuals have indicated to me that managing finances feels like a lot of paperwork and numbers. However, managing your finances is mostly about psychology, habits, and values you choose to live by.
In fact, in one of my earlier articles we discussed that our mindset is really the key to wealth building and good personal financial management.
So let us go over a few rules that will always improve your financial life. These rules do not change; they go way back although today we now have software to help us do the mathematics. Another key aspect is that in the financial marketplace, financial education must be a life-long pursuit that enables consumers of all ages and economic positions to be well informed.
Financial literacy and personal financial management
Financial literacy means different things to different people, ranging from the most basic -what is a bank account, what is an interest rate – to a sophisticated knowledge of financial markets. The following steps/activities will provide some assistance with your personal financial management roadmap:
1. Start saving for the future now: It is neither safe nor advisable to keep all your money at home. You will need some kind of bank account to save your spending money and short-term savings. A bank account (or credit union) can hold your money and allow you to access it whenever you need to. It is critical to start putting money away now to prepare for the future. Even if someone can only invest a small amount of money, it is worth it in the long run. The difference in totals at retirement can be solely due to when savings started. As is the case in Guyana to retire at age 55 or 60, one must consider how money will be available to live for the following 30+ years.
2. Get into the budgeting habit: Do you know where your money goes? A budget is one of the best ways to make sure that you are spending less than you earn. Budgeting gives you control over your money. Start by calculating how much money you make in a month. Then, write down all of your regular expenses. It is as simple as monitoring how much is made and how much is spent. Monitoring spending on a monthly basis and changing the budget as life changes will allow one to take control of personal finances and free up extra money to start saving for the future.
3. Avoid debt accumulation: Avoiding debt is one of the best ways to prepare for a secure financial future. Many consumers learn that as debt builds, it becomes increasingly difficult to get out of debt. For example, knowing how to use a credit card is an important part of avoiding debt. One should only pay for things that one can afford. For those in debt, a plan should be created on how unwanted debts will be paid off. High debt including the misuse of loans make it tough to save for retirement.
4. Bank smart: There are many ways that you can save money while you are banking. These include monitoring fee charges, not leaving too much money in a checking account, shopping around at different banks to find the best interest rates, and using the online bill pay function if it is available.
5. Have an emergency fund: It is important to be prepared for the “just in case” aspects of life. Creating a savings account that accrues for an unexpected expense such as car repair, home repair, or needed medical expense is recommended. This account may also be needed if one is faced with being laid off. Self-employed persons must certainly consider this aspect of personal financial management.
6. Learn about investing: It will be wise to take time to learn the basics of investing. It is critical to have a foundational understanding of managing your assets and staying away from potential frauds and fraudulent transactions.
7. Set goals: Setting clear, written goals for the future and making plans to accomplish them are essential. Taking the time to write down one’s goals and aspirations will really pay off.
8. Protect your assets: It is good to ensure that one has proper insurance for self-protection and for assets. Car and health insurance are must haves. Gain knowledge around what insurance options you do have and the costs.
9. Have some form of insurance: Insurance protects your financial assets, by helping to take care of the large financial disasters when they occur. You should consider health, automobile, and in many cases life insurance coverage.
10. Do not touch your retirement savings: If you withdraw your retirement savings early, you will lose principal and interest or have to pay withdrawal penalties.
11. Women need to pay special attention to making the most of their money: Women face challenges that often make it more difficult for them than men to adequately save for retirement. Women tend to earn less than men and work fewer years. Some studies indicate that on average, women live 5 years longer than men live, and thus need to build a larger retirement nest egg for themselves. In addition, women tend to lose more income than men following a divorce.
In conclusion, please remember, developing a mindset around the activities discussed above can lead you forward to financial success, and is the only way you will be able to earn wealth without inheriting it. Follow personal financial management principles and create a mindset that will truly make strategic decisions that lead to financial success.
Wealth is not the same as income. If you have a good income and spend it all, you are not getting any wealthier. Wealth is what you accumulate, not what you spend.

Next week we will discuss more of King Solomon’s money principles (Part 2). Thanks for all your comments and support. As usual, please send your comments or questions to [email protected]

---

---