PRINCIPLES OF PERSONAL FINANCIAL MANAGEMENT (5 UNIQUE KEYS FOR MILLENIALS)

Estimated reading time: 10 minutes

When you think of personal financial management, you can easily get discouraged because of how overwhelmed you get. We all know the importance of managing our finances. And especially now with a looming recession, we all want to successfully manage our finances to ensure that we protect ourselves and our money in the event of the unexpected. But knowing what you need is not as vital as knowing how to do it. Therefore, today I want us to talk about the 10 principles of financial management.

Before we start though, we need to define what personal financial management is and the importance of financial management. So let’s get right into it.

Definition of personal financial management.
- Personal financial management simply put is;
What is the importance of personal financial management?
Principles of personal financial management
Trade-off Risk and return
Scriptures on personal financial management.
Conclusion

Definition of personal financial management.

Personal financial management simply put is;

At a very basic level, personal financial management simply means gaining an understanding of your financial situation in order to make the most of your assets in day-to-day life and in planning for your future. Essentially, this means being aware of your current financial position and working with what you have to plan for your future and your daily expenditures.

There are three steps involved based on this definition.

Being aware of your current financial position
Assessing both your expenses and incomes
Planning on the way forward.

Let’s look at each one of them.

Current financial position awareness. And to do this you will need to look at five things:

Your income- This makes up all the money that is coming in whether it is through your 9-5 or your side hustles.
Your expenses-Money going out represents your expenses. It does not matter how small or big the bill is.
Your taxes- What you owe the government makes up your taxes
Your savings- What percentage of money do you put away for a rainy day?
Investments- Do you have projects, whether passive or active, where your money gets to work for you? Investments are, more like sowing where you invest your money in a project and expect a higher yield at a later date.

Assessing your income and expenses.

This will help you learn to make wise decisions when it comes to how you manage your money. Once you are aware of what is coming in and what is going out, you can make sober decisions and avoid future pitfalls like debt and, in worse cases, bankruptcy. Assessing your income and expenses involves budgeting and also some aspects of forecasting. The goal is to ensure that your income meets all your expenses and you even end up with some savings too hence.

Income > Expenses

Anytime your expenses exceed your income, it means you are working at a deficit and you will require debt to supplement your income. The problem with debt is that you will have to pay for it later and there is also the aspect of interest that you have to factor in. On the other hand, when you have a surplus, which is when your income exceeds your expenses, you can invest and save, leading to additional income sources that you can set up as an emergency fund and also start building wealth one coin at a time.

Planning for your future

It’s only natural to plan for your future once you have successfully assessed your current situation. And again this involves saving, investing, insurance, education policies, and making large purchases such as homes, etc.

What is the importance of personal financial management?

Better understand your money

Financial literacy is important in your personal financial management journey. Understanding your relationship with money and your education about money will help you effectively manage your personal finances. How do you view money? Who taught you financial education? Do you view money as a means to an end or simply the end goal? These are some of the questions you need to ask yourself to better understand your money. You see before you can have financial stability, you need to have a healthy view of money and not allow your finances to rule you. After all, the Bible tells us you cannot love both God and money.

Think about this, why would God give you wealth if it will only lead to your destruction and ending up in hell?

Properly organize your savings and investments

Having an effective personal financial management strategy will help you organize your savings and investments. This is because you will have a clear figure of the amount saved and invested. Savings come first and then investment. You need to have an emergency fund set up before you can think about investment. That is what wisdom looks like. Having a fund that can cater to your financial need in the event of loss of income or job will ensure that you quickly bounce bank.

Have clear financial goals

Before you can gain clarity on what you want to do with your finances, you need to have a proper strategy in place of analyzing your finances so that you can plan your future. How will you know the best time to invest for long-term projects when you don’t have an effective financial management system? You see analyzing your now will help you prepare for your future. And you do so by assessing your money and knowing your liquidity position. This simply means the disposable income you have or assets that can quickly be converted to cash.

Principles of personal financial management

Trade-off Risk and return

To be efficient in personal financial management, you need to understand the trade-off between risk and reward. This simply means being able to gauge whether what you are spending your money on now will benefit you in future or will only be a burden. An example would be the cost of managing a car. Can you pay off the insurance and cater to all the costs involved? And the return you have from buying the car will it supersedes the costs expected? If the answer is yes, then you can invest in it.

This does not only apply to vehicles. You should consider this for every single thing you buy. Assess the reward vs. the cost. Then make an informed decision.

Be aware of the time value of money.

Time value of money is the concept that a sum of money is worth more now than the same sum will be at a future date due to its earnings potential ( Investopedia) . This simply means that money is worth more now than a future time. And this is mostly brought about by the aspect of inflation. What 10 dollars can buy now is less than what 10 dollars could buy two or three years ago. This help you in making realistic plans for your future. And again, this helps you come up with other ways to increase your income and money value and this is through investment which is another principle

Savings.

