Tue | Jan 25, 2022

Oran Hall | Financial planning for students

Published:Sunday | March 3, 2019 | 12:21 AM

ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER

Two of the main purposes of a financial plan are to provide direction and meaning to financial decision-making and to clarify and connect all parts of a person’s life programme.

Students fit into the pre-career or foundation phase of the financial life cycle, one of the main objectives being effective money management.

If most students are not at the stage at which they are earning income, why should they learn about financial planning and, in particular, the management of financial resources on which this column will focus?

A good reason is that financial planning contributes to the creation of financially literate individuals who:

• are knowledgeable, educated, and informed on the issues of managing financial resources;

• understand the basic concepts underlying the management of money and assets;

• use that knowledge and understanding to plan and implement financial decisions;

• are less stressed financially;

• are better able to perform academically;

• experience better mental and physical well-being; and

• learn sound financial skills to build a foundation for life-long financial well-being.

Who or what influences the financial decision-making of students? Parents are generally the greatest influencers of students’ financial decision-making. Other influencers include external factors such as advertisements; peers, who may contribute to impulse shopping: the thrill of expensive purchases as status symbols.

Not so long ago, I learned from some tertiary-level students that they want to change the following financial practices: limited focus on savings, shopping without comparing value, limited budgeting, high entertainment spending and impulse buying.

A 2004-2005 study on “College students and financial literacy” to examine the overall financial management practices of the students of three tertiary institutions in the US identified some practices of financially-fit students.

Savings habits

They saved, a habit developed in childhood. They respected money: saw understanding its value as important. They discriminated between needs and wants.

Developing the savings habit is critical to the practice of good financial management.

Developing a culture of savings entails setting goals, budgeting, keeping records, doing cost-benefit analyses to establish a basis for making decisions, thinking long-term, setting aside emergency money, starting small and saving as much as possible, as often as possible, as long as possible.

It is not enough to save. Growing money is also important. Students who are fortunate to have surplus funds need not be wedded to savings instruments such as certificates of deposits or savings accounts.

The more conservative investors may opt for bonds to get a better return, but those with a higher risk tolerance may opt for capital growth unit trusts or stocks and ensure that they diversify their portfolio after determining their risk tolerance and the matching investment instruments.

It is also important to do the following: monitor their savings and investments, avoid the unfamiliar, avoid greed and do their homework, that is, do meaningful research.

Considering that so many students need to borrow to fund their education, learning to use other people’s money wisely is important. Just as important is learning to repay the money they borrow.

Borrowing funds

The time may come when it may be necessary to borrow for many different productive purposes.

The factors that will certainly be important then are: credit rating – an estimate of the ability to fulfil financial commitments based on past dealings; character – integrity, track record; capacity – ability to meet obligations; capital – value of their assets; and collateral – assets to secure a loan.

If you are a student, the following keys to sound financial planning should be helpful. Know yourself, that is, your emotions, priorities and financial position. Have a plan with clear objectives. Control your emotions. Make savings your priority. Weigh every spending decision. Let your money work.

Make a written budget and stick to it. Limit the influence of external elements. Respect money: do not waste it. Avoid risky undertakings. Understand what you are doing. Be deliberate: do not rush. Live within your means. Educate yourself on financial matters.

An important reason for getting an education, especially at the tertiary level, is to increase your future earnings power. How successful you are will depend on several factors, including workplace trends and opportunities, your career choice, education level, marketability of your skills, ability to advance in your career.

So it is important to learn and practise financial management and financial planning skills while learning the skills to develop a successful career and to live a successful life generally.

The inconvenient truth is that poor financial practices can potentially destroy or impair the success that should flow from securing a solid education.

Oran A. Hall, principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.

finviser.jm@gmail.com