Personal finance is the most important kind of finance. No seriously, there’s good reason to believe that good personal finance translates to good business, public and organisation finance. Good personal finance is not as the stories would have you believe the result of doing one big thing, like buying Econet shares in 1998, right but rather the culmination of a combination of things being done right. While personal financial configurations will vary from person to person these things are the signs of a sound and solid personal finance that will protect your future.
Increased income opportunities
I rarely discuss this but it is a cornerstone of financial success for many. We mostly talk about how you manage your money and managing it well is good but having more of it to manage is great. Opportunities to increase your regular income come from more than work although that is the best way for many. Investing and running a business (which is really investing) represent good opportunities to increase your income. Growth and career progression represent good opportunities too but maybe a bit more long term.
Insurance comes in many forms and includes life assurance, medical aid, funeral insurance and other personal insurance products. The insurance industry has not exactly covered itself in glory historically and is still viewed by many as a bottomless pit into which people throw their money but when the bill falls due the pit returns nothing. I’m not here to defend insurance companies, just to say that insurance is an essential part of a good personal finance plan. Insurance gives you a minimum acceptable position, a bottom line or a safety net if you will. If the position you insured against occurs you know how things will go.
And then there are things that insurance cover cannot do for you. For those, we have emergency funds. When covid-19 measures brought some companies to a close, jobs and incomes were lost. Income protection insurance is non-existent or just unpopular in Zimbabwe given the way the economy is set up. You need something that can step in times like this. It is also important to be cognisant of who we are as a people. Funeral contributions for deceased relatives are a part of our lives and part of black tax. An emergency fund is not for things that occur regularly, if you experience it every month it is an eventuality, not an emergency.
Saving is the next stepping stone from an emergency fund. It is strange because when it comes to saving the habit is more important than the amount saved. You read any book on personal finance that half decent and it will tell you to save a percentage of your income. Parkinson’s law states that as income increases so do expenses, the goal of saving is to fight this law to an extent. For money, the struggle seems to be saving for no reason. Many people find it easier to save towards a goal and that is how they build the habit. Once built the habit should stick. Savings give you the financial power to move on opportunities to improve your finances.
The main destination for some, BUT NOT ALL of the money you save should be investment. The reason why not all of it should end up there is investments carry some degree of risk. But the risk levels vary. Investing in a business has the risk of the business going belly up and you lose everything. This is especially so with new and small businesses. Stock market investing has a real risk of loss of monetary value but the risk of falling to zero is fairly low. Money market investments have a low-risk default but carry lower returns. Evidently, a mix of these sorts of investments is the best course to take. Investing puts your money to work for you to earn more income as discussed before.
Access to Credit
Zimbabweans have been through a lot. But even before then the mention of credit was not taken as a good thing. Despite what you’ve heard about credit and perhaps your own personal experiences, credit can be used to make money. While borrowing for consumption is not advisable, borrowing for productive pursuits is the stepping stone many have used to attain wealth. Even if you never need to use it, it’s good to have access to credit.
The budget really ties all these things up. Many already have a good understanding of what a budget is; a plan for how you will spend your money. How often do we review our budgets? After a month or whatever your income cycle is do you ever look at how you actually spent your money compared to how you intended to spend it? Budgets are not about plans they are about behaviour. The best lesson budgeting taught me is that what I intend to do and what I end up doing tend to be very different things. So do your budgets but also do your budget review and variance analysis, the outcome will likely surprise and educate you.
These are the 7 key elements of a good personal finance plan. You can think of them as disciplines each with its own foundations and pillars as we have already discussed in the articles on saving and investment.