Want to control your finances? Try a dose of prudence

"Money is one of the most important subjects of your entire life. Some of life's greatest enjoyments and most of life's greatest disappointments stem from your decisions about money. Whether you experience great peace or constant anxiety will depend on getting your finances under control."

If you agree with Robert G. Allen, the bestselling author of Multiple Streams of Income, you will recognise that wise spending and investment decisions are necessary for the achievement of your goals and the avoidance of undesired consequences.

Prudence in spending is buying what you can afford and what you need. It means buying less costly but comparable alternatives and buying with the right motivation.

It means considering the usefulness and useful life of the product in making your decision. It also means buying what has been provided for in the budget, what is on the shopping list and shopping around for the best deals.

Prudence in investing is investing with a goal in mind and having your own reason for doing so.

It means understanding the product, its suitability to your needs and the terms of the contract. It means understanding your investment personality, your risk tolerance, and the risk of the product.

MAKE GOOD DECISIONS

It requires investing what you can afford, time to monitor your portfolio, diversifying your portfolio, getting reliable advice from more than one source, if possible, and asking the right questions of the right people.

Poor investment decision-making is manifested, on the other hand, in taking too much risk or taking too little risk and may result in large losses or inadequate yields.

The causes of imprudence include irrational behaviours such as over-confidence, fear and greed.

Insufficient research, haste, lack of financial education, poor self-management, poor appreciation for the benefits of diversification, and irresponsible sales and marketing tactics also contribute to unwise investment behaviours.

There are several ways to correct financial imprudence.

Change how you engage with and manage financial affairs, think through impacts before spending or investing, take more time to make decisions, involve the family in decision-making, be sceptical, question every financial decision, understand yourself and your tolerance for and ability to take risk, make long-term plans, shop around, do a cost-benefit analysis, avoid what you do not know about, make your own decisions, learn from history, and seek clear, simple understandable information.

The public must educate itself about financial decision-making. Practitioners must educate themselves and their clients.

Though important, literacy alone cannot guarantee good decision-making. Knowledge must be used to plan and implement decisions

The responsibility for financial education rests with many groups including the churches and schools at all levels.

Government, public information agencies, consumer protection organisations, community groups, the media, employers, through financial education at the workplace, trade unions, financial institutions, for the benefit of their staff and customers, also have a role to play.

THE CHALLENGE

Regulators and supervisors of financial service providers and providers of higher education, through short courses, cannot be excluded.

The challenge for individuals is in dealing with how they make financial decisions. Decisions based on emotional predisposition such as overconfidence, self-control, optimism and loss aversion are more difficult to modify. These really are how people are. Each is a part of them.

On the other hand, decisions driven by cognitive factors such as anchoring and adjustment biases, which are influenced by purchase points or arbitrary price levels, are modified more easily.

Because they stem from faulty reasoning, better information, advice and education can bring about behavioural change more easily.

Financial prudence has many benefits. At the personal level, it gives personal financial security and independence and fosters goal achievement. It leads to better health from less worry and improved family stability and interpersonal relationships due to reduction in money-related stress.

INCREASED CONFIDENCE

Business benefits from better sales from a more satisfied and educated consumer. The financial sector incurs lower cost to get and keep business because the educated consumer will have a greater propensity to buy financial products as a result of increased confidence and understanding of his needs.

The level of persistent savers increases due to the availability of more funds because customers are more goal-oriented and have a better appreciation of the need to save. Borrowers are less likely to default.

Government benefits from increased taxes from higher levels of savings and investment and there is reduced pressure on the health services and consequently, lower health-care costs due to a lowering of stress-related conditions and the reduction of time and resources spent on crisis intervention.

Financial prudence is good for financial health and personal health. It is good for individuals, businesses, government and the economy as a whole.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of "The Handbook of Personal Financial Planning", offers free counsel and advice on personal financial planning. finviser.jm@gmail.com