It is imperative that you have an emergency fund as this will help you prepare for the unexpected. You cannot predict the future, but at least you can plan and prepare for it effectively. In the event you lose a job, can you cater your expenses as you look for another job. Unfortunately, most people are a paycheck away from poverty. This should not be you and that is why you should have a savings plan. Some savings scheme include.

Equity-linked savings schemes.
Fixed deposits
Pensions
Government Savings Schemes
Rural Savings Schemes

Saving in the scheme that works for you and accommodates your needs is the best way for effective personal financial management.

Investment and Diversification.

Piggy-banking on the previous point on the time value of money, it is imperative that you look for ways to increase your income so as to ensure that the money you put away grows. And this is where investing comes in. Investing is like sowing a seed with the hope of reaping an even greater reward at some point in the future. What you invest in is determined by your risk appetite, your financial muscles, expected return and the time period. Of course this then means that long-term investments will have less risk than short-term investments. Types of investments.

Retirement plans
Certificate of deposits
Mutual funds
Hedge funds
Index funds
Etfs
Individual stocks
High-yield savings accounts
Real estate

When it comes to diversification, it is important not to put your eggs in one basket. Rather, you should scatter your investment in different baskets so that you can guarantee some form of protection should one industry go sour. Asset diversification schemes will have a combination of different investments. And the key is that they will be negatively correlated with one another. This means that when one industry is going down, the other will be increasing. This is why it is important to have a portfolio. You should ask your financial advisor on the kinds of investment that works for you. (You should not take a generalized view and assume it will work for you. Remember, you have unique goals, plans and responsibilities which is why you need to have a personal financial advisor)

Seek financial education.

Knowledge gives you an edge on how you manage your finances effectively. And continuously learning about different financial concepts, investments and ideas will help you not only increase your financial literacy, but also make informed decisions that will help you achieve your financial goals. Education will help you set the proper plan you need to put in place to achieve the goals you need to and get you where you have always wanted to get.

You can seek financial education through enrolling in programs, buying books, buying courses from experts or even learning from free sites like Alison and EDX. In this era of google and other online platforms you have no excuse. Remember, God tells us that we perish for lack of knowledge and now more than ever financial education is key. You don’t necessarily need to take a finance degree, but you can take personal finance courses.

Books I recommend for personal financial management. ( Disclosure: I will earn a small commission when you choose to buy the book. Thanks )

Scriptures on personal financial management.

1. Whoever loves money never has enough (Ecclesiastes 5:10)

“Whoever loves money never has enough; whoever loves wealth is never satisfied with their income. This too is meaningless.”

2. It is God who gives you the ability to produce wealth (Deuteronomy 8:18)

“But remember the LORD your God, for it is he who gives you the ability to produce wealth, and so confirms his covenant, which he swore to your ancestors, as it is today.”

3. You cannot serve God and money (Matthew 6:24)

“No one can serve two masters, for either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve God and money.”

4. Don’t be greedy for money (1 Peter 5:2)

“Be shepherds of God’s flock that is under your care, serving as overseers-not because you must, but because you are willing, as God wants you to be; not greedy for money, but eager to serve;”

5. A wise man thinks ahead (Proverbs 13:16)

“A wise man thinks ahead; a fool doesn’t, and even brags about it!”

6. The plans of the diligent lead to profit (Proverbs 21:5)

“The plans of the diligent lead to profit as surely as haste leads to poverty.”

7. Sit down and estimate the cost (Luke 14:28)

“Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it?

8. It is wise to store up wealth (Proverbs 30:24-25)

“Four things on earth are small, yet they are extremely wise: Ants are creatures of little strength, yet they store up their food in the summer;”

9. Provide for your household (1 Timothy 5:8)

“But if anyone does not provide for his own, and especially for those of his household, he has denied the faith and is worse than an unbeliever.”

10. Be not one of those who give pledges (Proverbs 14:23)

“Be not one of those who give pledges, who put up security for debts. If you have nothing with which to pay, why should your bed be taken from under you?

Conclusion

Personal financial management is something you should take seriously. You cannot be effective as a kingdom financier if you cannot manage your finances. How will God, trust you to manage more if you cannot manage the little you have? You have to learn to steward the $100 so that in future you can steward the $1000.

Also, it is okay if you have not been doing right before. Just resolve in your mind that you will start today. Remember, it is never too late to take a step in the right direction. What savings and investment schemes do you think work for you? Had you been aware of your income and expenses before?

PRINCIPLES OF PERSONAL FINANCIAL MANAGEMENT (5 UNIQUE KEYS FOR MILLENIALS)

Definition of personal financial management.