Oran Hall | How to improve poor personal financial management
QUESTION: I have an issue of poor financial management, and I am seeking some advice if that is possible. I am looking forward to your response.
FINANCIAL ADVISER: You have taken two very important steps in the process of establishing financial stability in your life: acknowledging that there is an issue of poor financial management and seeking advice on how to correct the problem.
I am not sure what brought you to the point of recognising the problem as there are several red flags you could have seen. I remember being asked some time ago by an employer to assist some employees to improve their financial management.
Management came to the conclusion that the employees were not managing their finances well because they were asking regularly for salary advances, paying a significant portion of their income by salary deduction to service loans or both.
There are several other signs that indicate that you have a financial-management problem. Here are some examples:
• You are using an increasing amount of your income to repay debt;
• You are depending on overdraft facilities to pay recurring bills;
• You are using cash advances on your credit card to pay other bills;
• You tend to make only the minimum payments on your credit card;
• You are borrowing to pay basic bills – utility bills, for example;
• You are paying bills late or not at all;
• You are borrowing from Peter to pay Paul;
• You have constant cash flow problems;
• The debt collectors are calling you;
• Your surplus funds are not being used effectively to earn; and
• You are taking too much risk with your money.
Some may argue that personal financial problems are due to people not earning enough – even that they are underpaid. The truth, though, is that there has to be a balance between income and expenditure regardless of the situation. If there is a deficit, especially if it keeps recurring, there is a money-management problem.
If there is such a problem, priority matters like saving, investing, and the education of the children may be neglected. The constant worrying that this situation often leads to may lead to health problems, poor performance at work, poor inter-personal relationships and serious family stress, perhaps even the break-up of families.
I can only be general in my response to you, not knowing the exact nature of your problem and what has caused it, but hope that the solutions you seek will emerge from my response.
The classic response is to say make a budget – a realistic one that aligns spending with current income. This is key, for many make a budget, but it does not reflect meaningfully how they earn and spend money.
Others make a budget but do not stick to it. It is just a meaningless exercise because they do not track their spending, they do not establish their priorities, they buy impulsively, and they borrow beyond their capacity to pay, for example.
A budget is a spending plan that should show how money is earned and spent, taking into account expenses that are periodic, not just regular, and it makes it easier to exercise control.
The budget must balance from the beginning, that is, when it is created. Otherwise, it is a waste of time. Keep it in line by tracking your spending, and be patient. Avoid rushing to acquire too much too soon. What you can afford is what you can afford.
Sometimes there is the argument that money problems arise due to emergencies. Every effort should be made to build up a fund for emergencies, and this can be difficult for some given the level of their income.
If you are in debt, reach out to your creditors and see if they are willing to reach an accommodation with you about how you can honour your debt. Explore the possibility of debt consolidation, which may allow you to have one debt over a longer time.
Put away your credit card if you have one and it is contributing to your problem. As credit card debt is very expensive, make it your priority to eliminate it. If you have to make serious adjustments to how you live, so be it.
If you have an asset, such as a car, which you cannot afford, sell it. In fact, it may make sense to sell assets to reduce debt if need be.
Good financial management requires that you use your financial resources wisely. Thus, put your money in safe institutions, use your surplus cash to earn, invest wisely, diversify, buy assets that are of good quality and maintain them well.
Your first exercise is this: document your income, all your expenses, your debts and commitments. Establish your priorities and create a written plan to repair your financial situation step-by-step, and stick to it slavishly.
All the best.
- Oran A. Hall, author of ‘Understanding Investments’ and principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and email@example.com